Closing the Gap between Management and
Employees: Perspectives on Non-Cash Asset
Misappropriation and the Internal Anti-Fraud
Controls
A Qualitative Study
MSc BA Organizational & Management Control (O&MC)
Supervisor: dr. S. Girdhar
Co-assessor: dr. B. Crom
Theme: Fraudulent behaviours
Abstract
Table of Content
1. Introduction ... 4
2. Literature ... 5
2.1 Occupational Fraud ... 5
2.2 Non-Cash Asset Misappropriation ... 6
2.3 Internal Anti-Fraud Controls ... 8
2.4 Management & Employees ... 9
3. Methodology ... 9
3.1 Data Collection ... 9
3.2 Data Analysis ... 13
4. Results ... 13
4.1 Fraud perspective ... 13
4.2 Fraud preventing tools ... 16
5. Conclusions & Discussion ... 20
5.1 Conclusions ... 20
5.2 Discussion ... 22
5.3 Theoretical and Practical Implications ... 23
5.4 Limitations & further research ... 24
References ... 24
Appendix ... i
1. Introduction
Recent years, occupational fraud gained attention due to various corporate scandals (e.g. Satyam, Bernie Madoff, Lehmann Brothers, Worldcom, Enron) that came to light. PWC (2016) recently published a report about the Global Economic Crime Survey, which is highly related to fraud. In total, this survey was conducted in 115 countries and had 6337 respondents. Outcomes are frightful. 36% of all organizations had to do with economic crime within the recent 24 months, and 1 out of 5 organizations never carried out a fraud risk assessment. Internal actors commit 46% of all cases. The top three of fraudulent acts are Asset misappropriation, Cybercrime and Bribery & Corruption. A report of the Association of Certified Fraud Examiners (CFE) (2016) argued that on average 5% of the revenues of an organization are lost due to occupational fraud. The global projected loss due to occupational fraud is estimated on $3.7 trillion yearly. Next to the financial damage, also other forms of damage were noted in the survey of PWC (2016). These kinds of damage included: business disruptions, remedial measures, investigative and preventative interventions, regulatory fines, and legal fines. Also damage to the long-term business performance in the form of damage to moral and reputation within the organization was mentioned (PWC, 2016). The definition for occupational fraud as used in this paper contains: The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets (ACFE, 2016). Occupational fraud exists in three mutually exclusive forms: Asset misappropriation, corruption and fraudulent statements. However the forms are unique in it’s kind, it has four elements in common: it is illegal, it violates the actor’s fiduciary duties to the organization, it is committed for the purpose of direct or indirect financial benefit of the actor, and costs the employing organization assets, revenues, or reserves (Holtfreter, 2005).
This research focuses on a form of asset misappropriation, namely non-cash asset misappropriation. Non-cash asset misappropriation is defined as: Any scheme in which an employee steals or misuses non-cash assets of the victim organization for personal benefit (ACFE, 2016). Internal anti-fraud controls are described as being the most important preventing mechanisms to prevent the organization from non-cash asset misappropriation (PWC, 2016). PWC (2016) describes a rising trend of a disconnection between management and employees regarding occupational fraud. The aim of this research is to find out what this disconnection contents and what it looks like. This is going to be achieved by doing in-depth research in a company. Interviews have to demonstrate if there is a disconnection between managers and employees regarding their views on non-cash asset misappropriation and the effectiveness of the internal anti-fraud controls.
conducted by professional institutions, asset misappropriation is the most common form of occupational fraud. In 83,5% of the cases worldwide it concerns asset misappropriation of which 19,2% is non-cash asset misappropriation. In order to enrich the academic field on occupational fraud, this study focuses on non-cash asset misappropriation. Practical relevance lies in the fact that the disconnection between management and employees can harm the organization. When management and employees do not understand each other in terms of perceptions regarding non-cash asset misappropriation and their preventing mechanisms, it can lead to more incidents of non-cash asset misappropriation (Morgan & Zeffane, 2003). When there is a mutual understanding between management and employees they can build effective internal anti-fraud controls. This will be further elaborated in the theory section of this paper. The research question of this paper consists of three questions that are to be answered:
I. What is the perspective towards non-cash asset misappropriation of managers and employees?
II. How perceive managers and employees the internal anti-fraud controls regarding effectiveness?
III. Is there a difference in perspective towards non-cash asset misappropriation and the
perceived effectiveness between managers and employees?
