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Recognizing reactions to fraud.

FOR YEARS, RESEARCHERS IN medicine and other disciplines have studied responses by patients and other individuals faced with medical crises. Their findings show that regardless of age, sex, initial psychological stability, education, social or economic level, type, degree or duration of stress, or prior experiences in coping with stress, there is a clear sequence of identifiable response patterns to stressful situations:

1. Shock and denial

2. Anxiety

3. Anger or guilt

4. Depression

5. Acceptance

Like medical stresses, fraud committed by employees or management is a stressful occurrence for everyone involved. In such situations, managers, fellow employees, auditors, and others in the work environment are likely to respond like individuals who are experiencing medical crises.

If auditors and security personnel are to conduct a thorough and thoughtful investigation of the incident, understanding these response patterns is extremely important. Taking the wrong actions during any of the stages can result in lost or damaged evidence, lawsuits, inappropriate accusations against innocent employees, or other adverse consequences.

Researchers who have analyzed crisis response stages generally agree that when the crisis is fraud, the five response patterns are

1. Denial

2. Anger

3. Bargaining or rationalization

4. Depression

5. Acceptance

Denial functions as a buffer after unexpected, shocking news. It allows those around the fraud to collect themselves and mobilize other, less radical defenses. Denial involves screening out the reality of the situation.

Studies have shown that for an individual to function normally, a carefully balanced psychological and physiological system must be maintained. In order to avoid any sudden and severe disruption of the psychological equilibrium, which may destroy or incapacitate the system, the most immediate recourse is for the individual to maintain the status quo by denial. Since the individual does not acknowledge the stress at either the cognitive or emotional level, he or she is not motivated at this point to initiate the behavioral changes necessary to adjust to the new reality.

Denial may take many behavioral forms, such as appearing temporarily stunned or dazed, refusing to accept the information given, insisting that there is some mistake, or not comprehending what has been said.

The denial reactions act as "shock absorbers" to reduce the impact of sudden trauma. Denying fraud gives perpetrators time to lose, alter, destroy, or conceal valuable documents and records. Time lost during denial can also result in lost or confused witnesses or loss of other evidence.

When the first stage of denial cannot be maintained any longer, it is replaced by feelings of anger, rage, and resentment. The anger stage is difficult to cope with because anger is usually projected in all directions, at times almost randomly.

Anger usually arises because attempts to return to the old psychological status quo fail and are met with frustration. The anger is sometimes directed not only at the suspect but also at others, including friends. relatives. and coworkers. Sometimes the anger is directed inwardly, resulting in feelings of guilt. Feelings of anger often lead managers and others to become hostile to auditors and investigators because they perceive them as cruel or unfeeling, a reaction not unlike that of the ancient Greeks who murdered messengers bearing evil tidings.

Anger is a dangerous stage in the process of resolving frauds. While angry, managers or others may insult, harm, slander, libel, or terminate employees or others without due cause, These actions can result in slander, libel, assault, battery, or discrimination lawsuits.

For example, an angry manager of a fast-food restaurant who thought an employee was stealing had the police handcuff and drag the employee out of the store in front of the customers. The employee, who was later found to be innocent, sued and won a $250,000 lawsuit. In other circumstances, angry reactions have allowed criminals to get more legally than they did illegally.

The rationalization stage is an attempt to justify the dishonest act or to minimize the crime. During this stage, managers see themselves as understanding why the crime was committed and often feel that maybe the perpetrator's motivation was not all that bad.

Managers often feel during this period that the perpetrator is not really a bad person, that a mistake was made, and that perhaps the suspect should be given one more chance. Interviews during the rationalization stage often are not objective and can even prove detrimental to determining the truth or preparing potential prosecution efforts.

The rationalization stage leads to nonprosecution, easy penalties, and weak testimonies. Rationalization is the last attempt to return to the formerly established. psychologically steady state.

As attempts to resolve the problem repeatedly fail, hope diminishes, and managers are faced with the emotional burden of trauma. As trauma occurs, the symptoms of depression appear: sadness, withdrawal, and lack of interest in the environment. As in the stages of denial, anger, and rationalization, depression is a normal part of the coping sequence necessary for eventual psychological readjustment. Here, managers can no longer deny or rationalize the dishonest act, and the anger is replaced with a sense of loss and disappointment-sometimes even embarrassment that a fraud could happen in their environment.

