APU Business Intellectible Podcast

Assessing Fraud in a Post-Pandemic World

Podcast featuring Dr. Gary L. Deel, Ph.D, J.D.Faculty Director, School of Business and
Dr. Liz Yost, professor, University of Central Florida, Rosen College of Hospitality Management

The COVID-19 pandemic caused widespread changes for businesses across every industry. Did these rapid changes lead to more or new forms of fraud? In this episode, APU business professor Dr. Gary Deel talks to accountant and compliance expert Dr. Liz Yost about fraud cases and mitigation efforts. Learn about the fraud triangle, which identifies the need, opportunity and rationale that leads to fraud. Also learn how business leaders can prevent fraud through organizational culture, commitment to ethics, firm policies and procedures, and more.

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Dr. Gary Deel: Welcome to the podcast Intellectible. I’m your host, Dr. Gary Deel. Today, we’re talking about fraud and ethics in the world of finance. My guest today is Dr. Liz Yost. Liz has vast experience in the areas of audit, ethics, and compliance, and accounting and finance for the hospitality industry.

She holds a PhD in hospitality education and a Master’s degree in accounting from the University of Central Florida and a Bachelor’s of Science in finance from the University of Florida. Liz is a certified public accountant, a certified hospitality accountant executive, and a certified compliance and ethics professional. She’s currently an assistant professor for the University of Central Florida Rosen College of Hospitality Management. Liz, welcome to Intellectible and thank you for being our guest today.

Dr. Liz Yost: Thank you for having me.

Dr. Gary Deel: Perfect. Well, we’re here today to talk about the sometimes complicated, I would say most of the time, complicated world of fraud and ethics in finance and accounting. Both of our backgrounds obviously are in the hospitality industry, so I suspect we’ll spend a fair amount of time talking about the context of hospitality and tourism.

But I know we also want to try to cover how things have changed sort of pre- and post-COVID-19. So if we could, let’s start with the pre side and talk about what was going on in the world of fraud in the hospitality industry prior to the COVID pandemic of 2020. What kind of things were we seeing and what kind of things were you working on up to that point?

Dr. Liz Yost: Yeah, sure. Of course. Well I would say that fraud is always a risk factor for most organizations. Within the hospitality industry though in particular, because of the nature of the industry, and typically we’ve got some desirable goods or it could be inventory theft. You’re typically dealing with hourly employees. The employees, some guests, could also have that motivation to commit some type of fraud just depending on their own personal situation. So it’s always a risk factor and always has been. It’s always been discussed among the C-suite and highlighted as particular areas in management discussion and analysis topic. So it’s always been out there.

As a former external and internal auditor, we always monitored that fraud triangle, right, for organizations. Whether there’s a need, an opportunity, and a rationale to commit fraud. So that depends on the organization itself and also all of the related parties that are working for and with the organization in addition to patrons.

So it’s significant because there’s typically about a 5% to 6% loss of annual revenue from fraud. So from a material perspective, companies always want to monitor that. And the key to managing fraud has always been to have strong internal controls for your organization.

Some common types of fraud, pre-pandemic would be credit card fraud, skimming machines, vendor fraud, inventory theft as I mentioned, hacking into systems. All sorts of things like that. So you assess it from a level of what’s really a red flag based on those parameters within the fraud triangle.

So I can give you one case that I worked on specifically for the hospitality industry. And I did the audit for a hotel and resort portfolio group. And the controller had a gambling problem.

So the controller had misappropriated assets. There was a significant loss of cash. She was hiding checks received from receivables and then bringing that, pocketing some of that, and then sprinkling the expenses throughout the journal entries. Very minuscule amounts, so it was kind of hard to even get a total for a long period of time.

But eventually, that was found. I think to the tune of about $4 million. The company pursued legal action against her. But that was somebody in a position of power that was able to blur some lines, take advantage of controls that maybe weren’t there or just purposefully managed around that.

So that’s just one example of what I saw. I’m aware of several other examples where it’s employees of the organization who are creating fake payroll accounts and then having that money deposit into their own accounts.