This paper is structured as follows: It starts with the literature section where the most important subjects are elaborated, following with the methodology. Next, the results will be presented. Then a conclusion will be given which follows with a discussion and recommendations for further research.
2. Literature
In this section, the concepts that are being used in this paper will be elaborated on. First, an insight in the literature about occupational fraud will be given in terms of a definitions and forms. Second, an overview of previous literature on non-cash asset misappropriation will be given. And third, an overview will be given on what there on the area of anti-fraud tools in order to prevent the organization from non-cash asset misappropriation.
2.1 Occupational Fraud
fraud. The definition is also very broad and is applicable throughout all the layers of the organization. In general, there are three forms of occupational fraud, which are corruption, asset misappropriation
and financial statement fraud. All kinds of occupational fraud can be assigned to one of the three
mutually exclusive forms of occupational fraud. However the three forms of occupational fraud are mutually exclusive, they have four elements in common: it is clandestine, it violates the trust relation between the perpetrator and the organization, it is committed for the purpose of direct or indirect financial benefit of the perpetrator, and costs the employing organization assets, revenues, or reserves (Holtfreter, 2005). Asset misappropriation is the most common occurring of all cases of occupational fraud (83,5%), with a median loss of $125.000 (ACFE, 2016). Asset misappropriation involves the stealing from the organization and is often perpetrated by employees in relatively small and immaterial amount. It also committed by management who are usually more able to obscure or conceal misappropriations in a way that is harder to detect (Nia & Said, 2015). According to the ACFE (2016), in 35,4% of the cases is corruption concerned, with a median loss of $200.000. Corruption is to abuse the entrusted power for private gains (TU Delft, 2011). Two well-known examples of corruption are bribery and conflict of interest. In 9,6% of the cases financial statement fraud is involved, with a median loss of $975.000. Financial Statement Fraud is defined as “the intentional, deliberate, misstatement or omission of material facts, or accounting data which is misleading and, when considered with all the information made available, would cause the reader to change or alter his or her judgment or decision” (Zhou & Kapoor, 2011). Financial statement fraud consists in two forms, asset/revenue overstatement and asset/revenue understatement (ACFE, 2016). In this research I will focus on asset misappropriation, and then, in particular on non-cash asset misappropriation. The reason why I focus on non-cash asset misappropriation is because it is the most common form of occupational fraud. In 83.5% of the cases of occupational fraud it concerns asset misappropriation of which non-cash asset misappropriation is the most common (19.2%) according to the ACFE (2016).
2.2 Non-Cash Asset Misappropriation
The definition of non-cash asset misappropriation that applies in this research is given by the ACFE (2016). This definition is: Any scheme in which an employee steals or misuses non-cash assets of the victim organization for personal benefit. This is the most comprehensive definition and is used by all professional institutions over the world that is the reason why I apply this definition. In the little academic research that has been done on non-cash asset misappropriation, this definition is also most common.
The top three industries that are most susceptible to non-cash asset misappropriation are telecommunications, retail, and manufacturing. The average risk of becoming victim as an organization is respectively 38,7%, 32,7% and 30,2%. Furthermore, up to the present it is not yet clear what kind of organizational characteristics are more susceptible for non-cash asset misappropriation than others (Holtfreter, 2005). There is however, a study that found that there is a positive relationship between the size and level of bureaucracy and the willingness to approve of stealing from the organization (Smigel, 1956). There is a large support for arguing that size is an explanatory factor of the amount of asset misappropriation. (Baucus, 1989; Dalton & Kesner, 1988; Gricar, 1983; Kesner, Victor, & Lamont, 1988; Staw & Swajkoski, 1975). But later, in a study of Hill, Kelley, Agle, Hitt, and Hoskisson (1992) was found that it was not the size of the organization that predicted the non-cash asset misappropriation but factors as decentralization, span of control, and incentive system, which varies with organizational size. Therefore it is not to say that the relation between size and fraudulent acts is linear.
