The Anatomy of Fraud and Corruption
eBook - ePub

The Anatomy of Fraud and Corruption

Organizational Causes and Remedies

Tomas Brytting, Richard Minogue, Veronica Morino

Share book
  1. 294 pages
  2. English
  3. ePUB (mobile friendly)
  4. Available on iOS & Android
eBook - ePub

The Anatomy of Fraud and Corruption

Organizational Causes and Remedies

Tomas Brytting, Richard Minogue, Veronica Morino

Book details
Book preview
Table of contents
Citations

About This Book

This ground-breaking book explores what happens when the fine line between competitive excellence and fraudulent and corrupt practice is crossed. Whilst most fraud literature focuses on the individual perpetrator, The Anatomy of Fraud and Corruption looks at how organizations as a whole and the people within it behave when fraud and corruption occur. By presenting a theoretical basis and a practical methodology for fraud risk awareness training, the book helps risk management professionals, and all those in critical corporate roles to redesign and train their organizations to strengthen their culture and become more resistant and resilient to the ever present threat of fraud and corruption. The Anatomy of Fraud and Corruption demonstrates that what we see as objective facts are not always what they seem. The qualified and uniquely experienced authors present a refreshing interpretation of Cressey's triangle of need, opportunity and rationalization. They employ a drama metaphor to reflect the interaction between fraudsters, victims and bystanders on the organizational stage. Corporate design, management and culture dictate what behaviour is normal or abnormal, whether it be manager and employee behaviour or their ability to become suspicious and question apparently improper actions. Using actual cases and investigations, the organizational conditions that give rise to fraud and corruption are explored. The authors then provide important insights as to how employees may be trained and motivated to reduce the likelihood and impact of fraudulent incidents. Whilst fundamentally a practical guide, this book is also essential reading for academics wanting to stay abreast of the latest developments in the study of ethics, organizational and work psychology and sociology, and criminology.

Frequently asked questions

How do I cancel my subscription?
Simply head over to the account section in settings and click on ā€œCancel Subscriptionā€ - itā€™s as simple as that. After you cancel, your membership will stay active for the remainder of the time youā€™ve paid for. Learn more here.
Can/how do I download books?
At the moment all of our mobile-responsive ePub books are available to download via the app. Most of our PDFs are also available to download and we're working on making the final remaining ones downloadable now. Learn more here.
What is the difference between the pricing plans?
Both plans give you full access to the library and all of Perlegoā€™s features. The only differences are the price and subscription period: With the annual plan youā€™ll save around 30% compared to 12 months on the monthly plan.
What is Perlego?
We are an online textbook subscription service, where you can get access to an entire online library for less than the price of a single book per month. With over 1 million books across 1000+ topics, weā€™ve got you covered! Learn more here.
Do you support text-to-speech?
Look out for the read-aloud symbol on your next book to see if you can listen to it. The read-aloud tool reads text aloud for you, highlighting the text as it is being read. You can pause it, speed it up and slow it down. Learn more here.
Is The Anatomy of Fraud and Corruption an online PDF/ePUB?
Yes, you can access The Anatomy of Fraud and Corruption by Tomas Brytting, Richard Minogue, Veronica Morino in PDF and/or ePUB format, as well as other popular books in Droit & Droit des compagnies. We have over one million books available in our catalogue for you to explore.

Information

Publisher
Routledge
Year
2016
ISBN
9781317045090
Topic
Droit
Edition
1
PART I
The Anatomy