During the depression stage, managers and others become withdrawn and less cooperative. They are less willing to volunteer information or assist with investigations. Interviews conducted during this stage may not be as useful as those held during the acceptance stage if the state of mind of potential witnesses is not fully appreciated by those investigating the fraud.

Normal people cannot function in a continued stage of depression. Soon, managers try other behaviors in an attempt to adjust to the new situation. For small frauds with minimal impact, adjustment to a steady psychological state requires only a small amount of psychological change. For larger frauds with significant ramifications (such as embarrassment, loss of a client, public exposure, or job jeopardy), individuals may repeat the entire coping sequence a number of times or fluctuate between one or two phases as they try to reach a new psychological equilibrium.

Eventually, they will reach a state where there is no more depression or anger, just a realistic understanding of what happened. Acceptance is not a happy state, rather an acknowledgement of what happened and a desire to resolve the issue and move on. This phase is often precipitated by a knowledge of the facts surrounding the fraud, including a knowledge of the motivations of the perpetrator. During this phase, interviews are most useful and witnesses most cooperative. THIS CASE INVOLVES A FRAUD OF MORE than $5,000 by a supervisor in the shipping department of a wholesale/retail distribution center warehouse facility. The supervisor was responsible for the overall general operations of the warehouse and had individual accountability for a cash fund that was used for collecting money (usually amounts of $25 to $500) from customers who came to the warehouse to pick up cash-on-delivery orders. The established procedures called for the supervisor to issue the customer a cash receipt, which was recorded in a will-call/delivery log book. The file containing details on the customer order would eventually be matched against cash receipts by accounting personnel, and the transaction would be closed. Over a period of approximately one year, the supervisor defrauded the company by stealing small amounts of money. He attempted to conceal the fraud by submitting credit memos (with statements such as "billed to the wrong account," "to correct billing adjustment," or "miscellaneous") to clear the accounts receivable file. The accounts would be matched against the credit memo and the transaction closed. A second signature was not needed on the credit memos, and accounting personnel asked no questions about the credit memos originated by the warehouse supervisor. At first, the supervisor submitted only two to three fraudulent credit memos a week, totaling approximately $100. After a few months, however, the supervisor increased the amount of his theft to about $300 per week. To give the appearance of randomness to keep the accounting personnel from becoming suspicious, the supervisor intermixed larger credit memo amounts with smaller ones. The fraud surfaced when the supervisor accidentally credited the wrong customer's account for a cash transaction. By coincidence, the supervisor was on vacation when the error surfaced and was not available to cover his tracks when accounting personnel questioned the transaction. In his absence, the accounts receivable clerk questioned the manager of the warehouse, who investigated the problem. The manager scrutinized cash receipts and determined that the potential for fraud existed. Stage 1: Denial. Because of the possibility of fraud, the general manager and warehouse manager started their own investigation of the warehouse cash fund. Sensing a serious problem, they decided to wait until the supervisor returned from vacation before taking further action. Both managers became anxious and somewhat irritable during the intervening week before the supervisor returned. Each manager, independently, later said that his ability to perform was adversely affected because of shock and preoccupation with the matter. Even though they realized the potential fraud, both managers rationalized that the error could probably be explained by the supervisor, who had been with the firm for approximately three years and whom they considered to be a model employee.

After the fact, both managers admitted they tried to deny that the falsified credit memos could represent intentional fraud on behalf of the supervisor. Because of their denial, they didn't take advantage of evidence that was readily available during the suspect employee's absence.

Company procedure required managers to contact either the corporate security or internal audit department if a fraud occurred or was suspected. However, both managers had convinced themselves that fraud was not even a possibility because of their knowledge and trust of the supervisor. When the supervisor returned from vacation, the managers asked him to discuss the situation. Still in the denial stage, the managers simply requested an explanation from the supervisor regarding the handling of the cash fund. The supervisor, now thrown into his own initial stages of crisis, also took a position of denial and advised both managers that he did not know what they were talking about. Had he offered an alternative explanation for the credit memos and accounting error, the managers, who were still denying the fraud, probably would have been satisfied and terminated their suspicions and investigation.

