Fraud in Government Versus Private Industry


When we think of fraud in governmental agencies, we often think of the sleazy-sounding bribery and corruption. Maybe you think of the bribe paid to secure a contract, or a kickback to an official for pushing a large project toward a friend’s company. Things like illegal gratuities and extortion are also perceived as occurring in governmental agencies more often than in the private sector.

While those things do happen in governmental agencies, it may surprise you to know that they’re not necessarily the most common or the most costly types of fraud occurring in the public sector.

Government fraud happens the same way fraud occurs in the private sector. You might hear the phrase “waste and abuse,” and that’s probably a pretty accurate way to view the bulk of fraud committed against governmental entities. Government agencies rely on funds from the public to carry out their work, and when that money is used for illegal purposes, taxpayers feel that their money has been wasted and their trust abused. Continue reading

MLM: It’s About Recruiting, Not Sales


pyramid-scheme-mlmI’ve been telling you for years that multi-level marketing is NOT about selling products. It’s about recruiting people into a fake opportunity. The products are the “front,” meant to make MLM look like a legitimate business. In reality, very little product is retailed to actual consumers. Instead, it’s sold to new recruits into the scheme, who have little chance of ever retailing those products for a profit.

Look no further than the case of Herbalife to prove my point. (This point is usually difficult to prove, as MLMs do their best to hide the numbers so we never see the truth behind the scam.) This month Herbalife entered into a settlement agreement with the FTC that has them paying $200 million and substantially changing how the company does business.

Herbalife falsely claimed: “Settlement Does Not Change Herbalife’s Business Model as a Direct Selling Company.”

The FTC clearly disagrees, and said in its press release about the settlement (emphasis mine): Continue reading

Using the IRS Expenditures Method to Determine Income


When the IRS believes a taxpayer has unreported income, they will use alternative methods to attempt to determine the true income. One of those methods is the Expenditures Method. Tracy Coenen explains the basic methodology in this video. Note that this method of calculating income can be used in a variety of cases that involve allegations of hidden income including divorce, money laundering, and income tax fraud.

Highlighting Corporate Fraud Investigations


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.

Investigative Policy

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

Fraud and Infidelity: A Match Made in Heaven


What on earth do fraud and infidelity have in common? Quite a lot actually. While there may be no scientific studies available that analyze the correlation between financial fraud and infidelity, anecdotal evidence obtained while working in the field of fraud investigation for more than a decade suggests there is a correlation.

A discovery of a corporate fraud has often led to the discovery of a secret addiction like gambling, alcohol, or drugs. Digging into the financial records of a suspected thief finds a spending problem, a secret source of income, or theft from another party. Discovery of fraud has also led to a spouse finding out about infidelity and the existence of a love child.

The reasoning behind the theory that fraud and infidelity are often related is simple: Fraud does not happen in a vacuum. It takes a certain mindset to be able to commit adultery and to be able to commit fraud. I have rarely seen extremely deceitful acts being confined to simply one part of a person’s life. Continue reading

The Wide-Reaching Impact of Financial Statement Fraud


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

Prevent Fraud: Look for These Warning Signs


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.

Continue reading

The True Cost of Fraud


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

Consequences of Bankruptcy Fraud


Tracy Coenen talks about what could happen if a debtor commits fraud during the bankruptcy process. The potential consequences include the denial of discharge of debts, bankruptcy cannot be filed for the same debts again, exempt property taken, or criminal charges.

Be Prepared: Think Like a Thief


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