1
Introduction to Part I ā€“ The Anatomy

There is nothing either good or bad, but thinking makes it so.
Hamlet, II, ii, 50
As the American philosopher of science Abraham Kaplan (1964) explained:
A theory is a way of making sense of a disturbing situation so as to allow us most effectively to bring to bear our repertoire of habits, and even more important, to modify habits or discard them altogether, replacing them by new ones as the situation demands.
These words provide us with inspiration for a theoretical start of this book. Without a proper theory, working with fraud prevention might be quite disturbing. The fact that managerial fraud not only exists but that it is also a common phenomenon raises some fundamental questions:
ā€¢ Even though every society and culture condemns fraud, individuals with corrupt or fraudulent personalities keep reaching high positions in these cultures and societies. Why?
ā€¢ Why do highly trusted and wealthy high-status individuals in society suddenly risk everything by engaging in fraud and corruption?
ā€¢ Why is it so hard for people in the vicinity of fraud and corruption to realize what is going on?
ā€¢ Is managerial fraud and corruption an expression of an underlying personality disorder or is it the work of an immoral criminal mind? Is there a difference?
ā€¢ Is managerial fraud and corruption an individual phenomenon in the first place, or is it rather an inevitable (or even necessary!) dimension of any competitive business organization?
ā€¢ Why do we call fraud ā€˜unethicalā€™ and not simply irrational, illegal or inefficient business practice?
The present level of understanding, or rather the lack thereof, is truly disturbing. What is managerial fraud and corruption all about?

Definitions of Fraud and Corruption

The OECD, or Organization of Economically Developed Countries (OECD, 2002) has suggested the following definition of ā€˜corruptionā€™:
The active or passive misuse of the powers of Public officials (appointed or elected) for private financial or other benefits.
It is understood to include everything from the paying of bribes to civil servants and the simple theft of public purses, to a wide range of dubious economic and political practices in which business people, politicians and bureaucrats enrich themselves. Corruption comes in many guises in fact. Bribery, extortion, fraud, trafficking, embezzlement, but also nepotism and cronyism (giving privileges to long-time friends) are all different manifestations of it.
However, some of these practices may not always be meant to benefit individuals directly. One might for instance bribe someone on behalf of oneā€™s employer in order that the company receives beneficial treatment. If we take the OECD definition literally that would not be seen as an act of corruption. But, on the other hand, who would do such a thing without looking for some sort of private benefit as a side effect?
Literally (from Latin) corruption has to do with the misrepresentation or distortion of texts. This brings the meaning of the term closer to the modern usage of the term ā€˜fraudā€™ as described in the Oxford English Dictionary (2008):
Criminal Deception; the using of false representations to obtain an unjust advantage or to injure the rights or interests of another.
This dictionary definition adds a clear moral dimension to the term. Explicit and implicit references are made to moral values such as: Truth, Justice, Rights and Interests of others. These are core values in all discussions of both corruption and fraud. Thus fraud and corruption are not only unwanted, illegal or abusive. It is the infringement of these moral values that renders the practice of fraud and corruption the epithet: immoral or unethical.
The International Standard on Auditing issued by the International Auditing and Assurance Standards Board (IAASB, 2008) defines fraud in a way that specifically mentions management and those charged with governance as possible perpetrators, placing fraud in an organizational context as:
An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.
The Institute of International Auditors (IIA, 2010) presents an even more specific definition:
Any illegal acts characterized by deceit, concealment or violation of trust ā€¦ Frauds are perpetrated by individuals and organizations to obtain money, property, or services; to avoid payment or loss of services; or to secure personal or business advantage.
The IIA definition requires a fraudulent act to be illegal but not necessarily intentional. However, in most countries illegality would include the requirement of intent. But another interesting consequence of this definition is that, by including illegality in the definition, specific acts might be fraudulent in one jurisdiction, not fraudulent in another. This relativistic hint is something that we will return to later.
The IIA definition is useful for this study also because it states that organizations, and not only individuals, may act deceivingly. It will become clear that it makes sense to include, like IIA does, organizations in the discussion about fraudulent or corrupt acts, even though the criminal code normally requires the fraudster to be human. You cannot put a company in jail. It may also be argued from a strictly philosophical perspective that only human beings can be analyzed as moral subjects (for a philosophical discussion, see for example Wolgast, 1992). However, we will not enter deeply into that question here. For our purposes, it makes sense when studying ā€˜the anatomy of fraud and corruptionā€™ to study also organizational structures and cultures. They may sometimes hide or even support fraud and corruption. Also, the countermeasures we will propose in Part II may sometimes best be targeted to the organizational level rather than the individual.

