Find Deviant Behaviors, Find Fraud?

Sophisticated fraudsters may be able to conceal their frauds, but they may not be as adept in hiding their workplace deviant behaviors. Identifying or recognizing a correlation between the two, even if the correlation is weak, could significantly improve the anti-fraud profession's ability to uncover fraud.

On his first day on the job, Joe started viewing "adult" movies on his company computer and paying for them on his company-issued credit card. He continued this behavior during his six years with the nonprofit and racked up more than $4,000 in inappropriate charges. But that wasn't all. After Joe resigned, an audit of cash collections showed Joe took more than an additional $50,000 in donations. Another audit of the cash disbursement account also revealed Joe was writing checks payable to "cash," and personal checks written from this account totaled more than $28,000. In the end, Joe's frauds totaled more than $82,000. The company prosecuted Joe, and he received probation.

Throughout my career, when investigating fraud complaints, I would find that suspects often also would have problems with pornography, bullying, harassment and other human resources issues. Conversely, when I would be called in to investigate human resource complaints and issues, I occasionally would find one or more fraud schemes involving these individuals.

Over the years, I found so many instances of pornography on suspects' computers when investigating fraud complaints that I would jokingly comment that all investigations seem to lead to porn. After fellow fraud examiners shared similar stories at last year's ACFE Annual Fraud Conference and Exhibition, I decided to do some research.

A daily search of news articles in any country will yield dozens of examples and situations that are very similar to the one mentioned above: employees engaging in workplace deviant behaviors while also defrauding their employer. Is there any link, association or correlation between non-fraudulent deviant behavior in the workplace and fraud? Can we find fraud then by looking for deviant behaviors and working our way backwards to potential fraudsters? I wanted to know if anybody had researched this possible correlation.

I began to form the "Using the Deviant Behaviors of Others to Find Fraud" hypothesis or UDBOFF. (I've already received feedback that I should have come up with a catchy acronym first, then do the research, but we are too late for that, so UDBOFF it is.)

I conducted a three-month review of articles to look for other documented incidents in which workplace deviant behaviors and fraud were linked in the same cases and to explore whether I could expand and refine this approach so it could become a useful tool in the fight against fraud. Sophisticated fraudsters may be able to conceal their crimes, but they may not be as adept in hiding their workplace deviant behaviors. Identifying or recognizing a correlation between the two, even if the correlation is weak, could significantly improve the anti-fraud profession's ability to uncover fraud.

First, a definition that I work with: workplace deviant behaviors are those behaviors exhibited by people at work that violate company policies, laws and socially accepted workplace behavior. Examples may include: sexual harassment, sending or viewing inappropriate images, bullying or intimidating other employees, using directed profanity at others, conducting intra-office affairs or retaliating against another employee. Part of the UDBOFF hypothesis is based on the premise that if someone is willing to violate the sexual harassment policy, they may also have little regard for the financial policies of the organization. Therefore, finding the next fraudster could be as simple as looking for individuals who exhibit these deviant behaviors in the workplace.

THE THREE PRIMARY DRIVERS: MONEY, SEX AND POWER

A very quick study of human history and behavior can identify three primary drivers that motivate human beings to act the way they do: money, sex and power. Those committing deviant behavior, especially leaders and politicians, often will combine and commingle the three drivers in various ingenuous ways involving corruption, mistresses and sex scandals, payoffs, bribes, cover-ups and other types of fraud, waste and abuse. A recent example is former presidential nominee John Edwards who allegedly used campaign funds to pay off his mistress, with whom he had a child.

Individuals who engage in deviant behaviors may attempt to cover-up or conceal the behaviors with secondary deviant behaviors. An intra-office affair may also include secondary behaviors such as lies and misdirection. A power-hungry executive may circumvent policies and procedures and control others through manipulation, threats and force. Many of these secondary behaviors look very similar to those that fraudsters exhibit when they attempt to conceal their crimes. Therefore, how similar in nature are the primary drivers to one another, and how strongly are they correlated?

Donald Cressey's fraud triangle may be able to help further explain the relationship and possible correlation between money deviance (also known as fraud), sexual deviance and power deviance. Take any workplace deviant behavior, from pornography to retaliation, and you can see the forces of the fraud triangle — opportunity, pressure and rationalization — come into play. Could the fraud triangle also be a deviant behavior triangle? An argument could then be made that if the forces affecting the decision to engage in deviant behavior are similar, and the cover-up behaviors to conceal deviant behaviors are similar, then where there is one deviant behavior, there may be others.

