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It's all about money - Specialised Forensic Accounting Services
Newsletter – June 2009
Welcome to the twelfth edition of the Flint Forensics Pty Ltd semi-annual newsletter. This newsletter is to help keep you informed of the latest developments or topical issues for further discussion and consideration. It is a free service provided by Flint Forensics Pty Ltd.
Index
The behavioural theory of fraud on the work of psychologist B.F. Skinner and other, a school of though collectively known as Behaviourism. Skinner asserted that human beings act in certain ways because they have been conditioned to do so by their experience. Every act is prompted by a stimulus, which produces a response. With repetition, the response becomes conditioned to appear whenever the stimulus appears. A conditioned response is one that has been reinforced by experience; unless there is some interference, the stimulus will prompt the same conditioned response each time it appears. Many aspects of fraud theory, including Dr Donald Cresey's Fraud Triangle, draw heavily on behaviourist notions.
According to Skinner, neither reprehensible behaviour nor responsible behaviours are innate; the behaviours are learned. A man helps his neighbour because he has learned that doing so earns the neighbour's appreciation, and may ultimately benefit himself, either directly - the neighbour returns the favour later - or indirectly, by strengthening the community at large. The act of helping is a learned behaviour. The same man steals office supplies from his company because he has learned that stealing is an easy way to obtain the goods, he is not likely to be caught, and, even if he does, the infraction may not be prosecuted. The need for the supplies is the stimulus; stealing them is the conditioned response. The act is reinforced by coworkers who steal, and who declare, "It is not wrong. Everybody does it."
Behavioural theory also applies to the following scenario: A fictional government employee named Beth needed money for an emergency, so she used her government credit card to make personal purchases. When no one detected her action, the employee charged another $4,500 in personal items to the card. The emergency is the stimulus, a situation that demanded a response from the woman. In this case she responded by charging the money to her employer's credit card. As an act of behaviour, the event was positively reinforced because the money solved the crisis, there were no adverse effects and Beth rationalised her decision.
There is now a conditioned response in Beth's mind linking the credit card and ready money. Beth has good evidence that a simple act brought her exactly what she needed. Later she charges $4,500 more to the agency card. Maybe she said to herself, "I will pay back the money eventually, so it is not really stealing," or "No one is being hurt here." That is how many fraudsters rationalise their acts. The rationalisations allay any feeling of guilt and reinforce the urge to steal.
Behavourists are sometimes accused of disregarding a person's free will and portraying people as little more than pigeons pecking dots for food. In fact, behaviourists would regard Beth's act of theft as a complex behaviour, one finally determined by Beth's free will. Skinner called the process of molding voluntary behaviours operant conditioning. Operant behaviours, unlike simple reflexes, occur as a result of an individual's mental state interacting with the environment.
If Beth were to later need money for a house payment, her first thought may well be the agency credit card, since she has already completed two transactions successfully and reinforced her mental tendency to steal with rationalisations. However, Beth may have other options: she can borrow from her parents or friends, she can ask for a salary advance, obtain a forbearance on the past-due payment, or apply for a credit card in her own name.
Behaviourists aim to condition Beth's behaviour so that she does not choose theft as a response to her debt. Internal controls are the foundational component of every fraud prevention program - if the agency's procedures and supervision automatically stop personal uses of the credit card, Beth does not have the option. At the least she will have to work harder to overcome the controls, making the choice less attractive. Well-publicised penalties for fraud also have some conditioning effect, but as the rising incidence of fraud shows, punishment alone is not sufficient. Punishment in all of its forms is what Skinner called negative reinforcement. A behaviour is conditioned by associating it with a negative response: every time a pigeon pecks a green button, he is shocked; every time people are caught embezzling, they lose money and freedom. To be successful, a negative reinforcement must be consistently applied. Take away the punishment or the fear of punishment, and the behaviour returns. In this view, many legal sanctions for fraud are applied to inconsistently and sometimes too weakly.
