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Vigilance, Proactive Steps
Essential to Controlling Fraud
By Christopher H. Todd
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May 2008
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 When
the economy heads south, the fraudsters start working overtime.
There's never a legitimate reason to steal from your employer,
but when times get tough, more employees rationalize "good
reasons" to engage in some bad behavior.
The Association of Certified Fraud Examiners estimates that
5 percent of all business revenue — about $652 billion — is
lost to fraud each year. The median loss is $159,000, but one-fourth
of the cases result in losses of at least $1 million.
In good times and bad, experience shows that a company's higher-ups,
the CEOs and the CFOs, are more likely than rank-and-file workers
to be on the take.
A recent study by KPMG Forensics of 360 fraud cases it investigated
in Europe, the Middle East and Africa found that nearly two-thirds
of the perpetrators are in senior management. (Although the
study did not include U.S. cases, it's reasonable to expect
similar percentages here.)
Several factors account for this pattern. First of all, top
executives have the status and knowledge to work their way around
the company's financial controls. On a personal level, they
may well get caught up in their own lavish lifestyle and lust
for even more. Or, if things aren't going well for the company,
they may resort to adjusting financial statements in order to
conceal losses that could be attributed to poor decisions they've
made.
In assessing internal theft, the biggest difference between
what's taken by top-ranking fraudsters and those farther down
the organization chart is the number of zeros at the end of
the amount that's unaccounted for.
In the fraud examinations I've conducted, I've often found that
personal financial crises have transformed employees with good
records into thieves. It might be a gambling problem, a missed
mortgage payment, or, more common these days, high medical bills
after a family member suffers a serious illness or injury.
Many times the internal thief is one who feels his company owes
him something — perhaps he's upset because he didn't get an anticipated
raise or promotion. Perpetrators typically start small and escalate
their misdeeds for as long as it seems no one is on to their
schemes. Sometimes it doesn't end until the employee just stops
coming in to work.
In fact, that KPMG study found that more than half the fraudsters
conducted more than 20 frauds, and two-thirds of them escaped
detection for one to five years.
Sometimes the fraud affects not only the employer but also its
customers. In one recent case, a vice president for operations
at a major bank took nearly $3 million from her employer and
some 30 customers by stealing customer identity information,
creating phony lines of credit and moving the money into her
own accounts. The scam went on for four years before it was
discovered.
In that case, the banker received an eight-year prison term,
was ordered to repay her employer as well as pay more than $1
million in back taxes to the IRS.
Interestingly, however, many incidents of internal fraud never
result in criminal charges against the perpetrator, and never
come to the public's attention. That's because companies often
decline to prosecute. They'd rather resolve the matter on their
own, if possible, by recovering what they can and then dismissing
the employee. The reason: if word gets out, the company suffers
its own embarrassment for having a thief on its payroll. After
all, the objective of any business is to make money, and publicizing
its internal failings is not going to be part of its strategic
plan.
The best way for businesses to prevent or control internal fraud
is to take a proactive approach, creating an environment in
which fraud is less likely to occur and establishing procedures
that facilitate reporting suspected wrongdoing. Here are my
key suggestions:
Establish strong internal controls. Emphasize separation
of duties and internal controls. Cross-train a number of workers
in handling finances, and never have the same person write the
checks, make the deposits and reconcile the bank account.
Send a message from management. Establish a clear policy
that sets high ethical standards — and make sure that top managers
live that example.
Set up an anonymous tip line. Fraud hot lines are the
most frequent sources of information that identifies fraudsters.
A number of companies operate these lines as an independent
third-party service.
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