UDBOFF RESEARCH PROCESS

I conducted my three-month article review from Oct. 7, 2010 through Jan. 7, 2011 using Lexis/Nexis. (I had to limit my search to three months because I worked with more than 19,000 articles during that time.) My goal was to look for workplace deviant behavior keywords associated with fraud keywords and find instances in which both workplace deviant behaviors and fraud were present.

I used these workplace deviant behavior keywords: porn, pornography, sexual harassment, harassment, bully, profanity, vulgarity, curse, affair, intimidation, retaliation, racial discrimination, racist and racism. And I used these fraud keywords: credit card fraud, embezzlement, kickback, Ponzi, fraud, tax fraud, theft, expense account fraud, accounting, bribery, corruption, conflicts of interest, contract fraud, bid rigging, extortion, identity theft, financial statements, misuse, larceny, skimming, forgery and check tampering. This list of fraud keywords didn't encompass all possible fraud schemes, but it was a good starting point.

I identified 126 individual instances of workplace deviant behaviors and fraud among the articles, or roughly 10 per week. Each of these instances are referred to as a "direct connection" or link between workplace deviant behaviors and fraud in which one or more deviant behaviors were found in the presence of fraud. It doesn't mean that one caused the other, only that they were both in the same place at the same time.

The most frequent connection was "pornography" and "fraud," and "racism" and "fraud" had no reported connections. The perpetrators tended to be those who held positions of power or authority. Some of the repeat offender positions were: politicians, law enforcement, attorneys, CFOs, CEOs, clergy, auditors, judges, doctors and government employees.

Those who engaged in sexual deviant behaviors and fraud tended to engage in a wide variety of fraud schemes. In the articles, many of the frauds were perpetrated to pay for, pay off or conceal their sexual deviances. In one example, Martin, a CFO of a local hospital, quit his $164,000-a-year job after federal authorities notified the hospital of an investigation. Martin embezzled more than $22,000 to pay for pornography that he didn't want showing up on his credit card. What caught the federal authorities' attention? Those charges had been submitted to Medicare for reimbursement.

In another case, Scott, a veteran attorney with more than 30 years of experience, was reported as stealing more than $77,000 from his firm. A senior partner also learned that Scott was downloading pornography on his company computer and sending sexually explicit emails to his lover. Scott admitted his guilt and wrote a check for the $77,000. However, four months later, the firm learned that Scott also had embezzled nearly $300,000 from six of the firm's clients and the firm through overbilling.

Here are other types of fraud schemes I identified along with sexual deviant behaviors: credit card fraud, bankruptcy, embezzlement, fraud, theft, false expenses, false accounting, corruption, bribery, kickbacks, other crimes, extortion, audit issues, larceny, computer fraud, identity theft, time abuse and/or fraud, gambling, falsification of business records, misuse of company assets, billing schemes, check fraud and forgery.

Those who engaged in power deviant behaviors tended to lean towards the more aggressive fraud schemes, which involved the manipulation or control of others, and in many instances, the victim of fraud was a person rather than a company or business.

In one example, Mary, a building inspector, offered to purchase a piece of commercial property from a retired truck driver. When the truck driver refused, Mary began a campaign of harassment and vandalism to force the owner to sell. Mary coerced other inspectors to issue citations to the property owner, provided false information that the owner was running an unlicensed business from the property, put glue and expanding foam in the door locks and door jam and used the names of neighbors to file false complaints.

Following are the other types of fraud schemes that I identified along with power deviant behaviors: advance fee scams, arson, extortion, grand larceny, forgery, identity theft, stalking, corruption, felony robbery, coercion, conspiracy, murder, mortgage fraud, theft, kickbacks, tax evasion, obstruction of justice, bribery and witness tampering. This outcome may have simply been a coincidence or may be the basis for additional research on the correlation between particular power deviant behaviors and certain fraud schemes.

One of the difficulties in using media reports for research is that there are several limitations that affect the data set. How many stories about people fired for fraud end up in the news in a given week? Ten percent? Five percent? One percent? Less? Most of the attendees at the 22nd Annual ACFE Fraud Conference last summer who attended my training sessions on the subject said that very few, if any, of their cases end up in the media.

