The confession – the “how” and “why” of employee fraud

“It is not the criminal things that are hardest to confess, but the ridiculous and the shameful.”

– Jean Jacques Rousseau, (1712-1778) Swiss political philosopher

The employee sitting across the table from me (we’ll call him Bob) looked like he was going to throw up. I didn’t feel any better. I had played this scene over in mind for weeks and hardly slept the night before.

Welcome to my first interview involving a fraud suspect. You can conduct as many “mock” interviews as you like, but until you are sitting face to face with an employee accused of fraud, you really have no clue what it feels like.

Bob clasped his hands together – almost in prayer – and stared directly at me with eyes that appeared on the verge of unloading tears. Below the table, his legs were bouncing at an alarming rate, so much so that the binders in front of me were slowly shuffling towards the edge of the table. It was time to begin…

“Do you know why you’re here?” I asked

“Yes” said Bob. “I did it. I took the money. Can I go home? I need to tell my wife”

Now what am I supposed to do? The employee had confessed without seeing one document. This is easy! Will they all go this smoothly? I composed myself and asked Bob to tell me what he meant. What money? How did he take it? He again asked to go home, but I encouraged him so share his side of the story and review the documents I had compiled. I convinced him that he needed to know what he had just confessed to doing.

We spent the next hour reviewing the investigation binder in detail. During that time, Bob explained how he embezzled over $100,000 from the company. I also shared the mistake he made that resulted in his undoing. At the end of the hour, Bob had explained how he had committed the fraud, but he had not shared why he had done so.

Knowing how the fraud took place is certainly important as employee and third-party fraud tends to follow “tried and tested” modus operandi. There are certainly variations on themes where a fraud includes a “wrinkle” or unusual element that is unique. With nearly 17+ years experience in this arena, I am still learning new and unusual ways to commit fraud. But don’t neglect the “why”… If you really want to make a difference, ask about the how and the why.

Never make any promises to entice the employee to provide the “why” (That can really create much bigger problems down the road). There are a number of tactics to help employees through this phase of the interview. I personally like the “5 Whys” approach.

Why did you take the money?”

“Lots of reasons. I don’t really want to tell you why.”

“It would really help if you did. I know this has been bothering you for a long time. Why take all that money? What made you take the first step?”

“I didn’t get promoted last year. I deserved it. I did all the work, and he (pointing to his supervisor seated in the far corner) took credit. For everything.”

“But why commit fraud, though? You might have been promoted this year”

Bob looked down and bit his bottom lip.

“I know other people took money and got away with it.”

“In this office?” I asked. “How do you know?”

“I know because I saw them. They gave me money to keep quiet. I shouldn’t have taken it. But then I wanted more.”

Why take the money? Why not tell someone about what you saw?”

“My kids need clothes and we just don’t have it. My wife hasn’t been able to find a job and we don’t have anyone to look after the kids anyway. The others were fired so I couldn’t get any more money from them.”

It turns out that 2 employees were fired six months prior for absenteeism. Upon further investigation, both had been involved in stealing inventory and selling it on eBay. Bob stumbled across the fraud and agreed to accept kickbacks to keep quiet.

Sometimes the “5 Whys” works. Other times, no matter how you ask the questions, the employee declines to share anything of value. In fact, I had one employee tell me that they needed the money, and then run out of the room! Not much you can do in that type of situation.

Remember: how fraud is committed is always important, but so is the why. Don’t neglect one over the other as understanding both can help your company prevent fraud. Take the time to learn from each fraud. After all, you’ve paid the entrance price; why not watch the entire movie?

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.

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.

“There’s Gold in Them Thar Hills”

A Hooter

The lawsuit involving Hooters and Twin Peaks has already triggered a wave of clever, and not so clever, headlines, but it is really no laughing matter. (With this post, I suppose that I just added a headline to the list. You be the judge as to which category it falls into.)

The dispute involves Joe Hummel, the former  EVP of operations at Hooters. Hooters alleges that as he was leaving the company, Hummel stole over 500 pages of sensitive business information and trade secrets.

He is now employed with La Cima restaurants. Unfortunately for Hooters, La Cima is in the process of launching the Twin Peaks restaurant chain (any guesses what the new chain will “feature”?). Before joining La Cima, Hummel allegedly downloaded Hooter’s marketing plans, contract agreements, recruiting tools, and sales figures – some or all of which are likely trade secrets – and then emailed them to himself using his personal email account. If this is true, how could it have been prevented? I regularly help companies prevent IP theft, and I can tell you that there is no easy fix. Instead, it requires a multi-pronged approach using the right mix of people, processes, and technology.

