Does Employee Substance Abuse Predict Fraud?

Abstract

Motivated by survey evidence, we examine the relation between worker substance abuse and workplace fraud. In our sample of white-collar professionals, nearly 10% of all frauds occur in the 0.01% of worker-years where the worker receives a professional sanction for substance abuse. Workers receiving such a sanction are between 40 and 50 times more likely to commit fraud in the current year relative to their peers. These results are consistent with prior research suggesting that substance abuse creates financial pressures and impairs neural functioning of self-regulatory mechanisms, both of which make fraud more appealing. We also find that there is no increased likelihood to commit fraud among workers with past or future substance abuse sanctions. This suggests that (1) workers with past but not current substance problems are not a fraud risk, and (2) the results we observe are driven by actual substance abuse, as opposed to stable personality traits predictive of both fraud and substance abuse. This study has implications for employers and policymakers as they consider both how to prevent fraud and how to reduce the negative impact of substance abuse in the workplace through internal control systems and practices like Employee Assistance Programs.