by Joseph T. Wells, CFE, CPA
Employee dishonesty is almost as old as the workplace itself. The ancient Pharaohs of Egypt may have been first to recognize the problem. A portion of each harvest, which was gathered by slaves, invariably turned up missing. Even the scribes who kept records were not above suspicion when it came to the Pharaohs' assets.
In time, the Pharaohs concluded that no employee paid or not - could be completely trusted. Therefore two scribes were used to independently record and verify assets. The two totals were then compared to insure they matched. If not, one or both of the scribes often paid for the discrepancy with his life. Although today it is considered tacky in Western societies to execute embezzlers, the problem of employee dishonesty is still with us. In fact, many experts suggest it has grown significantly in the last decade or two.
Why employees commit fraud and abuse in the workplace - and what can be done about it - is the subject of this and many other articles.
Although I spent ten years investigating all forms of dishonesty as a Special Agent for the FBI, my actual first experience with employee theft came the good, old fashioned way: as a youth, I - and most of my fellow student workers were thieves ourselves.
That shouldn't surprise or shock you. Studies consistently show that at one point or another, just about every employee steals money or merchandise. And we're not talking about pencils and paper clips. In my case, I stole men's clothing.
Mr. Mace, Ill call him, was my boss. He was the sole proprietor of a men's collegiate clothing store not far from campus. He had the imagination to name his clothing store "Mr. Mace, Incorporated." Although Mr. Mace dressed to the nines, most of his employees thought he bore an eerie resemblance to Hitler, sans mustache.
When I went to work iii his store, it was clear that the other employees hated Mr. Mace. He was absolutely the most miserly individual I had ever met. About a month after I began work, I was up in the stockroom getting some merchandise off the top shelf. As I got down off a ladder and was tucking my shirt inside my pants, Mr. Mace appeared. He didn't say anything, but he had a curious look on his face. About ten minutes later, I was summoned to Mr. Mace's office. "Joe," he said, "I thought I saw you tucking some merchandise in your pants. Are you stealing from me?"
I was stunned. "Of course not," I replied.
"Well, then I am sure you wont mind dropping your pants so I can see for myself," he said. Because I needed this job desperately, I found myself dropping my trousers in front of my boss. My cheeks burned with anger and humiliation; and after Mr. Mace saw that I wasn't wearing any of his precious merchandise under my pants, I left the office in anger.
I walked out of that office vowing to make him pay for this transgression. From that point forward, I tried to steal everything I could from him. I made a game of it - I really didn't need the stuff (although certainly I could use it), but that wasn't the point, as far as I was concerned. Shortly thereafter, I learned that the other employees were doing the same thing for essentially the same reasons. We were trying to steal Mr. Mace, Inc., blind. It didn't work. But doubtless Mr. Mace wondered why his profit margins were so thin.
Thirty years later, after much practical experience and academic study, I learned that my motivations for behaving dishonestly on the job were typical. While people do steal because they "need" the money, by far the most common reason for employee dishonesty is dissatisfaction in the workplace.
That's the same conclusion that Hollinger and Clark came up with in their book, Theft by Employees (Lexington, Massachusetts: Lexington Books, 1983). In the early 1980s, they surveyed 9,000 employees in the U.S. and noted that employee theft and dishonesty is part of a larger pattern of what they call "workplace deviance."
This deviant behavior exists in all organizations to some extent or another. Employees who feel mistreated on the job have their own ways of retaliating: calling in sick, leaving work early or coming in late, pilfering and other such activities. At the extreme edge of workplace deviance is employee theft and dishonesty.
Sociologists like Hollinger and Clark argue that attempting to control employee theft without addressing its underlying causes often produces a "hydraulic effect."
Theft may drop by your attempts, but at the expense of more counterproductive behavior in other areas. In short, theft might be reduced, but employees may "get back" by calling in sick more. Suffice it to say, controlling employee dishonesty involves more than cameras, audits and criminal prosecution of miscreants.
To control employee theft, we must start with the understanding that it cannot be eliminated, just reduced. And to reduce employee dishonesty, banks should understand there are three interacting elements: the character attributes of the offender, societal influences and workplace factors.
A small percentage of any given population contains individuals without moral substance. This small percentage will lie, cheat and steal without much provocation. They seldom change their ways - even if they're caught. The only protection against such employees is not to hire them. Fortunately, most of them leave a track record that can be uncovered though adequate preemployment screening.
That leaves a large segment of the employment population who are "situationally honest" - that is, whether they act honestly depends entirely on the situation. No one behaves honestly or dishonestly all the time - no one. The truth is, some pretty nice people lie and steal on the job - People such as Anna.
Anna, My First Exposure
Anna worked in a bank in El Paso, Texas, as a teller. I had just arrived in the same town, a new graduate of the FBI Academy. Anna was my very first case, and I remember it like yesterday. One of the local banks had reported Anna was short of cash after a routine audit. It looked like Anna had embezzled the missing funds. I don't remember exactly what I was expecting to find as I drove to the bank to meet her, but it wasn't Anna.
My embezzler turned out to be a frightened divorcee with two lads and a deadbeat husband. She had "borrowed" money from time to time for family emergencies, replacing the funds with her own personal check. That check got larger and larger, until it was nearly a thousand dollars. The auditors spotted the check, and when they asked about it, Anna became very nervous. They knew right away why.
On the other hand, I had no experience at all with embezzlers. She was such a nice person, I felt sure the prosecutors wouldn't take the case even though she had confessed. I was wrong. When I explained to the prosecutor that this young woman really wasn't a criminal, he smiled and said, "I guess you're new at this business. Most embezzlers are pretty nice people."
