Don’t forget about fraud perpetrated by customers…

Source: Brittany G

Many fraud blogs – including this one – tend to focus almost exclusively on employee fraud. However, fraud perpetrated by customers can be just as damaging.

Not surprisingly, many companies are loathed to think that customer fraud happens. Senior executives in marketing, sales and operations often appear determined to explain why customer fraud is not a big issue. To underscore their flawed logic, and in defiance of their fiduciary duties to the company, the executives continue to dream up new products and services that are riddled with holes that allow, and sometimes encourage customer fraud to take place.

Inevitably, when the fraud losses start to mount, rarely will the department that created the product/service acknowledge that it was flawed. Instead, they ask why the fraud department seemed unable to stop the fraud from taking place. The company’s CFO or COO normally gets dragged in to the discussion and so begins the “Mexican Standoff”.

Before anyone becomes overly agitated that I believe executives sometimes violate their duties of loyalty and/or care, think about the bigger picture. Typically, fraud losses are not recorded in the same profit and loss statement (P&L) where the revenue is booked. Most executives that are in charge of a product or service receive bonuses based on the revenue generated instead of net profit earned. Surely, that creates the potential to drive up revenue at the expense of sound fraud risk management practices that minimize costs?

Some enlightened organizations allocate fraud losses back to the individual product or services’ P&L. Doing so allows the company to judge the sales and marketing executive’s performance based on revenue growth and the “bottom line” which reflects revenue less associated costs, including fraud.

This approach to fraud loss accounting is not “fool-proof” and requires time and effort to ensure that both the fraud department, and the department receiving the fraud loss allocation support the process. However, it is well worth the effort as the moral hazard associated with marketing and sales “owning” the revenue and not the fraud loss should give organizations – both large and small – cause for concern.

Does your organization allocate fraud losses to product P&Ls? If so, has it helped minimize losses?

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.

paul@mccormackwrites.com

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About Paul McCormack
I have over 20 years of experience in corporate fraud and intellectual theft prevention, detection and investigation. Unlike many fraud experts, I have both industry and professional services experience. To date, I have conducted over 800 interrogations of fraud suspects including numerous senior corporate executives. As a freelance writer, I have written over 1,000 articles on a broad range of topics. My areas of expertise include: • Asset Misappropriation • Big Data • Bribery, Corruption, and Collusion • Check, Wire, ACH, and Credit Card Fraud • Consumer Fraud • Corporate Security • Cybersecurity • Data privacy (Europe, Brazil, Russia, India, and China) • Drug Trafficking • Embezzlement • Employee Fraud • Executive Protection • Fintech • Financial Statement Fraud • FCPA • Healthcare fraud • Identity Theft • Intellectual Property Theft • Internal Audit • Interrogation Tactics • Loss Prevention • Mobile Fraud • Money Laundering • Operational Excellence • Organized Crime • Payments Fraud • PCI Compliance • Retail Fraud • Risk Management • Terrorism and Counterterrorism • UK Bribery Act • Workplace Violence

2 Responses to Don’t forget about fraud perpetrated by customers…

  1. srholmes3 says:

    Reblogged this on srholmes3 and commented:
    Wake up world and read this.

  2. srholmes3 says:

    Paul I have so many years dealing with FRAUD matters I have to say you have done a outstanding job with this web page, petersmithpr@gmail.com 787-405-4085 I wish you the best and what ever we do to stop fraud we have to be 5 jumps ahead of them always.

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