And always, it’s not a problem until it’s discovered as a problem. So there are just various tests to look at to kind of manage that. So I would say that it’s always been there as that hot-button risk, and it’s the job of the auditors and management to manage that risk appropriately and do the correct journal entry testing to see if there’s anything unusual. So that’s a typical audit procedure that’s done.

So you would look at some things hitting your accounts that just appear unusual. Any whole numbers, or anything that maybe is ending in 99, or certain times of the day that a journal entry is posting. Those are all reports that we would run and then review to flag for anything potentially unusual. And it is a real case, and that’s just on the employee side. That hasn’t yet touched the cases that then come to our attention through legal where you’re finding something out from an outsider.

Dr. Gary Deel: Perfect. There’s a lot to unpack there. And I think I’d like to start by not assuming too much in terms of context from our listeners. So I think a good place to begin is to establish what fraud is. And from a legal perspective, speaking from the background of an attorney, we have specific intent crimes and general intent crimes. The former of which requires that you intended the outcome, that you acted with purpose and with motive. And the latter does not.

So I guess for the sake of educating anyone who may not already know, and I don’t want to assume one way or the other, but just to be thorough, is fraud an intentional crime? In other words, is it possible for someone to commit accidental fraud, or must they know about it and mean to have deceived a third party for fraud to have in fact taken place?

Dr. Liz Yost: Yeah, that’s a really good point. I would say fraud is definitely intentional or deliberate acts to really deprive somebody of property or revenue that they own. I mean, there are certainly errors that occur in financial statements. I think the difference between the two is that intentional piece.

From the audit side, we always looked at that through the lens of that triangle, right? So is there underlying need, an opportunity to circumvent the organization to achieve your need? And then the rationalization piece. So why you, or how you justify that this is occurring. But I would 100% say that it is always intentional. That is what distinguishes fraud from an error.

Dr. Gary Deel: And I would imagine it can be, in your world, sometimes difficult to parse where the line is between an innocent error and someone intentionally trying to deceive or defraud another person, or entity, or company, or the government in general. And obviously we don’t mean to imply that an error that is innocent is not without legal consequences. If you make a good-faith innocent mistake on your tax return, you still may be liable for penalties owed to the government and so on and so forth. And the same is true if you make a mistake with your accounting records as a company. But fraud carries a whole other level of culpability, if it’s intentional.

Dr. Liz Yost: Absolutely, absolutely. And as I mentioned, digging deeper into that, you’ve got the risk from people that actually work for you within the company. And there is a whole wave of research that looks at tenure with a company, and how comfortable you are. And then individuals may have certain things come up within their lives that they then have that profiled to meet the need, opportunity, and rationalization to then commit fraud.

And something as small as pilfering office supplies from a company. I mean, that can all add up. So it’s really important from a culture standpoint for companies to maintain their rules, policies, procedures, controls in all areas of business to mitigate this as much as possible.

Dr. Gary Deel: Yeah. I think when it comes to you describe pilfering or theft, it’s interesting because that would be a difficult thing to explain away in an unintentional context. How did the company stapler end up in the backseat of your car by accident? But with respect to a financial fraud, especially a complex one, I can imagine it would sometimes be difficult even when you suspect fraud to establish if the person who committed the suspected fraud is clever. They may tend to argue that, “That was not intentional. It was actually an accident.” And then it becomes a matter of trying to establish that it was intentional. And all you have is conjecture as to that person’s word versus the evidence that suggests anything to the contrary.

Dr. Liz Yost: That’s right. That’s right.

Dr. Gary Deel: Now you identified the fraud triangle, and I’m somewhat familiar with that from the CFE designation that I carry as a fraud examiner. Can you give us an example because we’ve heard it now a few times on the podcast: need, opportunity, and rationale. Can we take a super simple example of maybe stealing something from a company and identify what would a good example of a need be and an opportunity and a rationale that would be relatable to someone in their everyday lives?

Dr. Liz Yost: Yeah. Well let me take my example that I touched on with the controller who had a gambling problem. So the need in that instance is to meet debts from the gambling problem. So absent of income from the hotels, her job, which was a good salary job, right? She needed more than that. So the need was to satisfy the debt. Or to continue the gambling, right? We didn’t really get into where she was with that need.