Another limitation is that out of all of the firings for fraud, how many of those also identified and/or reported other deviant behaviors? Most fraud examiners may not be concerned with investigating deviant behaviors during or at the conclusion of a fraud examination. Conversely, for human resources professionals, they may not recognize or deal with fraud issues.

The lack of consistent reporting and tracking of both deviant behaviors and fraud makes it especially difficult to build evidence of a strong correlation between the two. However, that does not mean the research was null and void. What the research can tell us is even with a very limited and reported data set, there were numerous instances in which workplace deviant behaviors and fraud were present together. There appears to be some correlation, but I still have to determine the extent. Even a low 10 percent correlation could help us uncover up to 10 percent more fraud than we are currently identifying.

INDIRECT INFLUENCE OF WORKPLACE DEVIANT BEHAVIORS ON FRAUD

The strength and security of the mightiest castle is unfortunately linked to the ability of the lowliest night watchman to stay awake. Said another way — if employees responsible for management and oversight aren't doing their jobs, how does their inattentiveness affect the entire organization?

Up to this point, the focus of this article has been on finding fraud by looking for those individuals exhibiting deviant behaviors in the workplace. An additional concern to ponder is whether the byproduct of workplace deviant behaviors is a less-controlled environment that allows for others to engage in fraud, waste and abuse. This assumption is referred to as the indirect influence of workplace deviant behaviors on fraud. An example would be a procurement employee who spends hours a day viewing pornography. The time he spends in this behavior instead of doing his job could cause contracts to be issued inappropriately or reduced scrutiny and review of vendor invoices and payments. In another example, a manager or supervisor engaged in sexual harassment or general harassment may cause subordinates to avoid their responsibilities in order to cater to the harassing supervisor or totally avoid him, which would weaken the overall control environment.

For example, take the repeated findings of senior Securities and Exchange Commission (SEC) officials in the recent past viewing pornography year after year. On one occasion, a senior attorney surfed for porn for as many as eight hours a day, burned the porn onto DVDs and stored them in his office. According to the SEC OIG report in 2008 alone, at least 16 employees were caught viewing porn. There were probably many more who were never caught. What were these officials and employees missing by not doing their jobs? The Bernard Madoff case and the financial issues and subsequent frauds of 2008 are the first things to come to mind.

Many National Science Foundation employees have been found surfing for porn on the government's time. According to a public report, one senior executive spent at least 331 days looking at pornography on his government computer. Were these leaders and employees engaged in proper oversight and management of the federal funds under their control? Most likely not. A recently released Senate report in the summer of 2011 concluded that the National Science Foundation has misspent $3 billion on "waste, fraud, duplication and mismanagement."

IMPLEMENTING THE UDBOFF HYPOTHESIS TO FIND FRAUD

The best place to start in determining if this approach has any validity in your organization is by reviewing your past investigations. Did your fraud cases show any signs of workplace deviant behaviors? Did complaints to the human resources department lead to fraud cases? Did employees who were terminated for fraud have previous human resources-related complaints filed against them over the years?

If you have identified some hits, the next step may include working with the human resources department to identify employees who have been investigated for workplace deviant behaviors but were not terminated or employees who are routinely the subject of allegations of workplace deviant behaviors that have never been able to be substantiated.

An example could be the executive who is routinely accused of sexual harassment, but no direct evidence can ever be found, or no one will come forward.

Once you identify individuals, it is important to assess if the person has an opportunity to commit fraud. What processes does (or can) this employee touch? Does this person have access to expense reports, contracts, accounts payable, inventory, purchasing cards, significant financial transactions, payroll, benefits, etc.? If he does, you may want to start off by reviewing a small sample of transactions to see if there are any issues, red flags or concerns. Start with those processes or transactions that would be the easiest convert to cash, and expand the review as needed.

Another alternative is to begin incorporating deviant behavior questions into interviews of witnesses and employees on investigations and audits. If a fraudster has covered his tracks, chances are that no one in a department can specifically point out the fraudster. But if 7 out of 10 people respond that Joe is looking at porn at work, you may want to start your audit or investigation with a review of Joe. You may be surprised with what you may find.

Add questions such as these to your interviews: