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Fraud is an act of misrepresenting when one party intentional deceive and induce the other party with something of value or to surrender a legal right. Employee fraud is employee get the personal benefit by converting cash or other assets, and management fraud is the performance fraud that hide the truth to make high earning or to stop the decline in earnings. As for the factor that will lead to the fraud: The situational pressure and opportunity work in a confrontation way with ethics that form the fraud triangle. When the situational pressure and opportunity increase, the likelihood of fraudulent behavior will increase. By further identify the relationship with situational pressure or opportunity, and likelihood of fraud, we can sum up some control methods for prevention.

First, the situational pressures include personal or job-related stresses that may simulate the dishonestly behavior. Bad working situations will lead to bad performance that employee with personal stresses will see fraud as an easier way to complete their target. Job-related stresses can also be caused by other people, like when a manager push a worker to reach the target as quickly as possible that force a variety of human responses and sometimes cause the internal fraud. Taking Wells Fargo’s fake accounts scandal as an employee fraud example. Employees opened millions of fake bank accounts to reach the sales targets. Wells Fargo Bank workers say they are still under pressure to get bonuses and push through deal closings with ‘no real respect’ (Michael Sainato), workers also face intense pressure from their managers who want the deal closings as soon as possible to get the bonuses and avoid the lost of compensation. A working condition without respect for work-life balance, decrease worker’s sense of belonging. Besides consider about company’s long run benefit, worker prefer use the shortcut to get a fake “good result”. Thus, the situational pressure leads to the fraud and causes Wells Fargo around 2 million loss.

Another example that situational pressure leads to the management fraud is the biggest scandal from Theranos, Theranos created a new way to do the blood test that they only need to collect fingerpicks of blood which is more convenience than the traditional blood collection. People can even do the blood test at home. However, the whole things for Theranos is a fraud. The founder of Theranos, Elizabeth Holmes started the idea, but the test result always fails. Elizabeth face the pressure from investor, so she keeping make up the test result and success of Theranos to fulfill investors and gain more investment.  a federal grand jury indicted Holmes and Balwani on charges of wire fraud and conspiracy to commit wire fraud for their roles in separate schemes: one to defraud investors and one to defraud doctors and patients. In September, Theranos shut down for good after reaching an agreement to hand over its patents to its most important creditor, Fortress Investment Group. It is estimated that investors lost nearly $1 billion. (fraud-magazine) The stress exceeds the ethical that she decided use the fraud to get short-run benefit and cover the failure of the idea.

Furthermore, here is an example that with both personal stress and management situational pressure cause the fraud. Jerome Kerviel is a rogue trader who tripped up the world’s financial market when his unauthorized trading in the securities markets using the bank’s computers resulted in €4.9 billion losses to the Société Générale funds. The worst part of the issue came when the bank’s executive tried to mask the fraud by “unwinding” his trades. (Jason) Kerviel face the pressure to generate and higher return and with his gambling attitude that he try to use fraud to ger better results, while the bank face the pressure to maintain their brand image that they won’t loss their brand loyalty, thus they use a fraud to cover-up the fraud.

As far as I concern, personal situational pressure in three ways that can lead to employee fraud. First factor can be one with bad financial situation, when certain people have high debt with very low quality of life, compare with ethic, make living is more important for them, so they need to generate money as soon as possible which make them choose use fraud to get money quicker. Second, bad personal habits can lead to fraud, one with bad habits, no matter in a good financial situation or not, prefer use fraud to make quick money. For example, people who are extensive invest in stock market or involve in gambling activity or indulge in drug and alcohol. Their normal income cannot afford their behavior that will lead to fraud. Third, some negative personal feelings will lead to fraud as well. Employee been treated unfairly in the company, with less communication with manager and workmate, or manager put too much pressure on employee. These factors will demotivate worker, and they will lose sense of belonging in the organization. Without consider about the company’s loss, employee will use fraud to finish their work faster or get more money or benefit for themselves. On the other hands, the situational pressure also contributes to management fraud in three ways: first, company with bad financial condition, when it face heavy losses or with high debt and low credit, even has urgent need for earnings. Avoiding get bankruptcy, it has no way but use fraud to keep lying to investors and consumers. Second, company with limitation can lead to fraud, for example, when company use niche market that only rely on one or two products, or dependence upon on one or two customers. The company is hard to extend its product line and enlarge the market to make further progress. Third, the unreasonable business plan also can lead to fraud: when company strategy is extremely rapid expansion or promise giving investor a super optimistic financial report. Since the business decisions are hard to achieve, once the company find they cannot fulfill the demand, facing the pressure from both internal and external, the company may use fraud to keep their negative earnings.

As for the control measure in order to decrease the situational pressure to decrease the likelihood of fraud. First for solving the situational pressure that cause employee fraud. Worker need to be motivated in the company to decrease the personal stress, thus they can feel sense of belonging and be loyalty to the company, furthermore their working efficiency will increase. Compare with employee fraud that may cause loss or even bankruptcy to the company, worker with motivation helps company earn more profit. According to Maslow’s hierarchy of needs: From the bottom of the hierarchy upwards, the needs are: physiological, safety, love and belonging, esteem and self-actualization. Needs lower down in the hierarchy must be satisfied before individuals can attend to needs higher up. (Saul Mcleod). People are not only motivated by money, provide them a better and safer working condition can fulfill their basic needs, company can organize some activity to let employee have chance make friends with the work mate and manager to give them sense of belonging in the company, also let manager reward subordinates when they did a good job to fulfill their esteem needs. Plus achieving worker’s full potential including creative activities to reach self-actualization. On the other hands, company should build a good company culture to let employee knows the important of ethic, and let them know what they should do, what they shouldn’t, not only be self-discipline, but also report and stop others when they try to use fraud.

Opportunism is also a factor that contribute to fraudulent behavior. It is the circumstance that allow fraud to occur. When people have the direct access to assets or information to make control of them to make self-benefit. Opportunism create a channel and indiscoverable environment for implementation of fraudulent activity.

Taken the example of Nirav Modi, jeweler to the stars, as an example: Modi’s seemingly charmed life came to a crashing halt early in the year when the second-largest state-run Indian bank, Punjab National Bank (PNB), filed a police complaint against Modi, another jeweler Mehul Choksi and others, alleging the men had conspired with two of its staff to defraud the bank of nearly $43 million. (Fraud Magazine) further the bank has identified the total amount in the fraud is around $2 billion, those transaction without proper authorization were not recorded in the bank’s system. The Modi’s scandal has been seven years, the fraud cannot be detect is also due to inefficiency internal control of Nirav Modi company create the opportunity for Modi to get money from bank for such a long time.

Another example is from the famous Enron Scandal. Enron, once a successful energy business, when to bankruptcy from its peak shares were worth about $90.  this Houston-based energy company toppled into a spectacular bankruptcy which spelled disaster in the financial world due to a painstakingly-planned accounting fraud made by its accounting firm, Arthur Andersen, Thousands of employees and investors saw their savings vanish with the company as it filed for an earnings restatement in October 2001. (Jason) The accounting method that Enron used is mark-to-market which is not based on “actual” cost but on “fair value”, they can put the estimate profit into the historical earning calculation, thus Enron can show a fake good financial result to the public. So, the unreasonable accounting method is the opportunity to form the scandal and encourage the fraud.

There is another similar case is the famous Ponzi Scheme, A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. (James Chen) People realized the perfect investment is a fraud when Bernie Madoff’s didn’t have enough money to go around. Companies engage in Ponzi scheme are focus on attract new investors put money into the “high return and low risk” investment, so they can get the money and paid old investor to approve their success that can attract more clients. Once the flow runs out, the bubble burst. Investor believe the fake guaranteed with out further due diligence of those company’s investment create the opportunity for the Ponzi’s fraud, plus investors are not allowed to view the official paperwork makes the fraud can keep running.