The opportunity as in a position of power if I recall the details of the case, she was able to convince one of the cashiers to let her take some of the cash to the bank because she was running there anyway. So use that position of power to circumvent what would normally be a controlled procedure of having the cashier count the money, somebody else review that, and then sign off. Somebody else approve, and then someone else take that to the bank, right? You have that appropriate segregation of duties across the way.

So I remember that specifically from that case, that that is one of the ways that the controller actually got that cash in her hands. So it was actual physical stealing and then doctoring the results.

So the opportunity is always on the business side. So having those appropriate controls to really prevent things like this from happening. So it was circumventing that, right? She circumvented the segregation of duties.

And the rationalization was really a desperation. I need this money either to continue my addiction to gambling or pay off some debts. And I’m a hard worker, and maybe I’ll pay it back, or maybe I’ll, whatever it is that’s that rationalization on the arm of the individual.

Dr. Gary Deel: Now I know we haven’t quite gotten to mitigation yet or prevention ideally. But with respect to that case, I’m just curious to know in the end result, did you find that there was something the company would have, could have, should have done to identify this sooner had they been doing something prudently? Or was this just a very clever ruse that even despite the best accounting practices and fail safes, would not have been caught until a mistake was made?

Dr. Liz Yost: No, so that’s a really great question. And yes, we did find, so as part of the audit, because this was part of a publicly traded real estate investment trust company, we are required to do internal controls audits to comply with the Sarbanes–Oxley Act of 2002.

So for that particular property, what we found the problem with the controls were the bank reconciliations. They were not being done timely for each month. So just on the treasury cycle side, we would go through our checklist and pull the bank recs. The company was apparently doing that on a monthly basis, or they indicated that as a key control. And there were some mishaps in there. And then that, from a timing perspective, approval perspective. And then we backed that up to the journal entries that were being made within the system and found very odd transactions that were sprinkled for expenses that we then couldn’t find support for. So that was how it kind of came to light.

So from a preventative standpoint, I would say the company, and I think it was a finding at the time, a significant deficiency in internal controls. There was a weakness in the treasury cycle that allowed us to see that. So had they had those controls in place, possibly this could have been found sooner or mitigated. But again, also it was unusual. It was a person in position of power who kind of called the shot.

Dr. Gary Deel: You said unusual. But I was thinking about when you mentioned Sarbanes–Oxley, that of course came out from the Enron scandal. Which as some of the executives are just now within the past few years getting out of prison for that.

Dr. Liz Yost: That’s right. Yes.

Dr. Gary Deel: Yeah. So I was seeing news of some folks being released. Was this case similar in nature in terms of the types of fraud, or completely different from what we saw with Enron?

Dr. Liz Yost: I think it was completely different. Enron was such a pivotal moment for the accounting profession, and the finance world, and really the general public. You saw this huge fallout where people could no longer rely on financial statements.

And I’ll tell you, it was really interesting because I was just coming out of my master’s degree when Enron hit. Many of us who were accounting majors and CPAs were going to work for the big five. At the time, I had friends who had internships with Arthur Andersen, who was the accounting firm that audited Enron. I also had a friend that actually had an internship with Enron. And at the time, he saved his letter. And I had him come speak to one of my classes at one point. And he showed the letter that he kept. Then of course it was rescinded. The company folded. Arthur Andersen folded, was dismantled.

So that was completely different fraud. Enron was complex financial transactions. To sum up my understanding of the massive fraud was using subsidiary companies to hide debt from the master company. And they were really focusing on this kind of new accounting pronouncement came out, market-to-market accounting for their industry and energy trading.

And for all intents and purposes, they made their assets and their revenue look really, really good, but they never had the cash to back it up. They had tremendous amount of debt that they were hiding in this other company that was related that they were carrying the debt, but it was really part of Enron’s. And everything kind of exploded when the whistleblower came forward and said there’s something really massively wrong with these financial statements.

Dr. Gary Deel: So it was a cooking of the books and fraudulent financial reporting with the SEC, because it wasn’t an accurate reflection of the company’s solvency and actual market cap?

Dr. Liz Yost: Yep. That is exactly right in a nutshell. And then what it did for the profession and for auditors in general, I always tell people I’m an auditor. I actually hate taxes. I hate doing my own taxes. I never wanted to do taxes for corporations. But on the audit side, I really kind of gravitated towards that work because it touched on so many other areas that looked at company culture and tone. And you could kind of see where things start to go south in some organizations. You can kind of pinpoint it back to how they’re actually run.