They are "pretty nice," and many times, very insecure. That's my conclusion after having taken several hundred bank embezzlement confessions over my career. Many experienced fraud examiners say that bank embezzlers fit the >
Embezzlers as a group and it is difficult to generalize tend to play out their insecurities by being materialoriented. For example, although Anna was nearly penniless, she managed to dress very well. Others spend their money on very conspicuous goods such as cars and nice homes.
To understand the inside criminal, banks should consider the societal influences that impact the rate of crime in general and employee dishonesty in particular. Many of these factors are beyond the control of the bank. But that's not always helpful when the institution is the victim.
Still, sociologists, criminologists and anti-fraud practitioners believe there is a connection between early family environment and the tendency to engage in crime, including bank embezzlement. Simply put, dysfunctional families produce more criminals.
According to many experts, dishonesty of all kinds permeates American society. They blame the problem on a lack of moral consensus they believe has occurred gradually over the last 40 years. In 1994, the Ethics Resource Center said that employees witness a great deal of misconduct on the job [Ethics Resource Center, Inc., Ethics in American Business: Policies, Programs anti Perceptions (Washington, D.C., 1994)]. Whether that misconduct ever will be dealt with depends on the employees' perception of management.
Anti-fraud professionals know that each workplace creates its own unique problems. Because all employees are endowed with a certain level of trust, dishonesty is easily created.
Complex banking and corporate structures contribute to the problem. Isolation and reporting sequences can make dishonesty easy to conceal.
Employees adopt the best and worst traits of their own managers and executives. Unfortunately, according to many experts, a corporate climate has developed whereby executives and employees view rule-breaking as the norm rather than the exception. Therefore, nothing will control employee dishonesty in employees who perceive that their leaders are doing the same thing.
Banks Versus Other Industries
Banks have unique problems with dishonesty. Although no national statistics are maintained, many experts see banks as especially vulnerable to occupational frauds for essentially the same reason the 1930s gangster Willie Sutton said he robbed banks: "Because that's where all the money is.
Frauds in banks typically are of three types: embezzlements of cash, loan fraud, and conflicts of interest.
The latter usually is committed by executives of the bank who fail to disclose financial interests in customers.
Banks also have particularly high turnover in teller personnel, those with the most direct access to currency. It is easy to see how marginally paid employees such as Anna, who are exposed constantly to open drawers of money, frequently are overcome with temptation.
Considering these factors, the prevention of dishonesty removing the various underlying causes - is a daunting prospect. But dishonesty can be deterred.
Deterrence can generally be defined as discouraging a person from acting on impulses - in this situation, dishonesty in banks. A person can be deterred through the perceived threat of negative consequences, such as being caught, fired, prosecuted, punished and humiliated.
There are two kinds of deterrence, general and specific. General deterrence is when other employees get a message from punishment of an embezzler. Specific deterrence is when the embezzler himself or herself is punished.
General deterrence involves a very complex formula. Not everyone can be deterred, and not everyone needs to be deterred. Most of us fall somewhere in between. In order to be effective, deterrence needs to involve the perception of swift, certain and severe punishment. This may be somewhat difficult to accomplish in our problem-ridden criminal justice system.
In cases involving employees with a conscience, though, the real punishment is the shame of being exposed as dishonest. Jobs are lost; family and friends are embarrassed; and a black mark is created permanently on an employees record.
Therefore, the most effective deterrent for banks and other enterprises is to increase the perception that the miscreants activities will be uncovered. Employees who perceive that their unlawful conduct will be uncovered are less likely to engage in it. This concept is called the perception of detection. The perception of detection in banks can be increased a number of easy and practical ways. Each bank, for example, should have a dedicated fraud examination unit in charge of all aspects of fraud detection and prevention. In smaller banks, this function can be handled by one person on a part-time basis. The purpose of that unit is to handle all matters involved with the detection or deterrence of fraud: education, policy, liaison with law enforcement and legal staff, and related activities.
Such proactive steps as surprise cash counts, loan collateral inventories and other visible deterrents can be very beneficial. Employees should be encouraged to report all conduct of a questionable nature to a hotline; of all possible practical deterrent measures, I believe this should be at the top of the list.
Hotlines were pioneered by government agencies for employees to report fraud, waste and abuse. They have been so successful that many are now mandated by law. The concept is simple: employees are given the hotline number and encouraged to report violations.
Studies have shown, however, that employees are less likely to report activity to an internal hotline within the bank. Therefore, you need to look to the outside for help.
The Association of Certified Fraud Examiners, for example, has EthicsLine (800) 2453321), a subscriber service whereby calls are answered 24 hours a day, 365 days a year for a nominal fee by experienced Certified Fraud Examiners. Information concerning the call is relayed back to the subscriber within one business day.
Employee dishonesty defies easy solutions. But as set forth, there are practical measures banks can implement to reduce risks. First, select honest employees. Treat them well and pay them adequately. Second, provide anti-fraud education for all employees and managers. Third, be proactive instead of reactive. By increasing the perception of detection, banks can significantly decrease their losses, both monetary and human.
Joseph T. Wells is founder and chairman of the 13,000-member Association of Certified Fraud Examiners, Austin, Tex. A former FBI agent, Wells writes, researches and lectures on white-collar crime.
Copyright © 1995 Bank Security & Fraud Prevention. Originally appeared in Bank Security & Fraud Prevention, Vol. 2, No. 8, 8/95
First published on 08/01/1995