Do you know how to decrease the risk of fraud in your accounting firm?
People are more likely to engage in unethical behavior when they think they can get away with it. You can prevent fraud by ensuring that your firm has strong oversight so that people don’t have the opportunity to steal.
Gusto, along with our partners at CPA Academy, presented an informative webinar all about preventing fraud. Our webinar titled, “Ethics: How D&D, Venmo, and Hourly Billing Rates Shape Your Professional Ethics,” featured the accounting and fraud-prevention expertise of Greg Kyte, founder of Comedy CPE, and Caleb Newquist, Editor-at-Large at Gusto. You can watch the entire presentation here.
In this article, we’ll share invaluable highlights from Greg and Caleb’s presentation. You’ll learn about how people are more likely to steal something of value rather than physical cash, how cash transactions impact ethical behavior, and why transparency is critical for preventing fraud.
Experiments involving ethical challenges
Greg and Caleb discussed experiments involving theft and how it relates to cash. The behavioral economist and Massachusetts Institute of Technology professor Dan Ariely conducted an experiment using MIT’s dorms. He placed loose money and Cokes in community fridges to see what people would steal:
“He went into these fridges, and on the even-numbered floors, he would put in a six-pack of Coke. In the odd-numbered floors, he would put in a paper plate with six one-dollar bills on it. … He came back, and he found [that] … in every single refrigerator that the Cokes were in, they were all gone, and in all of the refrigerators with the money, none of the bills was taken. All of the money was still sitting on the paper plate in the fridge.”
– Greg Kyte
Although people were able to justify stealing Cokes, they were unable to justify stealing physical cash worth the same amount. It’s easier for people to rationalize taking a Coke rather than stealing money outright:
“We want to maximize our personal benefit. … We’re going to look at those Cokes and go, ‘Yeah, can I get away with that and still retain my self-esteem?’ … Maybe you go, ‘Because people have stolen my Cokes out of this fridge too, it’s about time it comes my way.’ [It’s an] easy rationalization.”
– Greg Kyte
People can justify stealing Cokes because it’s common for people to steal drinks from communal fridges. People are less likely to justify stealing cash:
“People probably wouldn’t go, ‘Yeah, people have stolen my one-dollar bills out of this fridge too,’ and grabbed the cash. Chances are just taking money that doesn’t belong to you is not something that you do, or that you know that other people do, so you’re less likely to do it if it’s just laying around.”
– Greg Kyte
Dan Ariely also conducted an experiment showing how being a step removed from cash can increase your likelihood of stealing. He conducted an experiment involving a series of time-consuming math problems. With every answer students got right, they would receive cash, but they didn’t need to prove that they got the answers correctly.
“[In the first group], you corrected your own test, [and] you actually even shred all the documentation so you feel as though no one’s going to catch you. You go over to the proctor, and you say, ‘You need to give me this [amount of money].’”
– Greg Kyte
In the second group, students would inform the proctor how many questions they answered correctly in order to receive tokens.
“You would get tokens instead of cash, and then you would go to a separate person, and you’d trade your tokens for the money, and then you’d [leave] at that point.”
– Greg Kyte
When students received tokens rather than cash, they were twice as likely to lie about their test answers.
“There was twice as much cheating when you’re asking for tokens than when you’re asking for cash. … It’s bizarre to me that people don’t want to steal cash. It’s not something you want on your hands. As an average, rank-and-file human being, … [what] the research finds is that cash actually increases ethical behavior.”
– Greg Kyte
People are far more likely to steal when they’re a step away from actual money. Those who participated in the experiments were more likely to justify theft when there was a proxy for money rather than physical cash.
How cash transactions affect ethical behavior
Dealing with physical cash also affects ethical behavior because cash transactions increase the likelihood of tax fraud. When physical money changes hands, the vendor can pocket the cash rather than record the transaction. Greg told a story in which he received an offer to pay in cash in order to avoid sales tax:
“When I got my tattoo, … I went to pay for it, [and] the lady who did my tattoo said, ‘I don’t have to charge you sales tax if you pay me with cash.’ … [She was basically saying], ‘If you give me the cash, then this doesn’t have to go on the books, and then I don’t have to report it to the state. You save a little money, [and] I save a little money.’ … She was pushing me toward a cash transaction in order to do something that was unethical with it.”
– Greg Kyte
The tattoo artist wasn’t stealing cash outright, but handling the transaction in cash would enable her to avoid paying sales tax on the money she earned from the transaction.
“She was stealing something that didn’t seem like cash right then. She was stealing the obligation to pay on her side. … By keeping it off the books, she would probably just pocket it and not pay income tax on that $400.00. She’s stealing future money that she calls taxes, but she doesn’t see [it] as being dollar bills.”
– Greg Kyte
The artist likely didn’t view evading the sales tax as stealing money outright. People are far more likely to steal when they’re a step removed from stealing physical cash. She attempted to steal from the government through tax evasion, but she’s not stealing physical money.
Greg had a similar interaction after purchasing a car on eBay. He met up with the seller, and the seller offered to under-declare the amount Greg paid in order to underpay taxes:
“We were filling out the transfer of the title for this car. He had to fill out … how much the car was purchased for, and he asked me, … ‘How much do you want me to write in here because when you get back to Utah, this is how much they’re going to tax you on [it].’”
– Greg Kyte
People are far more likely to steal when they’re not stealing cash outright, but cash transactions enable people to avoid paying what they owe for taxes.
The importance of transparency in accountant ethics
When people don’t pay taxes on cash transactions, they illustrate a major contributing factor to fraud: lack of transparency. People are far more likely to commit fraud and engage in unethical behavior when there’s a lack of oversight into their actions. People commit tax fraud when handling money because they know that the government has no way of knowing about the transaction without a paper trail. The lack of transparency fuels unethical behavior:
“People are primed for unethical behavior because of the lack of transparency. … Transparency has a direct correlation [with] ethical behavior, and because cash is anonymous, it’s completely non-transparent. You are going to be less ethical as a result.”
– Greg Kyte
In addition to cash transactions, other non-transparent arrangements increase the likelihood of fraud. For example, Greg’s vehicle purchase from eBay involved a cashier’s check rather than cash, and using a cashier’s check increases the chances of a person committing tax fraud because of the lack of transparency. Greg observed that this same issue of transparency affects mobile payment applications such as Venmo:
“There’s a lack of transparency with cash, cashier’s checks, [and] Venmo. You don’t see the transparency, so people can try to wiggle out of other obligations.”
– Greg Kyte
The need for transparency illustrates a critical factor for preventing fraud. When your firm has an organized system of checks and balances in which people can’t get away with fraud, you prevent theft. Opportunity is one of the leading contributing factors of fraud. When given the opportunity, accountants and others may be tempted to engage in unethical practices if they know they can get away with it.
Learn more about accounting ethics
Cash, cashier’s checks, and payment applications like Venmo increase the likelihood of fraud because of a lack of transparency. Although people aren’t likely to steal cash outright, many feel comfortable cutting corners in paying taxes because they know that they can get away with it. Perhaps the most important way to prevent fraud is ensuring that people don’t have the opportunity to commit it. You can decrease the likelihood of fraud occurring by encouraging transparency in your accounting firm.
If you want to learn more about accounting ethics, be sure to check out Part One and Part Three of this webinar article series.
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