2
Six Cases of Fraud and Corruption

I could a tale unfold whose lightest word would harrow up thy soul, freeze thy young blood make thy two eyes, like stars, start from their spheres, thy knotted and combined locks to part and each particular hair to stand on end ā€¦
Hamlet, I, v, 15
We begin with a narrative of six cases of fraud, as described from the point of view of either the fraudsters themselves or other persons close to the events. While these cases are based on real events, the narratives themselves are constructed. Some of the common dynamics of managerial fraud are illustrated in the cases, including:
ā€¢ knowing about misconduct but not daring to come forward;
ā€¢ the hesitation to prosecute;
ā€¢ the ā€˜slippery slopeā€™;
ā€¢ the seduction by strong managers of weak colleagues and subordinates;
ā€¢ the inability of bystanders to draw correct conclusions; and
ā€¢ the (sometimes) narcissistic personality of the fraudster.
We will examine these phenomena in the following chapters.

Case 1: Rose

Dear Tom,
Since you are also heading up new business ventures I thought I would tell you the following story from when I was Director of Sales for the Nordic and the Former Soviet Union markets.
When it all came to a head way back in August 2002, we knew we were losing money, I had been expecting something like this. Criminals, the lot of them, I thought! We should never have opened a company or had delusions that we could break into the former Soviet Union so easily. First we had the problems with organized crime gangs in Odessa threatening our people and telling us that we donā€™t even own our plant ā€¦ now this. I could not believe it. A three-page letter packed with ludicrous accusations against Jimmy, our Managing Director, who we sent out there less than 18 months ago to set up our operations. Then itā€™s followed by 50 pages of documents, so-called evidence ā€“ most of which are in Russian or some other language which I could not make head or tail of. Of course I called Vladimir, our lawyer who represents us in Moscow, and he said he would look into it.
Less than 48 hours later, Jimmy turned up in my office, heavens knows why, swearing at me, as if I personally had accused him of all those crimes, most of which I didnā€™t understand anyway. Anyway I managed to calm him down and then thankfully Vladimir calls and tells us both that he has found out that the allegations are coming from the former local Finance Director in Kiev who Jimmy had sacked a few months ago because he suspected he had links to that Odessa mob. It seemed like our young Finance Director was just trying to scare Jimmy. So thatā€™s that; or at least I thought then.
However more letters kept on coming and just around year end I went to see Internal Audit to ask if they could put this one to bed, you know, cover my back. We had lost so much money out there this year by shutting everything down, that I did not want to be the only one taking decisions and carrying the can. They said they would look into it.
When they came back to me, I found what they had to say very hard to accept. They said that they had intelligence that Vladimir is the one with links to organized crime and shouldnā€™t be messed with. I thought we had checked him out but apparently no one ever did (or could!). It turns out Vladimir and Jimmy have plundered our operations, our plants, our customers and even our brands into a shadow company they set up and there is not that much we can do about it. This so-called young Finance Director was apparently trying to warn us and save what he knew was in fact a profitable business ā€“ we just did not know that!
Its then I make my next big error of judgement. I simply couldnā€™t, and wouldnā€™t believe the auditors. They said we had lost a lot but there was a chance we could get out of this one. Instead I stalled and asked for more evidence. I knew Jimmy well and was convinced that he was one of us, that he would never betray us!
But I was wrong and in the end it felt good to walk into the Head of Auditā€™s office and admit it. I was quite surprised how pleasant he was. He said if he had been in my shoes he would have found it hard to believe too, but he was paid to be a cynic!
We both agreed that the people you least expect to be stabbed by are your friends, et tu, Brute? ā€¦
I hope you take this for what it is meant to be ā€¦ a note of caution.
Your friend,
Matt

