5 reasons why companies struggle to combat fraud

Companies lose billions every year. Some are shocked that it happened to them. Others, have a line item in their financial plan (Yes, you read that correctly. They plan to lose money to fraud.) Far too many companies are forced to close their doors because of it…

So, why is it so hard for companies to combat fraud? Here are five reasons that I have uncovered during my career:

  1. “You work here as well?” – Fraud professionals often talk about their frustration with “silos” that result when departments involved with preventing and detecting fraud don’t talk to each other. In fact, a significant portion of my career has been spent helping break down the silos within organizations. The fraudster – both employee and third-party – is able to exploit the lack of communication between departments for their own benefit. Large companies are particularly guilty. It is not unusual for two or more departments to be actively investigating the same employee! No one has the complete picture of the fraud, yet each department continues to investigate the situation independently while the losses mount.
  2. “I don’t want to think about it” – Fraud can be overwhelming, especially for senior executives with an already heavy workload. It is easier not to think about what fraud may be doing to the company’s bottom line. Unfortunately, ignoring the problem will never solve it. In fact, when losses do result (yes, fraud happens) they are often gigantic.
  3. “We don’t have the money” – This reason is certainly understandable, especially when you consider the dire state of the global economy. It is probably the biggest hurdle that our firm has to overcome when talking with companies of all sizes. Unless the company has experienced a significant fraud within the last 12 months, there is resistance to any investment in fraud prevention or detection services. Until the company sees a spike in fraudulent activity, why should they worry? Well, unfortunately, you can’t pick a date and time when fraud will happen. It has an uncanny knack of taking place when you can least afford it. The costs to fix the problem are normally far higher than the prevention that was needed in the first place.
  4. “Bring it. We’ve got it covered” – From time to time, I run across an exceptionally high performing fraud department. They have the right mix of people, processes and technology to fight fraud. The company’s executives support their efforts and they routinely hire the “best of the best” to join their organization. They have fraud – internal and external – under control. Well, almost. What worked last month, or last year, will not automatically work today. Combating fraud requires a “continuous improvement mindset”. Fraud evolves, so too must the fraud department. Complacency can eventually destroy even the best fraud department. The latest fraud intelligence can literally make the difference between success and failure. Trust me; I’ve seen it happen on more than one occasion.
  5. “They were just that good” – I have interviewed 100’s of people who have committed fraud. Many of the schemes that they perpetrated required tremendous vision, drive and determination to execute. Some of the most intelligent individuals that I have met were in fact accomplished fraudsters. The really smart fraudsters are often never caught. Every fraud investigator can cite at least one or two situations where the fraudster got away with it. Some fraudsters are just that good. If they don’t make a mistake, you have almost no chance of catching them.

This list is certainly not all inclusive. I’d love to hear from others as to why fraud is so difficult for companies to fight. Also, if you disagree with any of my observations, feel free to say so!

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Two heads are better than one

Hiring employees is expensive. I get it. Really, I do. Segregating duties to prevent fraud by employing more than one person seems like overkill. For small businesses, although desirable, it is just not feasible. It is just not realistic to expect a small business owner to employ two or more employees when they can make do with just one.

For mid and large sized companies, segregating duties is absolutely crucial. Here’s an example of why…

Shaun Allen Clark pleaded guilty to a $2.3 million embezzlement scheme. Clark stole checks from The Scotts Company totaling $24,450. That was just the beginning. In 2008, Clark joined the Ohio Bridge Corporation as a controller. Between April 2008, and September 2009, he embezzled $2,310,006. How did Clark manage to steal so much money in such a short time? The answer is simple – he controlled everything…

  • Clark was granted access to initiate wire transfers from the company’s accounts to pay for raw materials. He used this access to transfer funds to his personal account. (Remember what I said about banks and detecting embezzlement?)
  • As controller, Clark managed bookkeeping and accounting entries involving the Ohio Bridge Company and its subsidiaries. He used his access to the “books” to hide evidence of the fraud.
  • Clark served as the point person for the bank regarding a line of credit.  He submitted fraudulent financial statements to the bank in order to comply with the terms of the line of credit and support the embezzlement scheme.

