Organizations of all types and sizes suffer from financial fraud. In its latest report to the nation, the Association of Certified Fraud Examiners estimates that 5% of all revenues are lost to fraud.

That figure alludes to 5% of gross revenues, not profits, and accounts for a staggering $3.7 trillion a year. To put that into perspective, in the five minutes or so that it will take you to read this article, another $35 million will be absconded.

What It Looks Like

There is no magic formula to identify exactly who will commit a fraud in your organization, or how; but we do know the statistics for frauds that have been uncovered. By far, asset misappropriation is the majority, making up 85% of work-related financial crimes. The average scheme lasts 18 months and costs the organization a median amount of $130,000 per occurrence. Banking and financial services, government and public administration are the leading victims.

Controls in Place?

The existence of consistent internal and external audits helps, but not as much as one would think. Less than 16% of misappropriations are detected by audit-related controls.

What is the No. 1 method for uncovering a fraud? Tips from other employees translate into more than 40% of discovered schemes. Fostering a culture of “See something, say something” may be your organization’s best defense.

The Psychology

The fraud triangle consists of three elements necessary for a person to commit financial fraud: motivations, rationalizations and opportunity. Note that two-thirds of these are related to an employee’s state of mind — not his ability to access your company’s assets.

Yet organizations tend to focus a program to deter fraud almost exclusively on minimizing opportunities to steal assets. While this is important and necessary, it can detract from the root of the problem, which is what is happening in an employee’s life that might make him cross the line. One of the main misconceptions about financial fraud is an assumption that the employee is motivated to commit fraud out of greed.

A growing body of research is showing that greed, while related to financial fraud, is rarely the motivating factor to an embezzler.

Who Might Steal?

Absolutely everyone in your organization is capable of stealing. Yes, that means you, too, and your best colleagues.

Upon hearing this stated, many employees might say, “I have never, and would never, steal from my employer or our clients. Period.”

It is that very mindset that allows financial fraud to take place at every level of every type of organization, often right under our collective noses. All of us live under pressures that, left unchecked, will make us do things we never thought we would. Right now, employees all around you are dealing with ambitions, addictions, relationship crises, abuse and any number of other motivators that can eventually manifest into a financial crime.

Lawrence Kohlberg, a famous psychologist in the area of moral development, once conducted experiments where subjects were exposed to escalating situations of moral hazard.

Perhaps his best known story is called “Heinz and the Drug.” In the story, Heinz has a dying spouse that needs a lifesaving drug that is only available from one druggist, who refuses to sell it to Heinz in an attempt at extortion. Heinz is faced with the dilemma of breaking the law or losing his dying spouse. The moral of the story is that, if the pressure and rationalizations get high enough for a person, eventually financial fraud can result.

Most of us will never face extreme choices like that, but employees in our organizations do often face staggering pressures in their personal lives of which we are unaware. Financial fraud is a human condition and, as such, has to be approached with this in mind when developing a program to combat fraud.

Bobby Waldrup is a professor of accounting for Loyola University Maryland’s Sellinger School of Business and Management, which has a campus in Columbia. He can be contacted at 410-617-2970 and [email protected].