And Enron was at the helm of very aggressive leaders who believed, there’s a great documentary, I’m not sure if you’ve seen it. You probably have, “The Smartest Guys in the Room.”

Dr. Gary Deel: I think I may have, yeah.

Dr. Liz Yost: It’s really a great documentary about what happened and also about the leadership. And I think when you’re referencing some of the individuals who are getting out of prison, Jeffrey Skilling, who was the CFO and the CEO, he was the one at the helm there.

So really forcing these aggressive financial reporting tactics. They got it all signed off by the auditors. So it all looked very appropriate and okay. But Andersen was also the auditor for many, many years. There was a personal relationship between the partners and the executives at Enron. And it really all came into light about professional skepticism. And out of that, the Sarbanes-Oxley Act is now required for auditors to move off of a company, go up for bid after five years, switch the leadership around, making management more accountable. And really at the helm of it was telling companies, “You have to have key internal controls for your organization. We’re going to hold you responsible for the underlying systems and the way you do things, in addition to what you’re actually reporting in the financial statements.”

So I remember coming out of school and starting my job. I worked for one of the big four for PricewaterhouseCoopers. And it was we’re creating a whole new audit plan and testing based on internal controls. And it created a lot more work for us and for documentation, but you could see how important it was. I mean, the general public as a result of Enron had really lost faith in publicly traded companies’ financials. You can no longer rely on what happened.

Dr. Gary Deel: It’s interesting that fundamentally, we’re talking about a crime that is not at its core different than walking into a Walmart and stealing a box of cereal off the shelf. But it’s hidden by such layers of complexity, that unless you’re an expert such as yourself, it would be impossible to see even in plain sight, because you’re not sure what you’re supposed to be seeing.

And if you’re someone whose eyes cross when you’re looking at spreadsheets and accounting, documents and filings, then that can easily go right over the heads of even people who are reasonably sophisticated when it comes to business operations. You have to have that forensic accounting skillset.

And that makes me question going back to your example of the controller fraud. I’m wondering, was that a case where in hindsight, you looked at Monday morning quarterbacking her side of it? Because you had said that if the company had been doing something different in terms of audits and reviews, they would’ve caught it. Was the evidence that ultimately led to the discovery something that had she been more clever, she could have hidden? Or was this something where that was unavoidable.

Dr. Liz Yost: Yeah, that’s a good question too. I think it was pretty unavoidable. I think we started looking at, I remember just reviewing the expenses and then not having the appropriate support for things that we had asked for. And it wasn’t matching up and it was too much to be just a clerical or a bookkeeping error. It just didn’t make sense.

And at some point, all of the financial statements, like I tell my students, they should tell a story about what your company is doing and how they’re doing. And they’re all linked together, which is the fun part I always thought of auditing financial statements. You can tie in your cash flow statement to your balance sheet, to your income statement. You could see how the puzzles fit together, and this just wasn’t happening in that case. So it just took a long time like most of these do, because it’s so imperceptible as you go through the process. This was I think over a four-year time period and this $4 million.

Dr. Gary Deel: It’s interesting because you had talked about with respect to cash deposits and cash literally taken out of cashier tills it sounds like. And I remember jobs that I had as a teenager where I actually was responsible for a bank with a cashier till and handling cash and dropping cash at the end of a shift. And how discrepancies would arise over a dime being missing or what have you. And one would think intuitively that a cashless society that’s dependent upon credit cards, and debit cards, and electronic forms of payment would be safer and less prone to fraud because you just don’t have so many physical moving pieces and tangible money. But I’m wondering if you’ve seen that in your experience, or if it’s just been the opposite? Because of course with that technology brings new doorways to fraud through the theft of payment card information and all that good stuff. Or I should say all the bad stuff rather.

Dr. Liz Yost: Yeah. You make a great point. And that is I think a very related, but a whole other topic that we could talk about for forever. We’re kind of seeing that right? Kind of going into that cashless item. I just read an article the other day about fraudsters really creating fake websites and systems.