So where did the money go? Clark reportedly spent $100,000 to buy Ohio State football season tickets. He had $101,788.35 in his bank accounts, as well as Chevy Tahoe and boat for his efforts. As for the rest of the money? Who knows…

Small companies can’t hire more than the bare minimum. Preventing employee fraud at small companies requires more creativity to be successful (more to follow in a post next month).

However, medium and large-sized organizations can often afford to have more than one employee involved in a process. Doing so can dramatically reduce the potential for fraud. As this case shows, vesting all that power with one individual resulted in a seven-figure loss than would force many companies to close their doors. Saving on labor costs seems like “false economy” don’t you think?

Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.


History repeats itself, yet we learn nothing?!?

“The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not.”

– John Kenneth Galbraith

Bernie Madoff stunned the world with an audacious $65 billion fraud. However, there is nothing new about Madoff’s method of fraud. In fact, the type of scheme that he operated – commonly known as a Ponzi scheme – dates back to the 1920s and an infamous fraudster named Charles Ponzi.

The numbers may be bigger and the public outrage much more vocal, but fraud has been part of society for as far back as there are records. How big a problem is fraud today? The Association of Certified Fraud Examiners, the preeminent authority on internal and external fraud reported in their 2010 “Report to the Nation” that organizations lose 5% of their gross revenue to fraud every year.

Internal fraud (fraud perpetrated by employees and members of management) routinely grabs the headlines. The damage that can be caused by internal fraudsters can range from a mere nuisance to a catastrophe that can literally destroy a company, wipe out shareholder value and leave thousands without jobs. Internal fraud schemes range in complexity from simple embezzlement schemes to highly orchestrated financial statement frauds that require tremendous time, effort and resources to perpetrate.

Typically, frauds perpetrated by members of management are far more damaging and costly than employee level fraud. The Madoff, WorldCom, Enron and Stanford cases all involved white males, over 50 years of age, all well educated. In addition, each man had a large team of helpers that knowingly, or unknowingly, helped perpetuate the alleged fraud schemes over multiple years.

Does this mean that all males over 50 with college degrees are fraudsters in the making? Certainly not, but it does give you an idea as to which individuals are more likely to involved.

So what? Fraud happens, and we move on with our lives. Well not exactly… In a recent article by Brian Payne, chair of the Department of Criminal Justice in the Andrew Young School of Policy Studies at Georgia State, he noted the following:

“…white-collar crime harms the community by reducing the faith that individuals have in public and private leaders. This consequence is particularly problematic given that most white-collar leaders are, in fact, honest professionals. Make no mistake about it — the vast majority of white-collar professionals never engage in wrongdoing. The few professionals who do commit crime dramatically lower the trust that individuals have in our political and economic institutions. The consequences of this broken trust are enormous.”

How much faith, or trust in the “system” has been lost as a result of headline grabbing frauds and the resulting collapse of the global economy? It is impossible to tell, but whether you agree with the tactics or not, “Occupy Wall Street” is just one example of frustration with the “system” and a desire to do “something”.

If we reduced the amount of fraud in the economy, would the level of trust in our institutions automatically increase? Probably not. Fraud is just one piece of a very large complex puzzle. However, when the people don’t trust the system, they push for change. Something eventually gives. Wouldn’t it be nice to see less fraud, and more trust? We can dream, right?

Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.


International fraud awareness week – shining a spotlight on an urgent problem

From November 6-12, the Association of Certified Fraud Examiners (ACFE) encourages companies of all sizes to participate in International Fraud Awareness Week. With an estimated five percent of revenue lost to fraud each year, the ACFE asks that organizations “proactively take steps to minimize the impact of fraud by promoting anti-fraud awareness and education.”

To help support the effort, the ACFE has provided a “starter” pack to help organizations think differently about fraud and the impact on their bottom line.

The starter pack includes a fraud prevention check-up to help companies test whether they have the appropriate internal controls in place to combat fraud, a profile of a fraudster and the red flags to look out for, and a paper that addresses the role of the board of directors in preventing fraud. The resources are free and can help set your organization on the path to combating both internal and external fraud.