What is a trade secret anyway? The short answer is whatever you say it is! The more detailed answer is that a trade secret must be secret (not widely known), be of value because it is not widely known, and treated as a secret at all times. In this case, it is not entirely clear if all of the information that Hummel allegedly took would meet the definition, but at face value, certain elements would appear to fit the bill. I would strongly suspect that Hooter’s marketing plans were not widely available within the company or the industry as a whole. Would the marketing plan be of value because it is not widely available? Ultimately, that is for the courts to decide.

Asking the courts to pursue employees that steal trade secrets is certainly within your company’s rights, but I would liken it to putting toothpaste back in the tube once squeezed. It is time consuming and potentially very messy, and the end result may not justify the effort.

Does your company have any trade secrets? (Hint: the vast majority do.) What have you done to protect them? Could an outgoing executive steal your company’s trade secrets? Would you even know?

If the answer to any of the questions above causes concern or leaves you wondering about how well protected your trade secrets may be, we can help. Just don’t wait until a theft occurs. By that time, the toothpaste is out of the tube…

Hooters is not alone in dealing with this type of situation. Given the glamorous nature of their business, they are unlucky enough to attract media attention when things go wrong. That said, could your company be next?

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.

5 facts about fraud that most companies learn the hard way

Source: Soldiers Media Center

Fraud happens. Often. Here are just five facts that companies learn the hard way when fraud occurs:

Fact #1 – Fraud does not happen on the company’s timetable.

Revenues are up. Revenues are down. It doesn’t matter. The company could be experiencing the best of times or the worst of times. The fraudster doesn’t care. All he or she wants is money. Fraud will happen on the fraudster’s timetable. He or she decides if, when, how much, and how often. If the company has countermeasures in place, the fraud may be prevented or the losses kept to a minimum. With little or no countermeasures in place, however, watch out.

Fact #2 – Fraud scares people, especially senior executives.

When I meet with clients, I often tell them that fraud is a small word with big implications. In my experience, senior executives are most often apathetic when it comes to discussions regarding fraud. That is, until they are made aware of an actual fraud taking place on their watch. Then they become exceptionally nervous and spend a great deal of energy worrying about what will happen. They don’t know what they don’t know, and that makes them nervous, sometimes angry, and generally apprehensive about the future. Is this my fault? Will I be blamed? How much money will we lose? Will we get it back?

Fact #3 – Fraud prevention is an afterthought in most companies.

When meeting with a new client, we want to gain a sense of the overall maturity of their efforts to prevent, detect, and investigate fraud. Below is a small selection of the questions that we typically ask:

  • Do you have an employee hotline? How do you measure its effectiveness?
  • Do you have a fraud case management database? If so, when was the last time the information was used to develop proactive countermeasures?
  • What controls do you have in place to prevent and detect fraud? Who “owns” control development, deployment, and testing?
  • What policies and procedures do you have in place to ensure that employees are unable to steal your company’s intellectual property? When was the last time someone tested their effectiveness?
  • How often does fraud take place in your industry?
  • Have you incorporated “lessons learned” from fraud at other companies?
  • Who is responsible for fraud prevention, detection, and investigation within your organization? If separate departments, how often do they meet to share intelligence?

Very rarely will senior executives answer these questions without providing some potential areas for improvement. Most often, they struggle to answer at least one or two of the questions, which can lead to some uncomfortable silences and pained expressions. That’s OK. We know that fraud prevention is an afterthought. It shouldn’t be, but it is. Most companies don’t think about fraud until it happens or they narrowly avoid taking a loss. I personally want to change that. There is no reason that companies need to experience the vast majority of employee and third-party fraud. A company will never be fraud free, but it can certainly make it much more difficult for fraud to happen.

Fact #4 – Fraud investigations are easy to screw up.

Investigating fraud, particularly employee fraud, is much more complicated than it appears. Employees have rights, and lots of them (as they should). If in the course of an investigation a company violates those rights, the “hunter” can become the “hunted.”

Let’s consider a real-world example.