2.3 Internal Anti-Fraud Controls
why I do not choose for the COSO framework is because it is too comprehensive and in the extent in which the academic literature currently is, the framework is too big seen the time and resources I have to conduct this study. When you compare the COSO framework with the ACFE internal anti-fraud controls, you can see similarities between the anti-fraud controls and the good control activities of the COSO framework.
2.4 Management & Employees
According to the occupational fraud report of PWC (2016) there is a rising and harmful trend. The report states that there is a disconnection between the tone at the top and the reality on the ground. One in five organizations are not aware of the existence of a formal ethics and compliance programme and in many organizations it is not clear who owns them internally (PWC, 2016). There is a small amount of literature available on this topic, so therefore it is important to explore how employees perceive the intentions on anti-fraud controls by management. Culture and a workforce that works in line with how it is meant by the top management is the first line of defence of an organization (Kane-urrabazo & Paso, 2006). When employees and management do not understand each other’s perceptions on anti-fraud controls, they can grow apart which can lead to more fraud by employees. This means that the organization is not in control of the employees. In order to prevent the organization from non-cash asset misappropriation and control the employees in an effective way, it is important to have strong internal anti-fraud controls. When there is a gap between the management’s intentions and employees’ perceptions, the actions to prevent and detect fraud are not working properly, because the employees do not understand them and trust in management fades away (Morgan & Zeffane, 2003).
3. Methodology
The previous section made clear that strong internal anti-fraud controls are important in preventing the organization from non-cash asset misappropriation. Also, there is a rising trend in terms of a disconnection between management and employees. This disconnection concerns preventing the organization from occupational fraud. There is little academic research conducted in this area, this is why it is important to explore how this disconnection looks like and how it possibly can be solved. Therefore, theory development is needed. By exploring this phenomenon an attempt is done to give a contribution to the managerial literature and, in particular to the area of occupational fraud.
3.1 Data Collection
observation was done by primary data. Secondary data was used to get an insight of the organization in terms of size and activities. Other secondary data contained information about the internal anti-fraud controls that are implemented in the organization. The secondary data consisted of documents made available by the organization. The way that primary was gathered is in the form of in-depth interviews. Interviews were conducted because in-depth research is needed to explore the non-cash asset misappropriation in the organization. The most appropriate type of research for exploring an academic field is by qualitative research. I chose for interviews because it is the best way to get thoughts, perspectives and perception about non-cash asset misappropriation and the effectiveness of the internal anti-fraud controls. Two types of data are used to get a stronger foundation of constructs (Eisenhardt, 1989). The outcomes of the study are compared with existing thoughts in literature about non-cash asset misappropriation and the internal anti-fraud controls. Academic propositions were derived from the comparisons, which can lead to enrichment in the managerial literature. For this research I collaborated with a large manufacturing firm that produces dairy products and cans to package the dairy products in. In total there were eleven interviews. This allowed me to replicate logic, record patterns, and possibly confirm them (Yin, 2003)
Interviews
MT
interviews
Interview
Function
Service
years
Years in
function
Education
M/F
1 HRM manager 10 years 10 years Business
administration
M
2 Factory Controller 19 years 6 years Higher professional
education
M
3 Manager FQA 35 years 19 years Dairy school F
Table 1a Key information about MT respondents
Employee
Interviews
Interview
Function
Service
years
Years in
function
Education
M/F
1 Procesoperator 15 years 1,5 years Middle professional
education
M
2 Group leader/Mechanic Tin
factory
34 years 5 years Middle professional
education
M
3 Technical Buyer 2 years 2 years Higher professional
education
M
4 General Service 37 years 15 years Lower professional
education
M
5 Group leader/Mechanic 33 years 12 years Lower professional
education
M
6 Chief Expedition 37 years N/A Higher professional
education
M
7 First employee Filling
department
N/A 20 years Middle professional
education
M
The Company
The company that is used for conducting the interviews and gathering data is a large dairy manufacturer in the north of the Netherlands. The headquarters is located in Germany. I chose to conduct my research in a manufacturing company because this industry is in the top three industries where the risk of non-cash asset misappropriation is the highest (ACFE, 2016). I came in contact with the organization via a student whose father is managing director of the Dutch production location. Seen the time in which the research had to be conducted and the scope of the study it was the most useful to get access to a company that is close to my hometown, which is another, more practical reason why I chose for a company in the north of the Netherlands.