I mean, there’s a whole element of phishing that’s going on to trick consumers. You get text messages and emails to verify, and everybody wants your information. And I just had this happen to me through PayPal just the other night. I got an email right away. I saw it right away and jumped on it, and reported it. But I used PayPal for a summer camp for my daughter recently. I never use it as a third-party to pay for things, but this was the request for the particular little camp that we’re doing. And I’m not sure how it got out there, but was a victim of fraud there. So it had my account. I saw a big charge to Neiman Marcus for $400, hit my account, got it all reversed.

But I think we’re seeing more of that as the technology has advanced. And this was in the late ’90s when that particular fraud for the hotel controller occurred. And that was the easiest probably means for her to rationalize and obtain that cash. But I think now, we’re in a whole other area of digital fraud, if you will.

Dr. Gary Deel: It’s interesting that you brought up a number of different fraud techniques, including the phishing and scamming via email and text messages. I had watched a documentary from someone who was talking about this, and I forget where exactly it was. I believe it might’ve been James Veitch who’s sort of a British comedian who has talked about how he plays with the folks who will write you and say, “I’m the crown prince of Nigeria, and I need to transfer $15 million into your account.” So he’s done several TED Talks, and he’s been on the Conan O’Brien show, and talked about how he will engage them in a story and a dialogue that goes on for hours, knowing that he’s just wasting their time so that they’re not scamming somebody else.

But I think it was him that pointed out that the ruses are to the reasonable person I guess if there is such a concept, rather outlandish. And to many people, myself included, they seem rather obvious at the forefront. Immediately it’s like okay, this is nonsense. And it’s an attempt to take advantage of me.

But he pointed out that that’s actually an intentional strategy, because you’re only likely to elicit cooperation from the most gullible people that will be responding to that. So you don’t really want a ruse that is borderline believable to the extent that you might string someone along such as myself or you only a few hours into that conversation or a few days into the process before we catch on, and then back out of the deal. So now the scammer has invested several hours of their own time trying to convert you into someone they can deceive and take the money from, only to find that they’ve wasted that effort completely.

So by making their stories about crown princes of Nigeria or what have you so incredibly unbelievable to all but maybe 1% of society who would read that and find it legitimate and credible, they’re sort of isolating that target market that they really want, because those are the people most likely to follow through.

If they believe the outlandish story to begin with, then they’ll probably make it through the other four steps of the transaction that gets into their bank account and gets the money in the mail, or wired, wherever they need it to go. So I thought that was an interesting point that I had always thought why would you make such a crazy story when you’re less likely to see sort of conversions that way? But in reality, it seems that that’s part of the strategy.

Dr. Liz Yost: Yeah. That is a great observation. I think that that’s all very true. What I’ve noticed lately is the sophistication of the fraudster. So there’s the outlandish story piece. And there’s the items where, I know you’re aware of this because you have a UCF email address as well. There have been many attempts and people who have gotten the system emails. And what they generate looks pretty good to somebody in the place of employment.

I’ve gotten a couple that I knew was a phishing attempt, but you have that second of pause where you go, “Is my boss really attempting to get in touch with me?” If you were new to the organization and you weren’t aware, like if you got something like that, then you might respond. So definitely that’s a whole other area of fraud from outsiders attempting to get the personal information.

Dr. Gary Deel: Absolutely. I certainly agree that the sophistication has gone up a level. I don’t know if you know who Mark Rober is. He’s a former NASA engineer, and he’s done several of these videos on his own YouTube channel about scam attempts. And most recently, was a pretty long expose into how intricate these networks of sort of money runners and supervisors of multiple scam units going on, all traced back to some other country. In that case, I believe it was India.

And they were talking about how the step-by-step, the scammer goes about convincing the person on the other end of the phone that they’ve overpaid for something and they need a refund or what have you. And when you actually see it laid out, it’s fairly clever. Obviously, it’s also repugnant that people would go to such lengths to deceive other people. But at the end of the day, it seems to be effective enough that they actually run this like a business model. It’s how many conversions did we get today? How many people can we defraud?