The other way to condition behaviour (in Skinner's view the most likely way to succeed) is positive reinforcement. Each time the pigeon pecks a red light, he gets food; each time a person asks for help, they receive aid. Thus, any fraud-prevention program ought to include rewards for good behaviours: bonuses and other performance incentives, company benefits, recreational activities, recognition, and incentives for preventing or exposing fraud (for example: a whistleblower program). Like negative reinforcement, positive conditioning requires a sustained application - take away the incentive and the behaviour gradually fades. But over the long haul, positive conditioning provides a more effective, lasting effect than punishment. And where punishment a more effective, lasting effect than punishment. And where punishment or restraint must be more or less constantly applied, positive reinforcement requires only a occassional application. In short, a successful fraud-prevention program, according to behavioural theory, recommends internal controls that place funds beyond people's reach, coupled with positive conditioning that enhancing people's strengths.
of insurance fraud include:
Source: Encyclopedia of Fraud 2005 Edition
The question is, "Can the behavioural theory of fraud be applied in the risk management strategy of an insurance claim".
In the words of Barack Obama, "Yes we can".
There are two commons forms of taking legal actions when a person considers fraud. You can litigate the matter under civil or criminal proceedings. Depending on what approach, the difference is primarily the "onus of proof" which is based on "the balance of probablities" or "beyond reasonable doubt".
With the criminal approach in New South Wales there are two main sections, 178BA and 178BB of Crimes Act 1900 NSW. Other states have similar legislation. The New South Wales sections are as follows:
Section 178 BA - Crimes Act 1900 NSW
Obtaining money etc by deception
(1) Whosoever by any deception dishonestly obtains for himself or herself or another person any money or valuable thing or any financial advantage of any kind whatsoever shall be liable to imprisonment for 5 years.
(2) In subsection (1):
"deception" means deception (whether deliberate or reckless) by words or conduct as to fact or as to law, including:(a) a deception as to the present intentions of the person using the deception or of any other person, and
(b) an act or thing done or omitted to be done with the intention of causing:
(i) a computer system, or
(ii) a machine that is designed to operate by means of payment or identification,
to make a response that the person doing or omitting to do the act or thing is not authorised to cause the computer system or machine to make.
(3) For the purposes of and without limiting Part 1A, the necessary geographical nexus exists between the State and an offence against this section if the offence is committed by a public official (within the meaning of the Independent Commission Against Corruption Act 1988 ) and involves public money of the State or other property held by the public official for or on behalf of the State.
Section 178BB - Crimes Act 1900 NSW
Obtaining money etc by false or misleading statements
(1) Whosoever, with intent to obtain for himself or herself or another person any money or valuable thing or any financial advantage of any kind whatsoever, makes or publishes, or concurs in making or publishing, any statement (whether or not in writing) which he or she knows to be false or misleading in a material particular or which is false or misleading in a material particular and is made with reckless disregard as to whether it is true or is false or misleading in a material particular shall be liable to imprisonment for 5 years.
(2) For the purposes of and without limiting Part 1A, the necessary geographical nexus exists between the State and an offence against this section if the offence is committed by a public official (within the meaning of the Independent Commission Against Corruption Act 1988 ) and involves public money of the State or other property held by the public official for or on behalf of the State.
I have available a series of instruction forms which also have guidelines as to what information may be required for specific tasks. This is a valuable resource and I can only stress the importance of requesting the right information the first time to make the financial assessment the most efficient and effective as possible. Please feel free to review these at your leisure.
You can either print them out or simply unprotect the document by using the password "FLINTFORENSICS" and save the document to your desktop.
In the next edition, look forward to more.
Talk to you soon,
Bruce Flint
Managing Director
FLINT FORENSICS PTY LIMITED - Assessment of Economic Loss, Expert Witness, Financial and Other Investigations, Income Protection Risk Management, Regulatory Investigation and Assessment, Training and Valuations
PH: 02 9584 1474 FAX: 02 9584 1475 MOBILE: 0409 18 4598
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