The organization is a dairy company that produces dairy products for the consumer and professional global market. The Dutch factory is a production location of a large German corporation. The company has nine production locations of which one in the Netherlands and the others in Germany. In total it counts circa 3600 milk suppliers, which comes down to 2.278,8 million kilos of milk that is processed yearly. This leads to an annual turnover of circa 1,44 billion euros. Their employment counts 1900 FTE. The production location in the Netherlands is responsible for 109 million kilos of milk, 143 milk suppliers and circa 200 FTE.
Controllability, Reliability and Validity
In order to be a valuable addition to the literature, the quality of this research has to be guaranteed in terms of validity and reliability.
The four sources of reliability bias were tackled. Research bias will be guaranteed by recording the interviews so that the researcher can re-hear the interviews. Making use of two researchers who do research to the same topic has guaranteed inter-rater reliability. They both coded their interviews in order to guarantee reliability. Instrument bias was prevented by triangulation. Primary and secondary data is used in order to correct and/or complement each other (Aken, Berend & v.d. Bij, 2012). It is also ensured to select the right persons in order to get good data. Respondents were carefully chosen by the organization. This is done by looking at key functions in the organization regarding accessibility to the organization’s assets. This prevented the research from respondents’ bias. In order to prevent the research from circumstance bias, the interviews were conducted at different days and times (Aken et al, 2012).
characteristics (Lincoln & Guba, 1986). In this way the results are transferable which is comparable with external validity for quantitative studies.
3.2 Data Analysis
First, all the interview records were transcribed. Second, all the transcripts were coded by making use of open coding. A second round of coding was done in order to combine quotes with the same message. This is called axial coding. Also a third round of coding was performed. Using the selective coding method, the final codes were selected that were used in the actual results (Feijt, 2015).
4. Results
4.1 Fraud perspective
In order to give answer on the first research question “What is the perspective towards non-cash
asset misappropriation of managers and employees? I interviewed managers and employees and
asked them questions about asset misappropriation and what their view on this topic was related to their job. According to two recently published reports of two large professional and acknowledged institutions (ACFE, 2016; PWC, 2016), there is a growing disconnection between the tone at the top and the reality on the work floor about asset misappropriation. By means of the interviews there is an attempt to map this for one specific case in order to explore how this disconnection looks like in reality and to deliver a contribution to the scientific field of occupational fraud. One of the first questions the respondents were asked is what they considered as non-cash asset misappropriation. Together with other questions like “Can you give an example of non-cash asset misappropriation?”, “Do you think there is a grey area towards non-cash asset misappropriation?”, “Have you had an experience with non-cash asset misappropriation? Could you share this with me?” This was asked in order to explore the perspectives of non-cash asset misappropriation by managers and employees. The full interview guide is included in the appendix.
Management Team
misappropriation is just stealing from the organization.” Another managers mentioned that they, as being the management team, had to show how it should occur. He believes that when the management shows negative behaviour in terms of non-cash asset misappropriation, the employees will follow. And when the management shows good behaviour, employees also will follow this. An example that was given that in the past, the managers washed their cars during working hours on the factory side. This was an indication for employees that it was normal to use assets of the organization for private purposes.
Examples of non-cash asset misappropriation that were given by managers varied between simple self made-up examples to serious real-life experiences. The most simple and often given example was that of pens and paper. With regard to the example of the pens and paper, the managers agreed that this could be a grey area. One manager gave the example:
“When you take a bloc note home and you use it to make work related notes, but the next day you write down your groceries-shopping, than you could say it is a grey area. But when you take a bloc note every day to provide your studying children from bloc notes, it is theft.”