Well that’s interesting, when we come back, I certainly want to talk about how COVID-19 has changed the landscape of fraud. When we left off, we had talked a little bit about cashless transactions and how one might think intuitively that this would lead to a more secure world, and more efficient world, a less complicated world without pennies, and nickels, and dimes for every transaction. Yet it opens new doors to fraud.

We haven’t even talked about NFC payment devices via the smartphone, Google Wallet, Apple Pay, Venmo kind of thing, which introduces an entirely new level of complexity. Convenience and efficiency to a certain extent, but also opportunities for hacking and for theft for those that are sophisticated enough to understand it and take advantage of it.

Dr. Liz Yost: Absolutely. And that has really become more paramount. We were going to start the discussion about a post-COVID world, right? So kind of this combination of financial and health risks that have impacted really every organization, but in particular, hospitality organizations. And who are now finding new ways to really survive financially as a result of closures for long periods of time. So I think that that really ties in directly when you have new ways where you’re earning revenue.

I mean, let’s take the restaurant industry for example, which has gone pretty much all to-go operations, delivery using third-parties, Uber Eats, DoorDash. I mean, I feel like I have Uber Eats at least twice a week. Our family, it’s just something that we’re all doing. But for restaurants to kind of meet that demand and adapt to that new technology brings a whole new host of fraud risk.

You could have the third-party impersonators coming in, and you have that short lead time where you’re just getting an order and then trying to process it through the right channel. It could be another increased fraud risk for the industry overall.

In addition to then even on the consumer side, maybe you’ve got some individuals out there that are trying to get that free meal either through the need, the opportunity, the rationalization going back to that fraud triangle. Somebody who says, “Oh hey, I never got my delivery.” And then as a restaurant, you’re trying to keep your customers. So maybe you just send out another one just to keep them happy, or they get a refund through the third-party. And then you’ve got an individual who just made a win that is really, I would consider fraudulent behavior, you know? So I think there’s a whole other element that is happening. I think that we’ll see that kind of come up in the next few months as we’re seeing the differences from COVID.

Dr. Gary Deel: No, that’s a really good point. We’ve been focusing up to this point in the podcast episode on internal fraud and how employees or executives of a company might defraud the company they work for. But we haven’t really spoken much about the way that customers can do that. And you’re absolutely right.

Especially with this remote environment that we’ve been forced to operate in up to really the immediate present.

So we are recording this obviously at the end of May in 2021. So we’re working our way out of this dark abyss that we’ve been in for the last 14, 15 months, which is great. But like you said, up to this point, it’s been a major change in the business model. And I think to a certain extent, and I’ve had a number of podcast episodes to this effect with other experts, but I think some of those changes that we’ve been forced to accept and adapt to over the last year are probably here to a certain extent to stay.

Dr. Liz Yost: I completely agree.

Dr. Gary Deel: Yeah. We’ve gotten used to that remote work environment. We’ve probably gotten used to eating a lot more meals at home. Like you said, DoorDash, Uber Eats. And I think that we’ve gotten a lot more comfortable with that modality. I think for service businesses, even businesses that were previously opposed to a self-service technologically assisted means of operation, they’re having to get on board.

Even the luxury scale hotels and operations that traditionally would have eschewed technology for the sake of a personal touch, it’s no longer just a cost-cutting initiative. It is now, or at least during the time of the pandemic and its worst era was a means of keeping people safe, both employees and human beings.

So all to the good in that respect. But to your point, it introduces technology that is imperfect. And to the extent that it’s imperfect and can be hacked by computer experts and folks that are far more knowledgeable in that area than I am. And frankly, than most consumers, we don’t necessarily appreciate how vulnerable we are until, to your point earlier, about the fraud and payment information theft that you personally experienced.

Now as COVID-19 begins to fade away, hopefully, and continues to do so, we’re all fingers crossed that the vaccination immunities hold and that we don’t see any new strains that threaten our populations. And it seems like, like I said, we’re coming out of this and everybody’s happy about that. But this situation has obviously put a strain on a lot of folks from a financial perspective with regard to ability to pay bills and make ends meet, especially if you lost your job, or you received a cut back in hours as a result of the pandemic. So have you seen, based on your ear to the ground in the industry that that’s increased the amount of fraud, theft, deception taking place across different industries among people in general?

