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The Lure of the Dark Side

The lure of the Dark Side

 

So, I had lunch with a lawyer friend of mine today. The conversation turned to “Stuff we’ve seen”. He told me about a story of a fraud a lawyer out west suffered recently. It goes like this:

“Husband and wife” visit lawyer to collect a cheque. After a few minutes of small talk, they pause on the way out of the door, and ask if the payment could be made to them by EFT instead. The lawyer says “Sure”, they hand the cheque back, and leave with the EFT already on its way. At the end of the month, the lawyer is reconciling his trust account, and finds that the payment went out twice. The “wife” visited the washroom while husband was chatting…. and deposited the cheque by photo-banking. The lawyer didn’t know that the cheque he got back had already been deposited.

Sadly, at H&Co, we run across frauds maybe once or twice a year. It’s safe to say that most of them aren’t as slick as that one – which involved some good sleight of hand. And, sadly…. many of them could have been so easily avoided.

So…. another public service blog. I can’t promise to immunize you against this risk, but at least let’s go for the low-hanging fruit. There are other sorts of fraud, but let’s focus on theft – of money or goods.

 

How and why do frauds take place?

Students of fraud often talk of the “Golden Triangle” – you typically need all three following elements….

The reason is normally fairly obvious: good old-fashioned greed. But… it can be more complex, or even tragic than that. Think of the spouse whose partner loses their job, and they can’t keep their kids in school. Or the person with the gambling addiction they’re hiding from their family.

Rationalization is more complex – it’s how you justify your action to yourself. I’m always worried about the “trusted employee” – that right-hand person who you trust completely. Most of the time your trust is justified. But there have been lots of cases where the fraudster had been building up resentment – and so they took what they felt they were entitled to.

In one famous case, the trusted employee had the opportunity to take lots of money. He stole the equivalent of 10% of his salary each year (to the dollar), because that’s the pay rise he felt he’d been unfairly denied. When the police asked why he didn’t steal more, he was horrified. “No, of course I wouldn’t do that. That would have been wrong!”

Opportunity is obvious: you can do it – and get away with it.

 

So…. What can you do?

I’m assuming you’re reading this as a business owner – or a director of a charity or a non-profit. I do quite a lot of work with non-profits, educating their boards on how to think about this sort of stuff. Often, it’s the first time that it’s occurred to them. Many directors also aren’t aware of the legal duties and risks they take on with the role. It can be a rude awakening.

Here are my two golden rules.

 

  1. Lead by example.

Think about the tone you are setting in your organization. If the staff know that their boss pads his expense reports or overbills clients, it’s not a great example. Same if someone’s busted, and gets only a slapped wrist.

But if you are always seen to be doing the right thing, then rationalizing theft becomes a little harder for those who look up to you.

 

  1. Don’t put people in harm’s way.

This is a bit more complex, and how to do it varies by organization. Lots of flipcharts involved.

The basics are obvious: Don’t put people in a position where they have the opportunity – and thus the temptation – to steal. Sensible physical controls (locks and cameras) go a long way to protect physical stuff, but it’s a lot harder to stop people stealing money – either by diverting it on the way in, or by fraudulently taking it out.

Here are the two most frequent objections I get – and how I reply.

“We don’t need to do this. We trust Joe completely.”

“Yes, but what if Joe goes off sick? Do you trust the next person in his job that well?”

OR

“Well, put yourself in Joe’s shoes. Money goes missing. He’s honest and didn’t steal it – but people see he had the chance, and start pointing fingers at him. Aren’t you being unfair to Joe by putting him in that position?”

“You’ve got to be kidding. If we do that, we’ll never get anything done.”

Yup, I agree. Sometimes a bit of rigour slows things down. So… find another way of achieving the same goal. If you can’t prevent somebody from stealing, the knowledge that they will very likely get caught will often do the job.

 

Here’s a true story:

I’m at a board meeting for a small charity. I know that all cheques have to be signed by both Joe (sole employee, not his real name) and the treasurer. Good control, it means Joe can’t be accused of writing him/herself a cheque. But… out of the corner of my eye, as I’m packing up, I see the treasurer signing a book of blank cheques. I ask what he’s doing. He shrugs. “Well, sometimes I’m out of town and Joe needs a cheque in a hurry. So I give him a few up front.”

Fair enough. A pity that Joe cashed $25,000 of these cheques over a 3-year period. Because the charity never set a budget, he was also able to hide the theft by spreading it over a few cost accounts.

Could it have been prevented? Sure, easily. Sometimes, Joe does legitimately need those cheques. But, in that case, the treasurer should make sure that each month he looks at the bank statement – and all the cheques that came back with it.

 

Moral of the story: People are human. Don’t assume they’re crooks – but don’t lead them into temptation.

If you have any good fraud stories, please let me know.

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