A more serious example that happened five or six years ago was that of a copper theft. In this case an employee took copper with a total value between 40.000 and 60.000 euros. The employee who committed this thought he or she could take it with him without being caught.
There are is a policy with rules based on using resources of the organization which makes it clear what is allowed, so formally seen there is no grey area. But the real execution of this policy depends on multiple factors including employees. These policies are communicated clearly towards the employees. But sometimes employees do not realise they are wrong because it is only a pen. According to the administration there is a yearly use of hundreds of pens and it remains unclear where they go. So when everybody gets a new pen every week, the costs will increase. A manager said the following about this:
“You cannot just take something, it is not harder than that. But monitoring and execution depends on multiple factors. When employees see something that is not right, and he or she does not want to report this, than you can have rules and policies but it does not get you anything.”
“I think the most important asset is your employees. You have to trust them. You have to ensure that you make good products in safe condition together with your employees. Therefore it is important that they (the employees) see that it is not in their interest to steal from the organization”
Employees
The employees that were interviewed had different key functions in the organization regarding accessibility to the organization’s assets. Generally, they came up with definitions, similar to each other. In the examples that they gave, they were differentiated. But it is possible that this is due to the fact that they have different functions in the organization, so they have access to different resources of the factory. What employees considered as non-cash asset misappropriation contained aspects like: “taking things that belongs to the organization to home”, “using properties of the organization for private use” and “everything that is taken without permission”. On the question about whether or not they think there is a grey area in which it is not clear if something is allowed or non-cash asset misappropriation, the opinions were differentiated. Approximately half of the employees believed that there was no such thing as a grey area. They said there is a limit of what is allowed and what not, and that you should not cross this line. This group of employees believed that everyone knows these limits. Crossing this line is just to appoint as non-cash asset misappropriation. One employee said:
“Suppose that I take a pen with me to home. I think that should not be allowed. The limits are clear and you should not cross these limits.”
Another employee mentioned:
“I don’t think there is a grey area. Everybody knows what belongs to the organization or to others. And you simply do not take such things.”
The other half of the employees that are being interviewed believed that there is such thing as a grey area in which it is unclear if something is allowed or not. However they think there is a boundary, but this is a gut feeling. Next to that it can be an attitude towards the organization. An employee said:
“Well, you should see it like this. Sometimes I come home with a pen in my jacket. Is this theft? I don’t think so. Sometime, I also take them back. But when I provide my son with pens every week, it becomes a different story. But I don’t believe in this because then they have to order too much pens, but in general I think one pen is not theft.”
“From safety reasons, we are required to wear gloves in the factory. And well, sometimes you take a pair of gloves home for gardening. In essence, this is theft, but I think they do not make a problem out of this here. So I call that a grey area.”
About the attitude towards assets of the organization an employee said that he is just not raised like this. From childhood he learned that stealing is not right. But he does not know how other guys are seeing this.
Comparison of perspective between MT & employees
The answers between members and employees are compared and what you see is that MT-members give a more academic and abstract definitions of non-cash asset misappropriation and employees tend to give a more concrete definition. MT-members give definitions like “Using assets for other purposes than business”, while employees non-cash asset misappropriation define as “stealing from the organization”. But the general intentions towards non-cash asset misappropriation are the same and you can conclude that it is something that should not be permitted in the organization.
When you look at the limits of what can be seen as non-cash asset misappropriation, the opinions between MT-members and employees are different. But here there are also differences in perspective within the group of employees. Within the MT-members there is no difference in perspective towards a possible grey area. They agree upon the fact that there should be no grey area on the topic of non-cash asset misappropriation and so they also strive for that. Employees however are differentiated about this. There is a part that says that there is a grey area in which some behaviour is tolerated. Other employees say that there is clear line, and say it is just not right to take assets of the organization to home for private use.