Dr. Liz Yost: Yeah. I haven’t seen some hard numbers on it, but I have seen among management teams that they are discussing that impact. And on the audit side, in particular, there’s a lot of focus now on revisiting that increased fraud risk as a result of what has happened.

And I would imagine that as we kind of recover and see the impact from that, we’ll kind of start to see some of those numbers pop out about things that have happened due to the pandemic and the really terrible implications for a lot of folks.

So that’s kind of the attention that I’m seeing from talking with people and some of the professional service publications that have been coming out about it. There’s going to be a renewed focus on the risks as a result of a forever-changed business model.

Dr. Gary Deel: Right. And this in so far as the fraud triangle is concerned speaks to the first prong, the need prong. And perhaps the rationale to a certain extent, because you can look at those as one in the same. It’s not to say that the opportunity may be different. But certainly if you suddenly lose a job or just have lost your source of income, and suppose you have children or you’re responsible for other people, and now you have to look after their wellbeing. And that can be a justification, and desperation motivates people to do wicked things in the name of survival. So something to think about moving forward.

And just keep in mind, and obviously we hope that as the pandemic subsides, people get back to work and are able to catch up on maybe unpaid bills or recover from the slump that we’ve been in over the last year. It’s certainly affected everybody in different ways.

When we talk about mitigating fraud, I know that was one of the last subjects we had on the agenda for today. And awareness I think is key. And when it comes to financial fraud, I think we could probably spend an entire day just talking about the different specific technical, tactical implications, and what you need to be looking at, and where, and when, and how often.

But are there any general guidelines, pieces of advice that an expert such as yourself can offer to businesses large and small that maybe are not obvious that they’re thinking about or should be thinking about with respect to trying to keep fraud out of their environments?

Dr. Liz Yost: Yeah, that’s a great question. I really think that it all comes back to organizational culture, your commitment to ethics, having firm policies and procedures that are clear, and following through with those. It’s kind of common sense, but it’s management’s commitment to that that will really kind of get you where you need from a preventative standpoint.

Obviously that’s the first thing you want. You want those preventative controls. And in my opinion, we’ve always done on the audit side what we call the softer components of evaluating an organization where we look at culture, we look at commitment to integrity, accountability, organizational charts, where people fall in their roles. And that’s just so important. I just really firmly believe that everything comes back to the way an organization does their business, who they have at the helm, and how committed they are to enforcing the integrity.

The problem, like when you have things that layer in with COVID is that out of that desperation, many companies have had to reinvent the way that they do things. And whether they previously had a strong policy for how they vet new suppliers, well maybe they’re not able to do that anymore. So they kind of let that one go a bit.

It’s kind of finding a new way in this era that I think we haven’t even seen the implications of yet. But that’s where I’d say the starting point should always be. And that commitment to policy and procedure as boring as it sounds, that’s where you create those rules for how you govern your business.

Dr. Gary Deel: I would wager a guess that there’s probably some link in the research between employee morale and well-being in general, and propensity to commit crimes against the company, defraud a company, steal from a company, etc.

Dr. Liz Yost: Absolutely. Yeah.

Dr. Gary Deel: And I’m wondering more specifically, and I don’t expect you to know this off the top of mind, but there’s a lot of conversation in society right now about whether the minimum wage laws are appropriate, and whether we should be raising it to $15. Florida actually back in November passed the $15 minimum wage. We have a step cycle to get there over the next I think five to seven years. We’re currently at $8 something if I remember correctly.

So speaking about that, I’m curious to know if there’s any link that you’re aware of between, I’m thinking for some reason the company Costco’s coming to mind, because I frequently see them advertised as a poster child for company fairness with respect to their employees. And I think the average wage at a Costco is $18 to $20 an hour. And if that’s true as purported and as I’ve seen it to be true, I’m just wondering, does that trickle down or end up with an if A, then B, where their employees are less likely to steal? Do they see lower rates of fraud and theft as a result of people being fairly compensated or better compensated than the competition? Or is there not so clear a link between those two elements?

Dr. Liz Yost: That would be a great niche research topic question, hypothesis about, and even particularly within hospitality or retail. I don’t know if anything has ever been done around that. I think fraud, in general, is a hard topic to do some true academic research. It’s hard to collect data. You’re basically looking just at people’s perception of fraud and how you can gather some information about it.

