Inside job: guarding against business fraud.

• Author: Bissonette, Laurie
• Position: BUSINESS SENSE

Fraud is a crime of opportunity. More often than not, it's also personal, which leaves private enterprises particularly vulnerable. The sense of betrayal can run deep, especially in companies that have fostered a culture based on close personal ties in which employees are considered friends, leading to a loss of trust and reputation as well as potentially devastating financial consequences, not to mention diverting attention and effort away from running the business and making it successful.

Entrepreneurial businesses are often at greater risk because they lack many of the basic controls needed to minimize and detect frauds. They have not set up internal systems to do so, either because of a lack of expertise or time. These employers tend to develop deeper personal relationships with their employees and are thus more inclined to entrust them with significant responsibilities, such as allowing them to work independently, and in many cases, handle a broad cross-section of tasks that would never be allowed in larger enterprises, such as opening mail, making deposits, reconciling expenses and bank statements.

A recent KPMG study, Who is the typical fraudster?, looked at hundreds of cases worldwide, including Canada, in order to help identify the characteristics and methods of fraudsters. It found that the typical criminal profile was a male employee, 36 to 45 years old, working in a finance-related role who conspires with another perpetrator. Not surprisingly, the primary reason most frauds occurred in the first place was an ability to exploit weaknesses in internal controls. Along with opportunity, motive is the other risk factor. I will admit that we have seen fraud in recent years where the criminal did not meet this profile--but I thought it would prove interesting.

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While the majority of fraudulent acts are attempts to conceal losses or poor performance, the overriding motivation is greed often fueled by an addiction or financial crisis. Psychological factors also play a key role in enabling people to rationalize their behaviour. For example, they convince themselves they're being denied their fair share, or are simply "borrowing" funds that they intend to repay...