Case 2: Build-IT

By Rebecca Thole

14 May 2010

The public prosecutor yesterday filed criminal charges against David Kyle, a former regional manager of Build-IT Limited. In an apparently related matter, Build-IT last year reported to the European Community anti-trust commission that one of its regional divisions had participated in a cartel arrangement which effectively controlled contract awards within its geographical area. The arrangement took place, according to their report, without the knowledge or approval of higher management. In a press release at the time Build-IT stated that it does not condone such activities and that those responsible would be held liable.
Sources that wish to remain anonymous because they are not authorized to speak to the media have told us that suspected illegal behaviour was reported more than three years ago during an internal training programme at Build-IT group headquarters. No actions were taken at that time, but in planning stages of a second workshop it was decided to follow-up the earlier suspicions as a pedagogical case study, to bring more of reality into the course. It was soon discovered that key Build-IT employees, including regional manager, David Kyle, had secret financial interests in companies working for Build-IT on a sub-contractor basis, and were using their authority to authorize overcharging; a clear conflict of interest. As the investigation continued, an internal whistleblower appeared who was able to show that systematic bid rigging was taking place in collusion with competitor companies. Kyle, who had resigned but was still working for Build-IT on a consultant basis, was apparently the organizer of the cartel. During the investigation it was discovered, among other things, that Kyle and other managers had purchased valuable parcels of real estate from a major sub-contractor for less than 10 per cent of the true value.
Using an unfinished settlement agreement with Build-IT as a cover, investigators had arranged an in-depth interview with Kyle in which he voluntarily supplied all details of the cartel arrangement. He apparently believed that Build-IT would never report itself to the anti-trust commission, and would therefore also not report his role. He turned out to be mistaken on both counts.
Kyle had a long and successful career within the industry and within Build-ITā€™s parent company. His recent success was perhaps the result of the cartel, which worked as follows. Bidding companies cooperated in a club in which all significant contracts were distributed. If someone outside of the club gave a competitive bid, the manager of Build-IT was notified, waiting in his car during the opening of the bids, ready to supply an ā€˜updatedā€™ offer on the spot.
According to our source, Kyle apparently claimed that bribes had been paid before in other large projects, and did not consider that he was acting against company policy in arranging the cartel; on the contrary he was proud of his achievement.
Build-IT confirmed to this reporter that they have turned the whole investigation over to the police and the anti-trust authorities, but would not comment further. David Kyle was not available for comment.

Case 3: Judgement Day

Initial statement by Jamie Stevenson (written and provided voluntarily) to Allan Donaldson in April 2010.

I was hired in May 2007 as Director of Human Resources at Acabas Technology Services with particular responsibility for the development of new management training programmes. With my experience and qualifications I was attractive to the headhunters, and at the same time I needed a new job.
The truth of the matter is that I desperately needed to change job as things were getting hot at my previous employer. My debts and alimony payments to two ex-wives were piling up. I owed a lot of money to Tim Johnstone, the owner of a supplier of IT and e-learning services, and he convinced me to buy more services in return for him settling some of my debts. It was at first easy enough, but recently people were asking questions since Johnstoneā€™s companyā€™s work was poor quality.
I did not lie to the headhunters about anything. They simply never asked any questions about my background or debts. They did very little checking to earn their Ā£50,000 fee.
In my new position I continued to purchase services from Johnstone. It was even easier than before. As a senior director I had sole responsibility for my cost centre and my bossā€™s approval was automatic. Johnstone has several companies all operating from the same address, which is actually just a farmhouse. I visited it only once some years ago.
During the last nine months I was able to order about Ā£1.8 million of work from Johnstoneā€™s companies, mainly design of e-course programmes, training material, web-platforms and related material. I believe that this material is either stolen from other companies, or created for a fraction of what it is charged out at. This, I believe, was also the case at my former employer.
My main concern was to ensure that his invoices got paid. I had an approval threshold but this was easy to circumvent. Johnstone would split the amounts each month across several companies. Our shared services centre never asked any questions as long as the invoices matched purchase orders.
It started...

Table of contents