In conclusion, opportunities can lead to employee fraud in two ways: First, personally-created opportunities when people inside the company familiar with how to cover up capabilities or have close relationship with supplier or key people give them the channel to do fraudulent behavior and without been realized at once. Second, the firm without rigorous characteristics make it easier for people to commit fraud. For example, company didn’t pay attention to let employee know what they should not do that employee without self-disciplines of fraud perpetrators. The high turnover rate of key employee will cause the vulnerability management. Company without clear record of disciplinary actions make people can find a loophole to do fraudulent behavior, indeed it will also hard to check which step went wrong and difficult to hold to account. Company didn’t pay attention to the operational detail and didn’t upgrade their internal security and audit regularly will create a better situation for fraud to be hided.

Opportunities that encourage management fraud in four ways: First, close unhealth relationship with outside parties will lead to fraud. When company switch their auditing firm and change auditor frequently that make fraud easier to commit. Also, when company use number of different banks, their unreasonable transaction may not be discovered, and it is hard to get a clear transaction history of the company give fraud a cover-up chance. Some company not cooperate with regulatory agencies and refuse to give auditors the data they ask for, then regulatory agencies cannot reach enough information to do due diligence which increase the likelihood of existence of the fraudulent behavior. Second, unreasonable organizational structures that make fraud easier to commit. Like when the business structures are too complex to get better management of different department, and the company’s internal auditing staff is ineffective and the internal control is careless implement lead to the increase the chance of fraud. Third, some economic environment such as hot industry makes management fraud easier to commit. Finally, non-compliance accounting practices will increase the likelihood of management fraud, in particular, unusual transactions, poor accounting records, questionable accounting practices didn’t been disclosure.

With better understanding of the factors that will lead to the fraud, we can easily consider about the way to make control upward in order to make company operate healthy, develop effectively and exist in the market for a long run. First of all, a well-developed internal control system helps the company better control their operation and can detect any suspicious behavior before it goes too far, more specifically, the company should have an internal audit department which responsible for supervise whole company’s activity and see something say something that make sure the company is running within the regulatory agency’s rules. Secondly company should work with external auditors to double check the status of the company, provide them with clear business information to let them do the due diligence, then the opportunity for the fraudulent behavior will disappear. When comes to some important operating or business decision making, let at least two people do it together to avoid the opportunity for the fraud that people can get benefit for themselves. Lastly and most importantly, company should build a perfectly fitted business structure for better management to eliminate the opportunity of fraud at the very beginning.

All in all, from variety of example and conclusion, we ensure higher situational pressures and more opportunist moments will increase the likelihood of fraud within a company. The control measure should be taken and prepared in 3 stages, prevention stage (before the fraud happened), stop stage (during the fraud happened) and recover state (after the fraud happened). When comes to the prevention activity, company should first have a top-down easy to understand standard, always remember do the background check of every strategy, secure company’s assets and important data, let employee know their duties and the importance of ethic, implement both effective internal and external audit to prevent the fraud. Then if the fraud is happened and the company has realized the fraud activity, it should take action at once to stop the fraud as soon as possible in order to limit the lost to minimum amount. The company should analysis the main reason for the fraud and fix the mistake. If unfortunately, the fraud is already happened and cause big loss to the company. They should set up a recover plan, learn from the history and start the business all over again.

Reference:

“Wells Fargo employees say little has changed since fake accounts scandal”, Michael Sainato, 4 Jan 2019, https://www.theguardian.com/business/2019/jan/04/wells-fargo-fake-accounts-scandal-employees

“heranos founder Elizabeth Holmes charged with massive fraud”,  Sara Ashley O'Brien, 14 March, 2018,

https://money.cnn.com/2018/03/14/technology/theranos-fraud-scandal/index.html

“5 most scandalous fraud cases of 2018”, Nov, 2018

https://www.fraud-magazine.com/2018Top5Frauds/

“Maslow’s Hierarchy of Needs”, Saul Mcleod, 2018

https://www.simplypsychology.org/maslow.html

“25 biggest corporate scandals ever”, Jason, 0ctober 29 2019

https://list25.com/25-biggest-corporate-scandals-ever/

“Ponzi Scheme”, James Chen, Feb 3 2019

https://www.investopedia.com/terms/p/ponzischeme.asp