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To Stop a Thief
by Jeff Brandenburg

Think you’re immune to fraud? Better think again.

An employee is late for work three times in one week due to car problems. “My boss was furious,” he fumes. “But what does he expect? If I could afford it, I’d buy a new car - but that’s impossible on what he pays me. Starting this week, when I pay the company’s bills, I’ll write a check to my new company - Need-A-Car, Inc. I should be cruising comfortably in no time.”

Occupational fraud is at an all-time high. The Association of Certified Fraud Examiners has calculated that more than $652 billion annually is lost to fraud by U.S. companies. That puts the national fraud rate at between two percent and five percent of a company’s annual revenues.

According to Larry A. Rosipajla, CPA, CFE, a Senior Manager of Forensic Accounting and Investigative Services in Clifton Gunderson’s Greenwood Village , CO , office, no company is exempt. But he says there are steps any company can take to mitigate the risk of loss of money and reputation due to fraud.

Fraud comes in many forms and is called by many names: fraud, corruption, transactional or vendor fraud, informational security breaches, health care fraud, money laundering and cyber-crime. Regardless of what it is called, it can happen anywhere in any industry. For example -

  • The IRS initiates forfeiture proceedings on a company’s assets because the estimated tax payments that the accounts payable clerk was supposed to make actually went to support her gambling addiction.
  • Corporate travel business is funneled to a travel agent, without whom a department head’s fabulous vacation would not have been possible.
  • Valuable merchandise is suddenly missing from inventory.
  • A technologically astute employee hacks into the payroll computer system and gives himself a raise.

The Fraud Triangle

Contrary to popular belief, the villains in white-collar crimes are not habitually dishonest. In fact, under the right (or wrong) circumstances, even long-term, trusted employees have the potential to commit fraud.

While not everyone will actually commit a crime, most are regularly subject to the pressures that lead to an act of fraud. A perpetrator will generally complete all three stages of what is called The Fraud Triangle.

1. Need-- Everyone has different needs, but an almost universal need is money. A seemingly “good” person could be under extreme financial stress -caring for an aging parent while putting two children through college, for example. Less sympathetic needs are those supporting drug or gambling habits. There are also work-related needs, such as accomplishing a goal, performing a job well, or achieving success.

2. Opportunity--Stage two is when the opportunity to answer the need presents itself. Unfortunately, it’s most often the company that offers the opportunity with -

  • Weak or non-existent security systems for internal control and auditing.
  • Too much responsibility and control assigned to one individual.
  • A highly decentralized organization that leaves management unaware of actions taken outside corporate headquarters.
  • A failure to punish fraud perpetrators.
  • Insignificant or unpublicized penalties.

An ineffective board of directors with limited supervisory powers, no outside representation, lack of follow-up and a willingness to unquestioningly accept whatever management says.

3. Rationalization-- In stage three, the perpetrator establishes a rationalization so believable that he himself is convinced of its morality. It is the element that permits an “honest” person to take that final step. For example: “I am so underpaid; I am only getting what I deserve.” Or the classic “I work a lot harder than the top brass, yet they have million-dollar homes, fancy cars, yachts and great vacations.”

Caught in the Act - Now What?

Fraud is a criminal offense, but many companies don’t want to go through the spectacle of a criminal trial or risk a defamation lawsuit by the perpetrator. They can, however, pursue civil litigation. This can be a more advantageous recourse in that:

  • Lost money can be recaptured.
  • It reduces the chance for wrongful accusation claims.
  • Unlike a criminal fraud case, the defendant does not have to be proven guilty “beyond a reasonable doubt.” There just has to be a preponderance of evidence that he or she committed the act. This much lower standard of proof drives the decision to seek restitution through civil versus the criminal prosecution.

Don’t Let It Happen to You

First, stop telling yourself these comfortable untruths, like, “We only hire honest people.” Remember - the need, opportunity and rationalization can lead an otherwise trustworthy and law-abiding person to commit an act of fraud.
Next, let your employees know they are being watched. Consider the driver on a deserted street who runs a red light. That same driver will undoubtedly come to a complete stop if he spots a police car in his rear-view mirror. Similarly, employees are less likely to go forward with an unlawful act if they know that someone is watching.

The absolute worst thing you can do is to confront the employee - or worse yet, fire him/her before an investigation is conducted. Engage an experienced professional investigator, preferably a certified fraud examiner (CFE). Be smart, and you may catch the villain, recoup your money and successfully prosecute him/her. Make a mistake, and the next call may be to a defense attorney in a defamation lawsuit.

It is important to note that companies, officers and employees can all be held responsible and prosecuted for the misconduct of an individual. Removing the opportunity eliminates a key element in the driving force behind the commitment of an act of fraud.

So do you believe you are immune to fraud? I hope not. Knowing that fraud can occur and understanding the Fraud Triangle are two good first steps in developing a strong fraud prevention and detection program within your organization.

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