Financial C.R.I.M.Es in small businesses: causes and consequences
| DOI | https://doi.org/10.1108/JFC-03-2020-0032 |
| Published date | 01 May 2020 |
| Date | 01 May 2020 |
| Pages | 742-758 |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
| Author | Radiah Othman,Fawzi Laswad,Matthew Berkahn |
Financial C.R.I.M.Es in small
businesses: causes
and consequences
Radiah Othman,Fawzi Laswad and Matthew Berkahn
School of Accountancy, Massey University, Palmerston North, New Zealand
Abstract
Purpose –The purpose of this paper is to examine the causes and consequences of financial crimes
perpetratedagainst New Zealand small businesses.
Design/methodology/approach –A random sample of200 court cases was selected from 2010 to 2017.
A total of 12 cases involving14 small businesses were analysed.
Findings –The results reveal that financial crime is a systemic problem and involves people with diverse
demographics, and the victims are not restricted to any specifictype of small business. The offenders are mostly
middle-level managers. The length of offence variedf rom1 year to 12.5 years. Most of them funnelled the stolen
money into their personal accounts. The common motive is “keeping up appearance”. The managementplaced
immense trust in their employees and did not vet candidates before employment. The losses suffered by small
entities ranged from $6,000 to $590,000 and liquidated one business. The severity of the actual court cases
indicates the necessity of an employee screening as the first line of defence in these businesses.
Research limitations/implications –The small sample of court cases is a limitation, but the study
contributesto the fraud auditing literature by examining actual court casesinvolving small businesses. Small
businessesas victims of employee fraud and their lack of internal controlsare known but under-researched to
promote thoughtabout fraud risk severity in these businesses.
Originality/value –The C.R.I.M.Emodel has yet been tested on fraud cases involvingsmall businesses.
Keywords Employee, Financial, Fraud, Internal control, New Zealand, Small businesses
Paper type Research paper
Key
NZHC = New Zealand High Court (unreported);
NZCA = New Zealand Court of Appeal (unreported);
NZERA = New Zealand Employment Relations Authority (unreported);
DC = District Court (unreported); and
DCR = District Court Reports, Wellington: LexisNexis New Zealand.
Introduction
This study examines a sample of financial crime cases, which came before the New Zealand
(hereafter, NZ) courts. The financial crimes include all types of employee fraud offences
including corruption, in which the small entities [1] are the victims. Financial crime is not as
black and white, as fraud victims may not even be aware that a crime has been committed
(Bradshaw, 2006). Financial crime is often characterised as exploitation of trust and misuse of
authority (Arnold and Bonython, 2016). Trust brings with it, opportunities. Unfortunately, in
NZ, opportunities for financial crimes are the primary driver of economic crime (PWC, 2018).
In NZ, small businesses are essential to the economy. Ninety-seven per cent of its
enterprises are small enterprises (MBIE, 2015). They make up the bulk of the business
JFC
30,3
742
Journalof Financial Crime
Vol.30 No. 3, 2023
pp. 742-758
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-03-2020-0032
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
community, employ 29% of the private sector workforce and account for more than a
quarter of the gross domestic product (NZ entrepreneur, 2017). This relationship suggestsa
significant risk posed by the workforce on the livelihood and sustainability of the business
community if they fall to fraud perpetrated by their employees. There is no one source of
information that can providean accurate idea of the scale of employee fraud in NZ (Gubbins,
personal communication, 6 November 2018). The recorded crime statistics have been
criticised as not being accurate (Maguire,2007). Many fraud cases are not detected, reported
or not being pursued throughthe court thus escaped from the statistics.
Globally, the PwC’s 2018 Global EconomicCrime Survey reports a significant increase in
fraud occurrence with 49% of respondents’organisations had been victims of fraud,up from
36% in 2016. A total of 51% of the NZ respondents were victimised in the past two years
(PWC, 2018). Employee fraud is still the most common type of occupational fraud,
accounting for 30% for Asia-Pacific regionwith a median loss of US$236,000 (ACFE, 2018).
Both surveys reported asset misappropriation as the most frequently reportedfrauds across
industries. It affected42% of NZ organisations as compared with a global average of 29%.
Often, employees use their positionsto take or divert assets belonging to their employers
(Albrecht et al.,2019). Pre-employment screening has been suggested as a preventive
measure. In fact, in NZ, the screening is a government-imposed mandatory protective
requirement, yet there were cases, such as Joanne Harrison (Ministry of Transport),
Mohamed Shakeel Siddiqui (Waikato District Health Board) and Dr. Roman Hasil
(Wanganui Hospital) which came to light.These fraudsters have inflicted not only financial
losses but also physical and emotional distress upon victims. Harrison, for instance, stole
over NZ$700,000 from the Ministry of Transport.Even when the Victoria Police Fraud and
Extortion unit contacted the Ministry indicating Harrison as a person of interest, nothing
was done (Newport, 2017). When numerous whistle-blowers reported her for failing to
comply with public service rules around contracts and invoices, Harrison made them
redundant by using restructuring excuses. Even the Auditor General disregarded the
complaints and shut down an on-going internal investigation. All this commotion could
have been preventedif pre-employment screening was undertaken. It will costa lot less than
the candidate’sfirstday’s salary (Gubbins, 2017).
If those cases in an environment where preventive controls are mandatory, one cannot
help wondering what has been happening in smallbusinesses, where employee screening is
optional. Considering the importance of small businesses to the economy, the research
questions are as follows:
RQ1. What are the causes and consequences of financial crimes in small businesses in
New Zealand?
RQ2. Would an employee screening be usefulas the first line of defence?
Literature review
There is a considerable research that examines fraud and NZ in various context. Some
studies examine the national,institutional and regulatory attributes (Marriott and Sim, 2017;
Zirker, 2017;Gregory and Zirker, 2013;Van Peursem and Balme, 2010;Brooks, 2004;
Shameem, 1998;Hamlin and Watson, 1997). These factors are macro-contextual in nature,
not at small entities context. Occupational fraud studies are focussing mainly on corporate
fraud and failures (Bhuiyan and Roudaki, 2018;Jessep, Farrar and Watson, 2012;Button
et al., 2011). Bhuiyan and Roudaki (2018) found that almost half of the failed finance firms
C.R.I.M.Es in
small entities
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