But that would be a really fascinating way that that particular area about fraud. Because obviously I’ve seen, we’ve talked about highly compensated individuals who have committed fraud. Just wanted to share another anecdotal story if I have time for it.

One of my first jobs after my internship a full-time associate with PricewaterhouseCoopers, I was scheduled to work on the re-audit of five years of financial statements for Adelphia company, which was in Pennsylvania, was the cable company who the Regis family started Adelphia and they committed massive fraud.

I went to Coudersport, Pennsylvania, which is in the middle of nowhere, about two and a half hours south of upstate New York. There’s nothing in Coudersport, Pennsylvania, except for the Adelphia compound. It was this massive building. And they committed massive fraud, this family. And it was all for material things that the family wanted. A yacht for the wife, these big lavish parties. They stole from the company to further their lavish lifestyle.

So we’ve seen, and I gave the example of the controller individuals. So it’d be interesting to see then from the employee level what’s happening on that side. And if wage is a driver for fraud, one way or the other, you know?

Dr. Gary Deel: Yeah. I think that raises an interesting point. It would be an excellent study. But I think you raise an excellent point that I hadn’t considered at the onset, which is that a lot of the most notorious fraud cases that have made the headlines were committed by people who were fairly handsomely paid in their position.

So these are not people who were necessarily desperate for anything, but nonetheless were I guess you could say greedy for more. In some respect, I’m thinking about the Enron executives who were are all major directors with probably at least six-figure paychecks

These are not people who are suffering, but yet they’re still propelled or compelled based on that fraud triangle I guess seeing an opportunity to further their own ambitions. It doesn’t stop them to think, “Well, I have enough.” Or, “I’ve reached a level that I’m satisfied with.” So perhaps it would not be as my intuition would have thought that if you pay people more, that they might be less inclined to steal from you.

I think if there is anything to say about that, it might be more of an intrinsic feeling of loyalty or indebtedness to a company that does right by you perhaps in ways beyond the scope of just the paycheck. If you feel that the company has treated you fairly, you may feel a sense of moral turpitude around stealing from them. Whereas if you hate your boss and your employer, and you think that they are not being fair with you, then you might not have any qualm about stealing or committing fraud.

Dr. Liz Yost: Right. Or even if it’s the higher propensity based on industry or type of employment. Or even, I’d be interested to see in this time of COVID about what has happened. For example, these restaurants, somebody lost their job. You’re not able to put food on the table. So I’m entitled to take these steaks from the high-end restaurant that I’m the bus boy at or whatever. There’s a whole side that is very sad. And it comes out of that need that I think is just another area to kind of explore.

Dr. Gary Deel: Right. Yeah. The desperation is multidimensional, and people often too quickly equivocate every type of theft regardless of the context. And I’m not saying it’s ever justified by any means. But you can empathize with someone who like you said, may have lost a job and needed money for the most sympathetic story you can imagine. Money for medicine for example for a sick child or something to that effect.

And who could not empathize with a situation like that? Not again condoning the behavior, but at least understanding the motive behind it. And yeah, it’s certainly a complicated world.

Dr. Liz Yost: Yeah. Absolutely.

Dr. Gary Deel: Perfect.It’s been very educational and insightful. I appreciate you taking the time with us today. And hopefully, this conversation compels people first and foremost to do the right thing in their personal and professional lives, but also provides a little bit of insight into the world of fraud.

And not just in the finance arena, but everywhere else in ways that businesses might be able to mitigate or prevent that through appropriate stewardship of all aspects of their operations. So I want to thank you for sharing your expertise and perspectives on these topics. And thanks for joining me today for this episode of Intellectible.

Dr. Liz Yost: Okay. Thanks Gary.

Dr. Gary Deel: Absolutely. And thank you to our listeners for joining us. You can learn more about these topics by visiting the various APU-sponsored podcasts and blogs. Be well and stay safe everyone. Thanks.

Dr. Gary Deel is a Faculty Director with the School of Business at American Public University. He holds a J.D. in Law and a Ph.D. in Hospitality/Business Management. Gary teaches human resources and employment law classes for American Public University, the University of Central Florida, Colorado State University and others.

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