The causes, impact and prevention of employee fraud. A case study of an automotive company
| Date | 03 October 2016 |
| Pages | 1012-1027 |
| DOI | https://doi.org/10.1108/JFC-04-2015-0020 |
| Published date | 03 October 2016 |
| Author | Mastura Omar,Anuar Nawawi,Ahmad Saiful Azlin Puteh Salin |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
The causes, impact and
prevention of employee fraud
A case study of an automotive company
Mastura Omar and Anuar Nawawi
Faculty of Accountancy, Universiti Teknologi MARA,
Shah Alam, Malaysia, and
Ahmad Saiful Azlin Puteh Salin
Faculty of Accountancy,
Universiti Teknologi MARA Perak Tapah Campus, Malaysia
Abstract
Purpose – The purpose of this paper is to investigate the causes and impact of employee fraud,
focusing on one particular industry, namely, the automotive industry.
Design/methodology/approach – One company was selected as a case for the study. Qualitative
data analysis was used for the study, with two techniques for data collection. First was the content or
document analysis on various reports, such as employee fraud reports and records of disciplinary
action, and second was a series of interviews with employees from different levels and various
departments of the company.
Findings – This study found that the most popular type of fraud is misappropriation of assets,
including theft of cash and inventories. No signicant differences were seen in terms of fraudster
position, as they can come from both the lower and the executive level. However, majority of the
fraudsters come from the operational and sales department. This study also found that majority of the
fraudsters in the case study were male, new employees and young adults. Their motivations to commit
fraud include lack of understanding about fraud behavior, opportunity to commit fraud and lifestyle
and nancial pressure.
Research limitations/implications – The results provide further conrmation of the Fraud
Triangle Theory and Fraud Diamond Theory on the causes of the fraud. They are also consistent with
much prior research and surveys conducted by global professional rms on fraud and its related causes
and implications. This study, however, was conducted on only one company with several series of
interviews and three years of document analysis. Future research should collect and analyze data from
a higher number of companies with more respondents for interviews and longer period for document
analysis to get more accurate results.
Practical implications – This study provides some recommendations for fraud prevention in the
future based on real fraud cases and those that involved managing cases up to and including
disciplinary decision. These include closed supervision, fraud awareness training, clearer job
descriptions, cultivation of a pleasant working environment and improved security control.
Social implications – This study found that some of the causes of fraud include social factors like
lifestyle and nancial pressure due to low income. Policy adjustments, such as an effort to push people
beyond the poverty line with higher minimum wages, need to be made to prevent low-income workers
from seeing their company as another source of illegal income.
Originality/value – This study is original, as it focuses on a company that operates in the automotive
industry, which is rare in fraud literature, particularly in developing markets. In addition, the company
is new, so analysis can be conducted on how the company evolved and learned from the fraud analysis
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
JFC
23,4
1012
Journalof Financial Crime
Vol.23 No. 4, 2016
pp.1012-1027
©Emerald Group Publishing Limited
1359-0790
DOI 10.1108/JFC-04-2015-0020
for prevention in the future. Furthermore, this study used two techniques of data collection, so that
verication of the ndings may be made for better reliability.
Keywords Case study, Malaysia, Fraud, Internal control, Fraudster, Unethical practices
Paper type Case study
Introduction
Every business transaction is vulnerable to the risk of fraud. Even though an
organization may have set proper internal controls, fraud still persists. Irrespective of
the size of the business, risk of fraud occurrence cannot be eliminated, showing that no
company is immune to fraud (Krambia-Kapardis and Zopiatis, 2010;Murray, 2014).
Bressler and Bressler (2007) stated that 30 per cent of small business failures result from
internal corruptions and employee dishonesty. In addition, lack of resources to
implement efcient internal control (Hanno and Hughes, 1999), such as anti-fraud
technology to prevent employee misconduct (Bierstaker et al., 2006), and lack of external
monitoring like external audits (Wells, 2004) cause small businesses to be more
susceptible to fraud.
Fraud is mainly about getting money by dishonestly deceiving other people who
would not give money if they knew the truth (Levi, 2011) and use of false representations
to gain unjust advantage (Gupta and Gupta, 2015). The Association of Certied Fraud
Examiners denes fraud (occupational fraud) as gaining advantages from position or
occupation for personal enrichment through misuse of an organization’s resources.
Wells (2004) describes that employee fraud can range from the most basic, such as
pilferage of company supplies, to the most complex, such as manipulation of nancial
statements.
Generally, most fraud was detected internally. A survey by KPMG (2013) illustrated
that the most common detection method is internal control (39 per cent), followed by
internal auditor review and employee notications (both 24 per cent), whistleblowing
mechanisms (21 per cent) and tips from an external party (16 per cent). Interestingly,
fraud also can be discovered when the company changes the personnel on duty (13 per
cent) (KPMG Malaysia, 2014).
The unethical behavior of an employee may lead to additional negative effects. If
the controls by the management are poor, there is no doubt that the spaces of fraud
are opened widely in a very subtle way. An employee who committed fraud in a rm
for whatever reason is like a plague which will have a bad effect on the organization.
This issue has attracted shareholders and various stakeholders because of its
negative impact, i.e. it reduces rm’s performance, tarnishes a company’s image
and, most importantly, leads to a loss of assets or money. Firm performance will
decrease due to diminished productivity, low job satisfaction and high employee
turnover, resulting in unnecessary cost incurred and lower long-term prots
(Cialdini et al., 2012).
Rezaee (2005) suggested that nancial statement fraud has cost more than US$500bn
during the past several years, while the US Chamber of Commerce estimated that
employee fraud costs business between US$20bn to US$40bn a year (Hanno and
Hughes, 1999). Proling and handling cases of employee fraud also consumes a lot of
time and requires dedicated resources, which if channeled to other areas such as
operation would give more benets to the company.
1013
Prevention of
employee
fraud
To continue reading
Request your trial