Perceived Opportunity: The Insider Threat

This year, in recognition of Fraud Week, Schneider Downs is presenting a series of articles detailing each leg of the fraud triangle.

An industry term coined by Steve Albrecht while working as an accounting professor at Brigham Young University and based on research done by criminologists Edwin Sutherland and Donald Cressey. In Albrecht’s words, “The Triangle states that individuals are motivated to commit fraud when three elements come together:

1. Perceived pressure
2. Apparent opportunity
3. Rationalization that fraud is not inconsistent with one’s values

The story below is a prime example of how the element of apparent opportunity  can play a role in leading insiders to commit fraud, even in well-resourced organizations.

On November 1, 2022, the U.S. Attorney’s Office in the Northern District of California issued a press release titled ‘Former Apple Employee Admits Defrauding Apple of More Than $17 Million’ that provided details of a series of fraudulent acts committed by Dhirendra Prasad, a former Apple employee who pleaded guilty to conspiracy to commit mail and wire fraud and conspiracy to defraud the United States.

Mr. Prasad was a buyer in Apple’s Global Service Supply Chain, mostly from 2008 through 2018. During that time, he was responsible for purchasing parts and services for Apple from vendors. His earliest known fraud began in 2011, in the form of corruption and asset misappropriation schemes in which Mr. Prasad would accept kickbacks, inflate invoices and steal parts. Those schemes ended up costing Apple over $17 million.

Mr. Prasad had co-conspirators who owned vendor companies that did business with Apple. On many occasions, he and his collaborators colluded to resell Apple its own materials. Upon receiving payment for the stolen goods from Apple, the vendor-collaborators would then remit Mr. Prasad his share of the proceeds. To close the loop, Mr. Prasad created a shell company that would send false invoices to his collaborators, which would allow them to pass the illicit payments off as legitimate and claim fraudulent tax deductions. The total loss realized by the IRS was $1.8 million.

This example illustrates the potentially catastrophic consequences of insider fraud – the type perpetrated by those inside the victim organization. In this case, Mr. Prasad had the ability to direct Apple inventory to his co-conspirators, generate purchase orders for materials that were shipped from Apple, and then was able to have those purchase orders converted into payments for his co-conspirators after Apple received its own inventory back. He was able to pull off various schemes like this for approximately seven years, costing his employer $17 million, despite the fact that he worked for one of the world’s largest companies, which presumably has a robust system of internal controls and a well-resourced internal audit function.

The takeaway here is that insiders, even in large, well-resourced companies, may have opportunities to commit fraud for years without being discovered. This opportunity is only amplified when the insider is colluding with other insiders or, in this case, outsiders. According to the Association of Certified Fraud Examiners’ (ACFE) 2022 Report to the Nations, organizations that fail to promptly detect fraud can face losses that are many orders of magnitude larger than those organizations that detect fraud promptly. Organizations that detected fraud within six months, for instance, saw median losses of $47,000, while those that failed to detect fraud within five years saw median losses of $800,000. ³

Organizations must develop and implement effective internal controls to combat insider fraud. While it’s likely impossible to eliminate entirely, those organizations that can promptly detect fraud can save hundreds of thousands, if not millions, of dollars. Per the ACFE, 42% of frauds are initially detected via a tip. Of those, 55% come from employees.³ If something is amiss or normal procedures are not being followed, employees will often be the first to know.

To assist in eliminating insider fraud, organizations should have formal reporting procedures, including a fraud hotline or an online mechanism that allows employees to report fraud directly to the internal audit function or to those responsible with responding to fraud, without having to go through the usual chain of command. The hotline should include an option to report anonymously, so as not to miss out on tips from employees who fear reprisal. Organizations should also offer fraud reporting mechanisms for customers, vendors or anyone with whom it does business.

Additionally, organizations should have clearly posted codes of conduct and should train employees regularly regarding their ethical obligations. This will help employees identify fraudulent and unethical behavior and also raise the perception of detection in the minds of would-be offenders.

Segregating duties, along with greater management oversight, are also powerful tools that could help reduce the opportunity for fraud. For example, organizations could require the approval of purchase requisitions over a certain dollar amount by a supervisor before a purchase order can be generated. Additionally, those who process sales orders, generate purchase orders and those who have custody of inventory should ideally all be separate.

Organizations with internal audit functions should test these controls regularly. It may not be feasible for smaller organizations and those without IA functions to completely segregate duties, but in these cases management should take an active role in reviewing transactions and procedures randomly on a regular basis.

In general, organizations need to be vigilant toward the insider threat. Insiders are familiar with organizational controls and have the most opportunity to exploit control gaps and trust. Organizations that have effective anti-fraud controls can reduce the opportunity to commit fraud and lower the risk that fraud will persist undetected, potentially saving millions of dollars.

We may only focus on Fraud Week once per year in this way, but our professionals educate, assist and prepare clients throughout the year with their unique fraud concerns.

If you have questions or concerns about fraud in your organization, contact Tom Pratt at [email protected] or Brian Webster at [email protected].

Related Articles

• International Fraud Awareness Week 2022
• Fraud at Wells Fargo: The Pressure to Perform
• The Rationalization Leg of the Fraud Triangle

About International Fraud Awareness Week

International Fraud Awareness Week, or Fraud Week, was established by the Association of Certified Fraud Examiners (ACFE) in 2000 as a dedicated time to raise awareness about fraud. The week-long campaign encourages business leaders and employees to proactively take steps to minimize the impact of fraud by promoting anti-fraud awareness and education.

Learn more at https://www.fraudweek.com.

About Schneider Downs Business Consulting 

Schneider Downs Business Consulting delivers sophisticated consulting services to meet the complex needs of today’s business environment. Our team features experienced professionals across a diverse array of specialties that allows us to help our clients make more informed business decisions across every facet of their operations.  

To learn more, visit our dedicated Business Consulting page.