4.2 Fraud preventing tools
The organization implemented three of the five anti-fraud controls that are described in the Report to the Nations by the ACFE (ACFE, 2016). These are a proper separation of duties, authorization and
physical safeguards. First there is a proper separation of duties, when an employee needs something
the factory where an employee has no business, he cannot come. Every door in the factory has to be opened by such a key, and every opening is recorded. Even when someone tries to open a door for which he or she has no access. The second way in which the organization uses authorization is by using permission letters. The organization is very cooperative regarding loaning tools or giving away stuff they do not need anymore and have no large value for the organization. The only thing employees need to do is asking for a permission letter, which has to be signed by one of MT-members. This breaks down barriers because there is no need for taking things secretly. The third way in which the organization works with authorization is by using ICT. Every employee that works on a computer has its own credentials to log in on a computer. Everything is monitored and also not every employee has access to everything on the server. Also a firewall is placed in order to prevent the organization from stealing sensitive information, which is also considered as non-cash asset misappropriation. The third anti-fraud control that is implemented in the organization is the use of physical safeguards. There are cameras outside the factory and around the factory area. There are no cameras inside the factory because of privacy reasons. The cameras are always recording which is checked every day. The footage cannot be used as evidence against own employees. Next to the cameras there are external security staff that are doing rounds in- and outside the factory a few times a week. Next to the external security staff, there is an employee general service, which also monitors and controls the security systems of the factory. There is also a possibility to visitation. When something is missing or there is another problem, the MT-members are allowed to look in the bags and pockets of employees at the exit of the factory. The anti-fraud tools work together with a combination of hard and soft fraud preventing mechanisms to prevent the organization from non-cash asset misappropriation. The other two tools that are named by the ACFE (job rotation and mandatory vacations) are not used in the organization because the Dutch department is too small to implement job rotation since it has only one factory in the Netherlands. And the MT-members do not believe mandatory vacations are an effective instrument in their organization.
4.3 Perceived effectiveness
Just as with the comparison in perspective of non-cash asset misappropriation between MT-members and employees, the same is done by the perceived effectiveness regarding the anti-fraud tools.
Management Team
“It is a mix of all kinds of actions. … The most important thing is to ensure that you have a good policy, to ensure that this policy is maintained and that you raise barriers so that it becomes harder to commit such an action.”
All MT-members agreed that it is important to raise physical barriers to make it difficult to steal assets. This is done by key authorization to track the employee’s movements, cameras to monitor the entrance and exit, a separation of functions to ensure that there are no wrong orderings, Traceability of the inventory to register all the assets and products in the factory, the possibility to visitation of employees and ICT controls. At the same time it is important to keep things transparent and to make it possible that employees communicate with the MT-members. Therefore there is a possibility to loan things of the organization or to take things that are not needed anymore. The only thing that has to be done is to ask for a permission letter that has to be signed by one of the MT-members. This is a system that lowers barriers in terms of communication and transparency.
“So the barrier to ask for permission is really low, and thereby we try to keep things transparent. If you want to loan a grinder or the drilling machine than this is no problem. The only thing you need to do is get a permission form and let it sign by one of the MT-members.”
And also in the context of “Food defence” it is important that assets are protected against evildoers from outside, but also from inside the organization. Another aspect that was mentioned by the MT-members is that the rules are tightened after an incident has taken place. And there is potential for improvement in the prevention of non-cash asset misappropriation but as long the non-cash asset misappropriation does not cost the organization thousands of euros, it is not really needed to improve the systems.
“A few years ago we had an issue for which someone has been fired. Thereby awareness has risen among the MT. Therefore we made a new policy and introduced the permission letter.”
Fraud prevention tool Amount of times managers
named it in interviews
Amount of times employees named
it in interviews
Key authorization
5
26
Permission letter
4
9
Separation of function 4
4
Visitation
2
2
Cameras
1
5
Security safeguards
4
2
ICT controls
2
0
Employees
Analysing the answers of the employees, there are two tools that were labelled as being effective prevention tools. These tools are the key authorization and permission letters. You can see that these tools are most named by the employees in table 2 Key authorization is seen as effective because it records all the movements of the employees. At the same it makes it impossible for employees to enter areas in the factory where they do not have business. The employee general service revealed that he regularly encounters doors that are manipulated, by a stone in the door or something else. But although this system is not completely waterproof, it is seen as effective. However all the movements are registered, employees do not feel like it touches their privacy. An employee said the following about this:
“We are monitored, but we do not have the feeling of being monitored just as with cameras. It (the
key authorization) does not touch your privacy, and the feeling about that is really positive. Only when something is not right it is being checked.”
