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January 27, 2020

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Butterfly or Leaf??

January 27, 2020

Things are not what they seem…


This photo was taken in Malaysia and shows how a local butterfly can mask its appearance by mimicking a leaf. On the branch one can view some “real leaves” and some leaves that are actually butterflies; a job well-done! 
If we consider internal fraud, these types of offenders are often camouflaged with the ethical employees, similar to the activities of the Malaysia butterflies.  

   
I have been asked more about internal theft in the last two years than in the entire decade prior.  This is disturbing as the primary focal point for companies is usually on external threats, not on individuals the company actually hired!  Many external fraudsters commit fraud as they feel a sense of entitlement; they justify their activity in a manner that makes them feel better about the crime. Internal employee fraud is no different. Many internal fraudsters commit fraud out of retaliation toward some aspect of their working conditions, which often includes compensation. I witnessed one company go into complete turmoil when, because it pledged complete transparency, decided to release corporate salaries. The company did this in a manner that did not reveal the names of specific employees but instead the particular compensation of a salary band. This was retracted within a year, as it caused incredible tension, turmoil, and negative energy among the employees. Academic studies have also confirmed this contention. Wage disclosure can cause increased incidents of employee fraud, as it breeds a sense of entitlement with the employee. One particular study revealed that when a salary gap is identified, the employee at the lower salary range will oftentimes act negatively in some manner. This behavior is justified by the lower-paid employee as an entitlement to recoup the wage gap; he/she will feel justified in the actions as he or she feels undervalued by the company. Thus, there appears to be a threshold on the transparency that a company should show, specifically when considering compensation.

 
In the above scenario of wage disclosure, it is difficult in the insurance and financial sector industry to accurately quantify fraud due to the complexity of measuring these incidents. In a recent study, the research revealed that higher wages have a positive impact on employee honesty. In one midsize retail store chain, researchers discovered that increasing salaries by $1 would cost $16,285, but prevent $6,362 in theft. A return on investment calculation would reveal that the wage increase of $1 would only cover 39 percent of the cost; however, this is not the overlying point of the study. The study instead offers significant insights that increases in salaries lower incidents of theft and have a positive impact on employee honesty. Furthermore, other studies have shown that when salaries are cut, employee theft increases, shedding additional insights into this perspective. This is not to imply that higher wages automatically reduce theft, but discussing these studies may assist in advancing the knowledge base and help companies in developing the appropriate counter fraud strategies in this area. 


Stay safe! 

 


Dr. Fraud 
 

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