Why Do People Commit Trust Account Fraud?
Updated: Feb 18
Last month I shared a blog on a trust account fraud by Solicitor Mark O’Brien who was jailed for ten years after being found guilty of misappropriating more than $6 million from the firm's trust account. The number one question I was asked in relation to the blog was why would a respected and reputable solicitor start committing fraud at the age of 58?
You might be surprised to learn that 80% of people could be incentivised to commit fraud under the right circumstances. Fraud prevention experts have developed what they call the 10-80-10 rule (1). This theory is based on the assumption that:
10 percent of the people are ethical all of the time,
80 percent could behave unethically depending on the situation, and
10 percent are actively looking for opportunities to commit fraud.
Members of the middle group aren’t fraudsters by nature, but given the right set of circumstances – motive, opportunity and rationalisation (2) – they are more likely to commit fraud.
Using the example of Mark O'Brien, we look at each of these in more detail (see my previous post for full details on the fraud):
Motive can be either real or perceived; emotional or financial. Motivation is a key driver to committing fraud. Motivators can include personal gain, financial difficulty, personal reputation, substance addiction and/or relationship problems. All of these can push an ordinarily honest person to consider committing fraud.
In this particular case the court heard O'Brien had begun stealing when faced with business difficulties, poor earning capacities and no superannuation at the age of 58. O’Brien told the police “Well I knew it was wrong," but he "did it because he perceived a need to in his own head".
There must also be the opportunity to steal. Opportunity relates to the existence of circumstances that create possibilities for fraud. Opportunities occur when internal control deficiencies exist which can be exploited, when processes or management oversight procedures are weak, and when there is a low perceived risk of being caught. KPMG’s 2016 global fraud survey indicated that weak internal controls were a factor in 61 percent of the frauds reported.
As an owner O’Brien was better positioned to override controls and have greater access to the firm’s trust account.
Finally, the employee must be able to rationalise their illegal actions. Being a perceived victim of bad circumstances or believing that the company has “too much” money are some reasons used to rationalize a fraud.
O’Brien was able to rationalise his actions as “He knew [the victim] wasn't overly connected with the charities she had chosen to bequeath money to."
Although there is no way to eradicate fraud, steps can be taken to mitigate the risk. Since motive and rationalisation are very difficult to identify, firms can invest in ways to reduce the opportunity for employees to commit fraud.
As per my previous post Opportunity can be monitored and controlled in many ways. Some examples include:
Segregating key duties that don’t allow any one person total control in the trust account process.
Limiting access to trust account systems and ensuring systems provide an audit trail for transactions.
Ensuring management is engaged in operations.
Timely account reconciliations and review of adjustments.
Monitoring of expenses – firm has a process to monitor and approve expenses and at least two levels of approval for certain expenses (such as payments for deceased estates).
Setting a “tone-at the top” which establishes management’s commitment to an ethical climate
Law Firms in Queensland are required to undertake an external examination annually. To get the most out of your audit there is an opportunity to discuss industry risks and internal controls with your auditor so as to prevent problems from occurring down the track, avoiding financial loss and potential litigation. If you would like to discuss your firm’s external examination please contact Audit Me on 0437 251 400.
1) Source: National Association of State Auditors, Comptrollers, and Treasurers (NASACT) and the Oregon State Controller’s Division
2) These three factors represent “the Fraud Triangle” a theory founded by criminologist Donald Cressey.