Also the effectiveness is perceived as positive. An employee said this:
“Suppose, something is missing out of the warehouse. And you also entered the warehouse that day, and then you have to justify why you were there and what you were doing there. So I think it works really well.”
Employees were also positive about the permission letters. Reasons were that they did not have to doubt if something was right or not in order to take things home. Other reasons were that it lowers barriers to communicate with the MT-members in order to ask permission for taking things or loaning tools. On employee said the following about this:
“I arrange every year one hundred pallets for an event in my town. This shows that the organization is cooperating very much, as long as you ask permission for it.”
collected the signatures. The employees suggest that the process should be digitalized. One employee said the following about this:
“There is a lot potential for improvement. As regards efficiency, gathering signatures takes too long because attorneys have also other business, they are not waiting the whole day if there are orders coming in. Sometimes it takes a week to get back an order with signatures. This is too long, especially with rush orders.”
The answers show that in general the employees see the tools as effective but that there is room for improvement. Employees mentioned also that control became stricter after an incident.
Differences between MT and employees
The differences in perceived effectiveness regarding the anti-fraud controls within the organization is differentiated between MT-members and employees. Also the approach of the tools differs between the two groups. Where the MT-members consider the anti-fraud tools as a package, the employees see them as separate mechanisms. It could be the case that this is because MT-members has to do with the entire organization where the employees only have to do with the systems that are used in their working area. For instance, a general production employee has not to give commands of orders. So has no business with the separation of functions. However, he is not authorised to enter the warehouse, so in that light he has business with the separation of functions.
There is also a disconnection discovered between the perceived effectiveness of the tools that prevent the organization from non-cash asset misappropriation. The MT-members assume that the effectiveness of the tools are good, and that they work fine. However, the employees are not positive about all the tools. They are very positive about the key authorization and permission letters but rather negative about the external security staff and the separation of functions.
MT-members and employees agreed that control became stricter after an accident. The shared opinion about this is that this is logical but that it not should be the way. When everyone is obeying the rules strictly all the time, there should be fewer incidents and stricter policies would not be necessary.
5. Conclusions & Discussion
5.1 Conclusions
managers and employees?” “How perceive managers and employees the internal anti-fraud controls regarding effectiveness?” “Is there a difference in perspective towards non-cash asset misappropriation and the perceived effectiveness between managers and employees?”
To give answer on the first research question “What is the perspective towards non-cash asset misappropriation of managers and employees?” I conclude that MT- members are very strict in their perspective. According to the interview data, MT-members gave similar and academic definitions of non-cash asset misappropriation. Non-cash asset misappropriation is something of which there should be no grey area, it is simply not allowed and should not be tolerated in any form. Actions and decisions of employees may only be for business purposes, all other purposes of using assets of the organization should not be allowed. Employees however, were less strict and gave a more concrete definition of non-cash asset misappropriation. The perspective towards non-cash asset misappropriation among employees differs. Where half of the employees agreed with the MT-members that non-cash asset misappropriation should not be allowed or tolerated in any form, the other half of employees thought there is a grey area in which there is room for taking assets for private use. However, this should be tolerated for low-cost goods such as pens and gloves and on a small scale.
