Posted in Leadership

Fraud - The Tone Is Set At The Top - By L. Burke Files

President of Financial Examinations & Evaluations, Inc.



I was recently asked to serve as the President of The American Anti-Corruption Institute.  I am not sure why I was selected but I am sure it began with a long conversation in Amman, Jordan.


The conversation began with watching one man trying to translate from English to Arabic the concept of “inventory shrinkage” to an Arab CPA.  The literal translation was essentially similar to “your items got smaller”.  Finally, I stepped in and said “It is theft or fraud” - that translated perfectly, and than the Arab CPA asked - “why do you call it shrinkage when it is theft or fraud?” An excellent question, why do we insist on calling “shrinkage”?


Fraud occurs when the three points of the fraud triangle are connected. Once Opportunity, Pressure and Rationalization, the three points, are connected the frauds occur. As management the only thing we hope we can control is Opportunity.


Why do we insist on not calling it what it is?  Why must we use soft terms for a hard subject?  Are we afraid to face the fact that people do steal?  Also, not only are people stealing - it seems like they are stealing more often with less shame.  I am also certain from my own empirical experience as a financial fraud investigator that people are stealing more, and they are getting better at defrauding our businesses, even as our ability to detect fraud improves.


I have also seen, over many years, some companies seem to be more “fraud and theft” prone.  We have been told in our management classes and by our financial investigators that one has to have controls to prevent fraud.  Controls do not actually prevent fraud. Controls only decrease the Opportunity by raising the skill level required to actually commit a fraud.  I have seen some companies with three and four different levels of control, two and three person approval processes and bidding required on all contracts over $10,000 - yet they get hit again and again with frauds. Conversely, I have seen large companies with tens of millions in sales with very few controls, in fact, from my perspective as an investigator of fraud, frighteningly few controls, yet - almost no frauds.  Even after we were sent in to specifically look for frauds - there just was not any significant shrinkage.  


This puzzle has rumbled in my head for years.  How do companies with lengthy and comprehensive policy manuals, tight controls, and multi-tiered approval process get hammered again and again with frauds while some similar sized business have almost none?


Last December the rock of inspiration hit me.  Sure, Newton got a soft apple I had to get hit with a rock.  Looking into several accounting irregularities in a fair sized company, about 12 million in sales with an extensive and professional compliance and control manual, we found not one fraudster but seven!  This was not seven fraudsters working together but seven different unconnected frauds in different departments. The controls and fraud prevention processes had been thwarted in all cases.  When I interviewed the seven fraudsters all had a common attitude. Though the words were different, their attitude was “The owner is a b*****d and a thief, so why not steal from a b*****d and a thief.” I’ll put that down to a strong point on Rationalization.


They were right, she was a b*****d and a thief.  Any short comings in operations she railed against a given manger’s incompetency and success we hers and hers alone. She drove the latest convertible Jaguar, went to all of the socialite charity functions. Afterward she talked about how fab all of the events were and what famous person she had just met and how they were going to be in a photograph together in this or that magazine.  It was also well known within the company that she paid for her children’s college and large personal items such as expensive summer vacations out of company funds.  She rubbed her arrogance and money right in the faces of her employees.  Seven employees bit the hand that rubbed the money in their face.


If this was her company, there is not much I can say.  Yes, it was and is tax fraud, but that is her problem.  My problem is that I was not hired by her, but by the company.  So when I delivered the report that included all irregularities, including hers, all shareholders got a copy and those shareholders were her siblings. Several days after the report was delivered, I was called to the office by the family members for shareholder meeting.  On my way from the car to the office I was hit by one of several rocks thrown at me by the b*****d and a thief.


How more clear can we say “The tone is set at the top”.


She set the tone and a chorus of seven stole a few more bars…


The insight was those companies that had large and comprehensive manuals had them because of past instances of fraud. The size and complexity of the manuals grew in response to the threat.  The threat was expressed in the encountering of more and more frauds.  Every time a fraud was discovered, so it goes in my mind, a new chapter was added to the compliance and control manual. In this company the tone at the top is was easy for a fraudster to rationalize the thefts.


The response, increasingly comprehensive compliance and control manuals, grew in proportion to the threat, which were frauds that were committed.  


The similar size companies I had looked at that had small compliance manuals - had genuine servant based leadership.  Owners and leaders worked with and mentored the employees.  I came to these smaller companies not to look for fraud, but to be part of a due diligence team to review the company before acquisition or significant funding.  While part of the duties was to look for fraud, we rarely found any.  


Inspirational and authentic leadership inspires people to do their best.  Inspiration is by saying and than doing.  It is just not enough to say you are going to do something, actions and deeds must accompany the words. The words too must be authentic.  The term shrinkage is an accounting term of art for; loss by, fraud, theft or error. Servant based leadership produces an authentic environment where all are less likely to commit a shrinkage.


Mr. Files is a published author of five books, in particular "Due Diligence for the Financial Professional, 2nd edition 2010" and "Money and Budgets" other writing and material can be found at .  Mr. Files is an international speaker on these topics. 




FE&E, Inc. is an international investigative firm specializing in, fraud prevention, asset recovery, due diligence, anti money laundering and intellectual property. 




As a financial industry insider for over 30 years he is keenly aware of the type, and accuracy of the information required to make decisions. Mr. Files has been the case manager on fraud investigations ranging from tens of thousands of dollars to over 3 billion.   As an international expert on due diligence and Intellectual Property and Critical Information (IPCI) he is regularly sought for those cases that bedevil the desktop practitioners. 




This article is courtesy of the Top 1% Club and the Top 1% Club Mentor Gail Kasper. For additional information on Gail Kasper, her television appearances and speaking engagements, please visit