The Business Journal of Milwaukee
By Barbara Bartlein

In the aftermath of Enron, WorldCom and Tyco, many companies have taken steps to protect their businesses from fraud. They have initiated new accounting procedures, complied with the Sarbanes-Oxley legislation and conducted better screening of new employees.

Yet there has not been any noticeable decrease in fraud overall, according to a provocative new book, “Essentials of Corporate Fraud.” Written by fraud expert Tracy Coenen, who conducts fraud investigations for public and private companies, it presents an insider’s look at corporate fraud.

“Corporate fraud causes losses to companies of between 5 percent and 6 percent of revenues every year. This level has not changed for the last 12 years,” according to Coenen. “When applied to the US gross domestic product, this would total about $660 billion per year.”

What has changed, though, is the employer’s perspective on fraud. A 2006 survey by Ernst & Young of more than 500 corporate leaders found that companies had increased their spending on assessing and improving corporate controls. As a result, the leaders believed they made significant progress in detecting and preventing corporate fraud. Yet one out of five companies surveyed by Ernst & Young reported “significant fraudulent activity” within the last two years.

“Corporate executives think that their companies are doing better now than in the recent past when it comes to preventing fraud, but none of the hard data supports that assertion,” says Coenen. “That’s dangerous. Executives and managers may very well be caught off guard by a fraud while they hold on to this false sense of security.”

It is not easy to detect fraud. There is not a typical “profile” of a person who commits white collar crime. They are ordinary employees usually with no known history of fraud. More than 90 percent have no prior criminal charges or convictions related to fraud. Men and women commit a fairly equal number of frauds, but those committed by men cost companies more than twice as much as the frauds committed by women. The higher a person’s position in the company, the greater the fraud. Higher positions have greater access to people, data and opportunities to commit fraud. There also may be less scrutiny and oversight of these positions.

Statement frauds
The large frauds we all became familiar with were all financial statement fraud schemes whereby the executives created fictitious revenue and hid expenses to make the financial results look better. Financial statement fraud generally involves manipulating the financial statements for some indirect benefit to the executives engaging in the fraud. This might mean an increased stock price, a larger year-end bonus, or meeting requirements for bank financing.

{sidebar id=10}Financial statement fraud is by far the most expensive type of fraud, costing companies, on average, $2 million per scheme. Yet it is also the least common type of fraud, present in only about 10 percent of all fraud schemes.

The most common type of fraud, occurring in 91 percent of all fraud schemes, is asset misappropriation. These schemes include things like expense report fraud, inventory theft, cash receipts skimming, and theft of customer data. Often, the employee committing the theft has financial pressures due to lifestyle and poor decisions.

There is evidence that the proliferation of casinos and gambling has driven an increase in corporate fraud. High-profile cases like Christopher Kelly, the former adviser on gambling to the Illinois governor, are in the news on a daily basis. He used corporate funds to pay off millions in debts to a bookie in Chicago and casinos in Las Vegas, portraying them as legitimate business expenses.

Preventing fraud
There are steps that employers can take to reduce the risk of white collar crime. Coenen recommends:

• Establishing an anonymous hotline for reporting. An anonymous hotline can cut fraud losses in half because it gives employees an opportunity to report without getting involved. Co-workers may spot a problem long before it is apparent to management.
• Making the ethics of the corporate culture clear. Values and ethics flow from the top down. Employees won’t follow the rules if their bosses are doing the same. Management should be modeling ethical behavior at all times.
• Creating a code of conduct for employees. The boundaries and rules should be clear and employees should know what is expected. Don’t allow the “gray area” of having employees substitute their judgment for what is right and wrong.
• Implementing simple fraud prevention procedures. These include segregation of duties, random audits of records and monitoring access to assets and data. Establish levels of authority for financial transactions with multiple signatures.

For more information on corporate fraud and how you can protect your company, visit www.fraudessentials.com.

Barbara Bartlein is the president of Great Lakes Consulting Group, Milwaukee. She can be reached at 888-747-9953, [email protected] or www.ThePeoplePro.com