Because the supervisor denied the existence of the credit memos, which was an obvious misrepresentation, the managers decided that further investigation would be needed and sent the supervisor back to the job. From an investigative standpoint, sending the supervisor back to his desk was a risky action. He was placed back in control of the original credit memos and cash transaction logs and could have easily destroyed a great deal of evidence. Simply "losing" the records could have concealed the fraud and jeopardized the investigation. At this point, the warehouse managers requested the assistance of the internal audit department to review the matter further. A full week passed before investigative assistance was made available. Stage 2: Anger. During the one-week waiting period, both managers became very angry with the suspect and decided, in their own minds, that fraud had indeed been committed. They discussed their feelings and decided to confront the employee again. This time they vowed that they would get answers. Clearly, both managers were evolving from the denial stage to the anger stage. Without the additional information that could have been provided through a full investigation, the managers again confronted the supervisor and demanded an explanation. The supervisor simply said nothing. Irate, the managers fired the employee on the spot without allowing additional information or explanation. This emotional firing could have jeopardized the investigation and the company in several ways. First, if fraud had not been committed, the company could have been subjected to litigation and sued for wrongful dismissal, slander, or libel. Second, the harsh treatment could jeopardize further cooperation by the perpetrator in the investigation. The basis for the termination was that several falsified credit memorandums (totaling approximately $300 to $400) had been located by the managers.

The subsequent audit revealed that there were more than 100 falsified credit memos, and the losses were actually more than $5,000. The managers were surprised at the extent of the fraud. In addition, the managers placed the corporation in a position of liability because they directly accused the supervisor of fraud well before a case was developed that clearly demonstrated the supervisor's guilt.

Stage 3: Bargaining/rationalization. After terminating the supervisor, the general manager rationalized that maybe both he and the warehouse manager had acted too quickly in firing the supervisor. Regardless of whether or not the supervisor was guilty, they felt that perhaps they should give him one more chance. They also began to worry about their company's liabilities in the matter. Although rehiring the supervisor would be contrary to company policy, the general manager felt he could save" this valued" employee.

Through rationalization, the general manager was trying to come to grips with the fact that a trusted friend and employee had committed a fraud against the firm. He was "bargaining, " or trying to change the facts in some way to provide another alternative or explanation, which did not exist.

Stage 4: Depression. During the bargaining stage of the crisis, both the general manager and the warehouse manager became less irritated and much more withdrawn. Feelings of depression began to envelop both individuals as the reality of what had happened started to hit home.

The feelings of depression were reinforced by comments and reactions from other warehouse employees, who were beginning to learn what had occurred. The fact that the internal auditors were in the supervisor's office for more than a week added to the employees' discomfort and concern. It was highly unusual for auditors to be around for more than one or two days, and rumors that the supervisor had been terminated added to misunderstandings.

Interestingly enough, during this period neither manager discussed his feelings with the other. Rather, they kept their feelings to themselves, apparently because they felt that the employee had suffered enough and that the case should be closed.

Stage 5: Acceptance. The investigation conducted by corporate security and internal audit revealed the following facts: * The supervisor had a substance-abuse problem involving cocaine and alcohol. As a result of his confrontation with management, he was considering rehabilitation.

a Me supervisor rationalized the theft by believing that he was simply "borrowing" the money. In his mind he had every intention of repaying the loan but got caught up in the machinations of the fraud and was surprised that in less than one year he had defrauded the company of more than $5,000. * The supervisor informed security personnel that he had spent almost his entire life savings on cocaine and had lost his family in the process. Losing his job represented the last straw. * The supervisor admitted that he considered destroying evidence when he was sent back to his desk but was in such a state of shock and crisis himself that he decided not to. * In discussions with local management, it was learned that several managers and employees had noticed a change in the behavior of the supervisor during the last two to three months. These behavior changes, which no one acted on, included frequent mood changes (bright and cheerful in the morning but extremely depressed later in the day), frequent tardiness and absenteeism, and a preoccupation with impressing employees by taking them out for lunch and talking relentlessly.

Once these facts were known, both managers accepted the fraud as a reality and felt that they were back in control of the situation. Their desire now was to resolve the fraud and move on to normal operations.

The occurrence of fraud in an organization is a stress-producing crisis. Managers and others who become aware of fraud usually react by going through five well-defined psychological response patterns. These reactions and the crisis itself can sometimes cause otherwise intelligent, decisive, and articulate business people to lose control or fall apart when fraud is committed.

