Fraud Starts with People, Not When the Money Disappears
/In a lively, Wednesday morning session, Inès Panou, CFE, MBA, engaged 37th Annual ACFE Global Fraud Conference attendees in a discussion on conducting audits across international borders. Panou, the chief risk officer for SANRU, a nongovernmental organization in the Democratic Republic of Congo, said that fraud is a universal condition that starts with people — not when the money disappears. According to Panou, the human element of fraud and how people rationalize committing it is an overlooked part of the Fraud Triangle.
Panou has conducted audits and investigations globally in corporate and nonprofit settings. She queried the attendees about the types of organizations they work for. Hands shot up representing private industry, nonprofits and multinational organizations. “This session will apply to all of you,” said Panou. “Here we will talk about culture, but not only culture at the global level in terms of diversity, but also in terms of corporate culture, so you will find yourself in this conversation.”
Then she turned to a major theme of her session, Dr. Donald Cressey’s foundational Fraud Triangle. Fraud examiners know this concept well, with the three legs of the triangle representing opportunity, pressure and rationalization, and coming together to result in someone committing fraud. Panou said that early on in her career as an internal auditor, she focused a lot on the opportunity aspect of the triangle and implementing controls to prevent fraud. But, Panou said that people often overlook the human element of fraud — the pressures that people face and the rationalizations they make in deciding to defraud their organization. “We have the tools to manage the risk of fraud when it comes to opportunity, but pressure and rationalization are the hardest ones to detect,” she said. “Unfortunately, we realize that fraud has occurred when the money is gone.”
Panou explained how pressure manifests in organizations and how the culture of an organization can influence misconduct. She related her experience starting a new position and talking to employees about the organization. One employee came up to her and told Panou that to succeed in the organization, “You have to be a shark.” As Panou explained to attendees, “In order to survive, I had to transform myself to be another person.” She didn’t stay long at that organization.
Tone at the top plays an important role in creating opportunities to commit fraud. Opportunity is tied to culture as well. An organization that is transparent and encourages integrity is an organization that provides few opportunities for employees to commit fraud.
Panou then turned to the rationalization element of the Fraud Triangle. Rationalization is the internal justification that allows an individual to reframe conduct as acceptable. “It’s the most dangerous part of the triangle, because you think you’re right,” said Panou. She engaged the audience to describe some of their experiences with fraud rationalizations in investigations. One attendee provided an example of reviewing emails to learn that an employee had been ill with complications from COVID-19 and was hit with massive medical bills. The employee didn’t want to reveal how ill he’d been and how he was unable to pay his bills. He wanted to protect his ego and his family.
According to Panou, these situations are more than human resources issues. They’re an auditing issue as well, and it’s important to assess how employees are feeling on the job. Auditors can learn a lot about fraud risks by talking to people and building rapport with them. “You will be surprised what people are willing to share,” said Panou. “Because that aspect of rationalization is all about how people feel. And it’s so difficult to assess when you’re an auditor who comes in, stays in the room and asks for samples, which you will get probably after they modify everything.” Case in point: While implementing a whistleblower program, Panou wanted to know how comfortable people felt about speaking up about misconduct. Most people said no, because they didn’t feel safe. “If people are not feeling safe in your organization, that tells a lot about your tone at the top. They’re not feeling safe, probably because integrity is not encouraged. Retaliation is OK.” Further investigation revealed that many people in the organization committed fraud. Panou recommended including surveys of people’s feeling about the organization as part of the audit. Panou told attendees that moral values aren’t specific to one culture. “Integrity is universal.”
Rationalization Is Hard to Detect
Rationalization is an often-overlooked section of the Fraud Triangle, because it’s difficult to detect, but Panou told attendees that there are signals. “Silence can be extremely loud in an organization,” she said. “Silence is a big indicator.” When everything seems too perfect, and too clean, there might be something else going on below the surface. Sometimes, the risk indicators can be found in the human resources department, and auditors should look to it for help with assessing fraud risk, which involves assessing what’s going on in the field. Other signals that Panou said are suggestive of a troubled culture include the normalization of making exceptions to the rules and leaders not asking any questions during meetings — especially in a crisis.
Panou concluded the session with the message that fraud fighters can’t underestimate the impact of pressure on human beings. “We are human beings and they have their financial needs.”
