The largest occupational fraud losses typically come from people in positions with the highest authority — owners and executives. The median loss from these fraud schemes is $337,000, compared to $50,000 for rank-and-file workers, according to the Occupational Fraud 2022: A Report to the Nations. This biennial report, published by the Association of Certified Fraud Examiners (ACFE), also reveals that roughly 23% of frauds are committed by executives, including owners, CEOs and CFOs. Companies and nonprofits may be able to thwart executive-level frauds by focusing on the three critical elements of the fraud triangle.

First, perpetrators must experience some type of pressure that motivates them to commit fraud. Pressure can come from within organizations — for example, pressure to meet aggressive earnings or growth targets. Alternatively, pressure could be personal, such as the need to maintain a high standard of living or pay off debt from credit cards, medical bills or gambling.

Executives tend to feel “lifestyle” pressures. For example, they might need to drive an expensive car to prove they’ve “made it.” Or they might feel pressure to pump up revenue or profits to impress investors or lenders.

To minimize pressures to commit fraud, it’s important to compensate executives fairly and set realistic performance goals. Employee Assistance Programs (EAPs) that provide counseling and other help to troubled employees can also relieve pressures, especially when employees are dealing with addictions or family crises.

2. Opportunity

Executives have unique opportunities to commit fraud that aren’t available to lower-level employees. Their positions of authority may allow them to bully or intimidate subordinates and override controls that would otherwise detect fraud. These factors can make it harder to detect executive crimes, causing such frauds to incur higher losses and last longer. In fact, the ACFE reports that the median duration of frauds committed by an owner or executive is 18 months, compared to just eight months for rank-and-file employees.

A strong system of internal controls is a company’s first line of defense against executive fraud. Effective measures may include whistleblower reporting hotlines, fraud training programs and audits. It’s important that executives perceive that someone (such as an internal or external auditor) is overseeing their work — and that suspicious behaviors will be reported and investigated.

3. Rationalization

The third leg of the fraud triangle is a perpetrator’s ability to justify dishonest behavior. When perpetrators rationalize wrongdoing, they overcome ethical barriers that generally guide their conduct. For example, they might tell themselves that they’ll pay back the money before anyone misses it. They may reason their employers can afford financial losses — or that they’ll lose everything if they don’t commit fraud.

Changing a would-be fraudster’s mindset can be challenging, especially when substance or gambling addictions are clouding someone’s thinking. Organizations may be able to get inside a perpetrator’s head by communicating zero-tolerance antifraud policies and providing tangible consequences for dishonest behaviors, such as termination, probation, criminal referrals and civil actions. Fostering a supportive workplace — rather than a cut-throat, win-at-all-costs culture — can also make it harder for executives to rationalize dishonest behaviors.

4. Risk assessment

All organizations should conduct risk assessments to identify the areas where they’re most vulnerable to fraud perpetrated by C-suite executives. Forensic accounting experts can perform independent assessments and recommend corrective measures, as well as investigate suspicious behaviors to detect frauds early and minimize potential losses. Please reach out if you have any questions.