I’ve been investigating fraud for over two decades. When I first started, financial fraud wasn’t a big topic. In fact, most people had never heard of forensic accounting. Then in 2001 and 2002 everyone became more aware of the issue of fraud when the big frauds of Enron, WorldCom, and Tyco became public. It is now commonplace to hear about corporate frauds involving embezzlement, financial statement manipulation, or kickbacks.
Despite this knowledge, there are still many misconceptions about employee fraud. If owners and executives mistakenly believe their company is not at risk, they are probably not actively preventing fraud. Management must know the truth about fraud and its perpetrators in order to actively protect the company.
Here are five myths about fraud that I still run into in my forensic accounting practice. They’re often unspoken, and many would never admit that they believe them. However, I know from experience that they run rampant.
1. Our company doesn’t have an internal fraud problem.
While companies would like to believe they have good employees and adequate internal controls to prevent fraud, the fact of the matter is that studies suggest 75% of companies will fall victim to a fraud scheme. While some of these may not be large frauds, they will cause losses nonetheless. Continue reading
There are two inexpensive and simple steps that can be taken to provide more oversight for the disbursement function at a law office. First, a partner needs to be actively involved in the process of issuing checks and payments. It’s not enough to simply glance at checks to vendors and immediately sign them.
Before any check is signed or sent out, it should be compared to an invoice, credit card statement, or other documentation that will help verify the legitimacy of the payment. This reduces the risk that an employee pays a personal credit card with company funds or otherwise improperly issues a payment from the firm’s checking account.
The second step to increase oversight at a law firm is involving at least one other person in some of the functions. If the office manager is disbursing funds, another employee should do the bank reconciliation. This provides a natural checks-and-balances situation, in which the second employee is verifying the work of the office manager. Continue reading
The unthinkable has happened. We have good employees. Our people are honest. They don’t steal from us. They’re like family. We trust them. So it goes when a company discovers a fraud from within.
Then what happens?
After the initial shock wears off, it’s time to start investigating the situation. The company must know who did it, how the fraud was committed, and what controls can be put in place to stop fraud from happening again. This is all accomplished with an effective fraud investigation.
Companies should have in place a standard set of guidelines for managers to follow when fraud is suspected. Most supervisors and managers have not dealt with on-the-job fraud, so they need guidance when evaluating fraud allegations. Fraud investigation guidelines may also help guard the company against employees’ claims of selective treatment. Continue reading
Of all the fraud schemes perpetrated in our world today, financial statement fraud seems to get the least air time. That makes no sense, as financial statement fraud happens to be one of the most costly types of fraud.
The problem is that involved parties, both inside and outside the company, rely on the information provided in the financial statements. They assess the financial results and make predictions and decisions about the future of the company based on those results.
Financial statements are the measuring stick that numerous parties use to assess the financial health of a company. Falsified financial statements can mean only one thing – those assessments are faulty.
Financial statement fraud causes a median loss of $2 million per fraud scheme, according to the most recent occupational fraud study done by the Association of Certified Fraud Examiners. That amount dwarfs asset misappropriation schemes, which only cause median losses of $150,000 per scheme. Continue reading
When attempting to prevent corporate fraud, management must be aware of the warning signs and be willing to identify operational risk factors and implement effective solutions to the problems.
Operational red flags are among the most important red flags of fraud to be aware of. These are ways that the company’s operations may make it easier for someone to commit fraud and get away with it. Operational red flags of fraud can include some of the following:
- Operating in “crisis mode” or “fire drill mode”: When companies don’t establish “normal” operations because there is always a crisis, it becomes next to impossible for employees to determine when something out of the ordinary is going on. A constant state of chaos means that it’s hard to pay attention to details, and things that might otherwise be considered unusual won’t be flagged.
- No clear lines of authority: Employees must understand the pecking order within a company. If they do not, they will be unclear about who receives complaints, and they may be less likely to report suspicious behavior. Even in companies that utilize the “team” concept throughout, there is still a chain of authority that should be clear in case of trouble.
When we think of on-the-job fraud, we tend to think in extremes. One extreme is the teenage punk with orange hair and a nose ring, and he’s stealing cash out of the register or letting his friends have free chips and soda. The other extreme is that of the wealthy executive who runs off with millions by extracting lavish gifts and manipulating the company’s financial statements to boost the stock price and enhance his bonus.
The problem with these extremes is that they fail to consider the majority of thefts that go on within companies. Most occupational fraudsters steal between $10,000 and $500,000 from their employers. While these dollars can be significant to companies of varying sizes, they only represent the dollars directly taken by the employee.
A company’s cost of fraud goes far beyond the initial sums of money stolen by a dishonest employee. These costs range from some tangible negative effects, to other less tangible results throughout the company. One way or another, they all cost the company time, money, productivity, and potentially customer relationships. Continue reading
Fraud is committed by real people. They have real families and real jobs. They often are just like you and me. But what makes thieves different from a lot of us is their ability to lie and steal. Most of us would never seriously consider taking something that does not belong to us, especially not significant sums of money.
But thieves are different. Those who commit fraud have taken that which is not theirs. They have cheated others. They have covered up their lies. What makes it okay in their minds to commit fraud? What is it about their moral code that allows them to steal? How do they justify their actions?
The answer is found in the fraud triangle, an old concept in criminology that still has wide acceptance in the fraud examination field. In order for fraud to occur, three things must be present, and each represents one side of the triangle. The three pieces of every fraud puzzle are opportunity, motivation, and rationalization. These are key to explaining why a fraud occurs. Continue reading
It might be hard to believe, but each and every day companies are losing money because they not only give employees opportunities to steal, they encourage it.
How? By not providing adequate oversight. A clerk, for example, sees that an error in an account wasn’t caught by anyone. A purchasing manager notices that no one is watching over his vendor relationships, and won’t know it if he establishes a fake account. Employees are not stupid. They know when they are being monitored and when their work is being checked. They know when they are working in an environment ripe for fraud.
But you have honest employees, you say? You’re probably right. If we thought job applicants were criminals, we wouldn’t hire them. But situations occur where the temptation to steal simply becomes too much. Imagine owing money to a hospital or having an expensive (and necessary) car repair that you can’t afford. What if your child needs clothing or food? There may come a day in your life when your morals are challenged because you have a financial need and an opportunity at the workplace that seems too good to pass up. Continue reading
Companies devote significant time and money to the task of making sure that their customers don’t steal from them. But how much time do they spend considering the risk that their own employees are stealing from them?
That risk is great, so great that the annual internal fraud losses in the United States total an estimated $652 billion, according to the most recent study completed by the Association of Certified Fraud Examiners.
Each year, the average company loses 5 percent of revenues to internal fraud. This adds up quickly, especially for companies that are operating with little or no profit margin. Five percent of that company’s revenues can mean the difference between being in business or filing bankruptcy. It pays to implement aggressive fraud prevention techniques because they can save the company significant money in the long run.
The cost to implement procedures to monitor and restrict activities is far less than the fraud risk that companies face each day. Continue reading
One of the biggest mistakes small business owners make in relation to fraud prevention at their companies is doing nothing. They often think that fraud prevention is too extensive and too expensive, so they opt to do nothing proactive to reduce fraud. The idea that fraud prevention is too difficult or too costly is simply not true.
While it is true that a full-blown fraud prevention plan at a company can be expensive to develop and implement, there are many inexpensive things small business owners can do to reduce their risks of fraud. So even if they can’t afford the best or most expensive fraud prevention solutions, there are still steps they can take to improve. Continue reading