If security managers understand these stages and their respective symptoms, investigations can be better planned and more effective in terms of establishing the actual facts. In addition, litigation and other adverse consequences may be avoided. Moreover, a tremendous amount of goodwill and confidence can be earned by security managers who know how to recognize these reactions and can help managers maintain their personal and professional perspectives. About the Authors . . . W. Steve Albrecht, PhD, is Arthur Andersen Alumni Professor at Brigham Young University in Provo, UT. Timothy L. Williams, CPP, is assistant vice president for corporate security at Northern Telecom Limited in Mississauga, Canada. Williams is a member of ASIS. CATCHING THE CONSPIRATORS

BY PHILIP J. BRENNER

DOES YOUR CORPORATION HAVE AN internal conspirator, someone who is cooperating and providing important shipping information or stolen cargo to an organized theft ring? Do you have workers who are smuggling drugs? Are some of your employees dealing drugs? Are your pilferage and theft losses increasing?

A number of indicators help security managers uncover internal conspirators. All it takes is astute observation - looking for the unusual - and an ear for company gossip.

A security education program where supervisors and key personnel are trained to be aware of certain characteristics involving internal conspirators will help identify them to take appropriate action. One or two of the traits listed below does not confirm illegal activity by a suspected employee, but it should alert a supervisor to conduct a more thorough review of the worker's behavior.

Unexplained increase in standard of living. Watch for the purchase of big-ticket luxury items such as expensive cars, trucks, recreational vehicles, boats, or even airplanes, where before the employee was satisfied with less expensive toys.

Purchase of a new, bigger, and expensive house, summer home or condo, or large amounts of land for no apparent reason. Salaries are no secret in any organization. People who live above their means are easy to spot. These items take 10 to 20 percent downpayments at a minimum to qualify.

Unexpected solvency from debt. Human nature being what it is, individuals will brag about getting out from under debt. Spending freely while in debt is a sign that something is out of the ordinary.

Transfer of children to private schools or expensive colleges. School expenses not only are an excellent way to hide ill-gotten gains but also are easier to conceal from friends and coworkers because the children are out of sight. College costs are not reportable and are difficult even for government agencies to trace.

Heavy gambling. Gambling provides a recreational outlet for extra cash and offers a good alibi if the employee becomes a winner.

Payment with cash only. In today's plastic money world, it is highly unusual to pay cash for even the most mundane purchases.

Supporting a lover. This is an expensive proposition for the internal conspirator, particularly if the person is already married. The individual could easily direct all the illegal profits into such an arrangement, and it does offer a place to hide big-ticket items in someone else's name.

Change in friendships and acquaintances. Conspirators must conspire, and they have to do it someplace. Employees may be trying to hide something if strange and peculiar people show up at work to see them over "innocent" matters, they have secretive telephone calls, or they quickly change the subject of a conversation when someone comes within hearing range.

Unusual or unannounced travel patterns. Peculiar travel and unusual destinations would suggest a person is meeting coconspirators or distributing stolen property or drugs. If this is the case, the employee will be reluctant

to talk about the travel with fellow workers.

Unusual absenteeism. Unexplained absence from work may mean the employee is meeting with contacts or conducting illegal dealings. As the internal conspirator becomes more deeply involved with illegal activity, it takes more time.

Attempts to gain or expand access to vaults, high-value storage areas or key transfer spaces, and an inquisitiveness about the organization's paperwork. Such acts may mean the employee is trying to find loopholes in the operation and security of the organization to exploit them toward his or her activities.

Repeated or unusual unaccompanied overtime. The implications are obvious: Unmanifested cargo or pilfered goods are being moved by the employee as the illegal operations are conducted during this time.

Many times when Americans have been caught spying, a common denominator has been discovered-greed and a desire for a better life-style without having to pay for or earn it. Unexplained wealth is one of the key indicators counterintelligence agents use to ferret out spies. Security managers can use the same indicators to discover internal conspirators. About the Author . . . Philip J. Brenner is a lieutenant colonel in the US Army Military Police Corps. He is a member of the ASIS Standing Committee on Transportation Security.
COPYRIGHT 1990 American Society for Industrial Security
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:includes article on catching the conspirators
Author:Albrecht, W. Steve; Williams, Timothy L.; Brenner, Philip J.
Publication:Security Management
Date:Dec 1, 1990
Words:3465
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