To give answer on the second research question “How perceive managers and employees the internal anti-fraud controls regarding effectiveness?” I conclude that MT-members see the internal anti-fraud controls as a package that work together with other prevention mechanisms to prevent the organization from non-cash asset misappropriation. Employees saw the internal anti-fraud controls as loose systems that prevent the organization from non-cash asset misappropriation. When you consider the perceived effectiveness, you can conclude that the MT-members as well as the employees perceived the internal-anti fraud controls as being effective. Employees make difference between the internal anti-fraud controls, and labelled the key authorization and permission letters as being most effective. MT-members and employees also agreed on the fact that rules regarding anti-fraud controls become stricter after an incident concerning non-cash asset misappropriation. Another important conclusion is that employees thought there is room for improvement but MT-members thought that for now the internal anti-fraud controls are sufficient.
perceived effectiveness of the internal anti-fraud controls, MT-members and employees generally agreed with each other. Both perceive the internal anti-fraud controls as being effective and ensures that non-cash asset misappropriation is difficult to occur and that any incidents could be traced to the perpetrator. Employees however, thought there is room for improvement regarding efficiency and effectiveness.
5.2 Discussion
The respondents used for this research were all male except for one MT-member. All the respondents were Dutch of origin and the research is conducted at one location of the company. This could have influenced the results. However, all respondents were chosen with care so that all hierarchical levels were covered. Also, the employees that were chosen are working in key functions in the organization regarding the accessibility to the organization’s assets, which I found very valuable for my research.
A lot of respondents gave answers that had to do with other prevention tools that are implemented in the organization that made it difficult to focus on only the internal anti-fraud controls. Other tools that were named were things like culture, whistleblowing policy. Reasons for this might be that the respondents had less knowledge about the topic and that they see all the prevention tools as a package. But the results are still reliable because of the valid questions that were asked.
A surprising finding was that MT-members gave academic and abstract definitions of non-cash asset misappropriation, and employees gave a more concrete and practical definition of non-cash asset misappropriation. Reasons for this can be the education level of the respondents, MT-members are generally higher educated than the workforce. Another reason could be that employees work with these systems that was implemented by the MT, so employees are the practicing and MT developing policies around non-cash asset misappropriation and so the MT does not really come in contact with the non-cash asset misappropriation. Another finding that was interesting was that employees labelled the key authorization and permission letters as most effective in contrast to the physical safeguards and separation in functions. Physical safeguards and separation in functions were also found effective, but there was certainly room for improvement. Reasons that were given and that can be interesting for future research are that key authorization is a tool that monitors and controls the employees that they feel that they are being watched. It does not touch their privacy. The permission letter is labelled as effective because it lowers the barrier to take assets, but with permission so it does not need to happen secretly anymore. It could be interesting to see how this works in other organizations and if it could be an effective tool to prevent the organization from non-cash asset misappropriation and keep things transparent.
5.3 Theoretical and Practical Implications
This research contributes to the academic field of occupational fraud, which is still immature of nature. The study found out that there could be a disconnection between management and employees, which can be dangerous for the organization in terms of effectiveness of internal anti-fraud controls in preventing the organization from non-cash asset misappropriation. A second contribution is that an organization should consider bottom-up communication that can make sure that the effectiveness of internal anti-fraud controls is high and can be improved. In the lights of previous studies, which state that internal anti-fraud controls are the most important tools to prevent the organization from non-cash asset misappropriation, this research adds to our knowledge that these internal anti-fraud controls only work when employees see them as effective.
5.4 Limitations & further research
The reader should bear in mind that this study is based on only one organization in the manufacturing industry, so a limitation is that the research only concerns data from one Dutch organization. In order generalize the findings, research in more industries and different countries is necessary. This research is conducted in a manufacturing organization where employees generally work for longer periods of their working life. Therefore, it is interesting to see how the differences are in organizations where the workforce is more dynamic and with a bigger employee turnover. This research focuses only on non-cash asset misappropriation and the internal anti-fraud controls. The thesis does not engage with other forms of occupational fraud such as corruption and financial statement fraud. It is also beyond the scope of this study to examine more prevention mechanisms. Interesting would be how other forms of occupational fraud are perceived by management and employees in organizations. Also, the focus on other preventing mechanisms is interesting for future research. Other prevention mechanism could be whistleblowing policies, fraud training and code of conduct. Because there has been little academic literature conducted on the area of occupational fraud there are enough research gaps to fill in the future which makes it a very interesting field.
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