Based on the information shared in the ACFE’s Report to the Nations, the profile of a fraudster is a follows:

  • More than half of all cases in the study were committed by individuals between the ages of 31 and 45
  • Fraud offenders were most likely to be found in one of six departments:

Accounting (22%)

Operations (18%)

Sales (13.5%)

Executive/upper management (13.5%)

Customer service (7.2%)

Purchasing (6.2%)

  •  The median loss was $160,000
  • The frauds lasted a median of 18 months before being detected
  • The most common behavioral red flags displayed by perpetrators:

Living beyond one’s means (43 percent of cases)

Experiencing financial difficulties (36 percent of cases)

  • Frauds committed by owners/executives were more than three times as costly as frauds committed by managers, and more than nine times as costly as employee frauds. They also took much longer to detect.

By promoting fraud awareness and prevention and providing free resources, the ACFE is leading the charge in tackling a pervasive problem that is estimated to cost companies around the globe $2.9 trillion a year. Whether your company has a fully integrated fraud program in place, or it is just beginning the process, the ACFE is an invaluable resource in the fight against fraud.

Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.


Today’s high school cheats – tomorrow’s fraudsters?

The numbers are truly astounding. Several recent studies note that approximately 90 to 95% of high school students admit to having cheated in some shape or form. The type of cheating ranged from copying homework to cheating on final exams.

USA Today reported that an Ohio High School canceled graduation ceremonies for all 60 seniors.

An excerpt from the USA Today article:

“Superintendent Dorothy Holden said so many students are involved that it was impossible “to separate the wheat from the chaff” in terms of deciding who could graduate. Instead, all students will be mailed their diplomas.”

The statistics relating to cheating in college are equally shocking. Various studies report that approximately 85 to 95% of college students admit to cheating.

What does this alarming trend mean for companies? The connection between cheating in high school, college and fraud in the workplace is not fully understood. However, if children opt to cheat while “earning” an education, what type of behaviors will they pursue in the work place?

For employees that routinely received “A’s” in high school and college, a bad performance review may trigger feelings of resentment that could lead to fraudulent activity. Just as they felt justified in cheating while in school, they may rationalize that committing fraud to either improve their performance, or steal funds to “punish” their employer is justified. In fact, given their track record of academic fraud, reaching the decision to commit corporate fraud may be arrived at in very short order.

I do not mean to infer that all “20 something” employees entering the workforce are fraudsters in the making. However, you can’t help but ask if an employee that cheated in high school and/or college has the moral compass to guide them in today’s workplace?

Do you believe that academic fraud is an indicator of propensity to commit corporate fraud? If so, are you concerned that corporate fraud will increase as today’s college and high school seniors enter the workplace?

Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.


“Bloodless, white collar crime”

“The son of a Philadelphia mob boss infamous for his violent reign was indicted today for a bloodless, white collar crime: a scheme to defraud a Texas financial firm out of $12 million.”

– abc news, ‘Little Nicky’ Scarfo’s Son Busted in Jersey

Within hours of finishing my post on organized crime and the “Easy Button”, I stumbled across this article involving ‘Little Nicky’. Allegedly, Little Nicky and his friends had plans to take over FirstPlus Financial Group, a publicly traded company, by replacing the board with representatives under their control, and using the company to purchase reportedly worthless companies created for the purpose. Prosecutors allege that the scheme cost FirstPlus $12 million.

The scheme unraveled as a result of a three-year investigation by the FBI. That gives you an idea of how difficult organized crime is to combat. If it takes the FBI – with all of their powers – three years to investigate and trigger indictments, the mob had a solid plan in place. There is no indication of how the plan ultimately fell apart, but for at least a short period, it appeared to work. Dismiss members of organized crime as being “dumb”, or unable to commit white collar crime at your peril.

Preparing for this type of attack is way beyond the scope of this post, but, I wanted to provide a specific example of organized crime and white collar crime. It can, and does happen…

Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.