David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting and marital dissolution services in Philadelphia and the Delaware Valley.

In my previous discussions about the Fraud Triangle – the three factors that must be present for fraud to occur – one of those factors was Rationalization: The mental process a potential fraudster goes through to justify committing the fraud. Without being able to rationalize to oneself why it is OK to commit the fraud, a potential fraudster with Opportunity and Pressure – the other two key factors in the Fraud Triangle – is unlikely to proceed.

Tone at the Top – management’s attitude towards honesty and ethical behavior – can have a significant impact upon an employee’s likelihood to commit fraud. Employees typically take their cues from management. If management has clearly stated that fraud is unacceptable in the company’s written policies, in employee training, and in how management acts, then employees will be less likely to commit fraud.

However, regardless of what management says, if management shows a disdain for fighting fraud or plays “fast and loose” with rules and regulations, employees are more likely to rationalize it is OK for them to commit fraud.

Here are a few examples:

• In a large real estate development company, the owner had his CFO rent, at the company’s expense, a luxury apartment for the owner’s girlfriend to use, and had the company acquire an expensive car for the girlfriend to drive. The girlfriend was neither an employee nor contractor of the company. When the CFO saw an opportunity to exploit a weakness in the company’s payroll software, he used the weakness to embezzle over $3 million from the company. When caught and questioned, he stated that since the owner of the company was cheating the government, he figured it would be okay to cheat the company.
• Similarly, the owner of furniture store chain regularly bragged to his controller that he was having the company pay for an expensive home theater room and expensive bathroom hardware for his vacation home. He directed the controller to hide the expenses so that “the IRS won’t find out.” The controller began to have personal financial problems and started taking money from the company through various fraudulent schemes. When confronted by the owner, she threatened to turn him in to the IRS if he reported her. The owner allowed her to keep working for another year, and to keep taking funds through other schemes, and finally contacted his lawyer about how to manage this. If he had contacted us (or a good lawyer), we would have advised him he could have filed amended tax returns with the IRS and paid the additional taxes plus some interest and penalties, instead of allowing the controller to continue to commit fraud.
• The owners of a consulting business regularly charged personal expenses, including vacations and personal purchases to their company credit card. They told the controller to record the personal expenses as business expenses. The controller ordered an additional company credit card in her name, charged her own personal purchases to the company credit card, and recorded the charges as the company’s business expenses. When we investigated and confronted her, she, too, stated that since the owners were “cheating” she figured it would be okay for her to cheat the company.
• A construction company owner had his bookkeeper “adjust” employees’ work records to show fewer hours than they actually worked. He also regularly instructed his bookkeeper to not pay certain vendors until the vendors threatened to sue the company. He would then negotiate reductions in the vendors’ bills. The bookkeeper’s husband became ill and was laid off from his job. Because of the financial pressure, the bookkeeper began writing checks to herself to help her cover her expenses. She recorded the checks as having been paid to various vendors. When we investigated and confronted her, she told us that because she needed the money, and saw how the owner regularly defrauded others, she felt it was okay to defraud him since she was only taking monies to which he was not entitled.

The above examples illustrate how the Tone at the Top of each of these companies contributed to the fraudsters rationalization that it was okay for them to improperly take funds from the company. In essence, each fostered a culture of improper behavior, and each suffered because employees reflected the behavior of management.

If you would like to speak with such a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert in Philadelphia with more than 30 years of experience in financial and operational leadership positions. He is a Certified Public Accountant, a Certified Fraud Examiner, and a Certified Valuation Analyst.