Local law enforcement thinks that one of your employees, Bob, is involved in drug trafficking. Your internal audit department is also investigating Bob. They plan to talk with him next week regarding some missing inventory. A detective from local law enforcement wants internal audit to ask a couple of questions that would help him with the drug investigation. In fact, the detective really wants to be in the room during the meeting. Helping law enforcement is a good idea, right? We might need them to help go after Bob for the inventory we think he has stolen. Would we screw up the investigation by helping law enforcement? How? We’ve already sent an email to the detective detailing the inventory theft. The detective agrees – this guy is a criminal!

(Hint: this investigation is destined for failure.)

Screw up an investigation, and you may be forced to rehire the employee that allegedly committed fraud as well as pay lost earnings and possibly even a fine. Trust me, it happens.

Fact #5 – Fraud losses are rarely recovered.

We’d like to think that law enforcement can reach out and claw back the proceeds from a fraud whenever needed. The truth is that most of the time, the proceeds are long gone. Fraud schemes typically last a median of 18 months. During that time, your company’s money is burning a hole in the pocket of the fraudster. They want to buy goods and services, pay down debt, stop foreclosure, share their good fortune with family and friends, etc. The last thing they want to do is deposit the money in their bank account and watch it gather interest (although in very rare circumstances, this does happen).

Notwithstanding the fact that fraudsters want to spend the proceeds, the truth is that law enforcement is often unable or unwilling to help companies recover fraud losses. Law enforcement is overstretched. At the local level, detectives in small cities are assigned all manner of cases, from petty theft to murder. In larger jurisdictions, detectives have an overwhelming case backlog that is closely tracked by their superiors. Financial crimes can be extremely complicated and time consuming to investigate, especially if the detective does not have a financial background. Detectives need to close cases – quickly. At the federal level, the bar is even higher. A six-figure loss may be devastating for your company, but it may barely raise the eyebrow of an FBI special agent in a large metropolitan area. With no connection to organized crime, drugs, or terrorism, the case file may be shelved and forgotten.

I strongly support law enforcement and have worked with some very talented local, state, and federal agents. However, we really can’t expect them to pursue every fraud that hits their desk. Let’s be honest; why should we expect law enforcement to help recover losses when so many of them could have been easily avoided?

If you have additional “facts” that you would like to share, please feel free to add a comment.

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.

Simple fraud, shocking results: $718,167 walks out the door

“Even a mom-and-pop business with only a few employees needs to provide oversight for anyone involved in accounting or bookkeeping operations. Businesses are especially vulnerable when one employee both issues payments and reconciles company bank accounts.”

– Beth Phillips, United States Attorney for the Western District of Missouri

Could not have said it better myself, Ms. Phillips. Small business owners, listen up: if you won’t take my word for it, how about taking the word of the US Attorney for Missouri? Law enforcement is often left to clean up the mess caused by small business fraud. They see what needs to be done to stop it from happening in the first place. Maybe you should listen!

The perpetrator in this scheme, Kim Brown, plead guilty to stealing $718,167 from her employer, Standard Sheet Metal, over a seven-year period. Again, this was not a particularly complex scheme. Brown wrote “at least” 474 checks from her employer’s bank account and deposited them in her personal account. That’s all she wrote (pun intended), and now the employer is left with a huge loss that will likely never be recovered.

Brown was a trusted employee. From 1998 to 2009, she had been promoted from receptionist to accounting and bookkeeping. What a kick in the gut! The company gives her more responsibility, and presumably a bigger salary, and she commits fraud in return.

Note: Notice that the bank did not stop this from happening. As I have said before, never rely on your bank to stop embezzlement.

Maybe now is the time to proactively address fraud within your company? You’ve got the backing of the US Attorney to do so.

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.

No more free coffee

Never underestimate the power (and stupidity) of people in large groups. It will take months, possibly years to figure out all the reasons behind the riots in England, but themes are emerging. Community leaders as well as many of the rioters themselves appear frustrated with cuts in social services and the widening of the gap between the haves and the have nots. English society has always functioned on a class system; it’s not as pronounced as it was even 100 years ago, but it is still very much apparent in certain professions and areas of the country. The cuts in services as well as the overall collapse of the economy have helped ensure that those in the “lower” classes feel even more disenfranchised.

When you take what people believe to be theirs and further reaffirm what they perceive to be their lower class status, they can react in a number of ways. When “wronged,” they often band together in a shared sense of anger and frustration at what transpired. A few will act out and take steps to let the group know how angry they are. Others will react purely for the attention and thrill of “doing something.” Some will sit in the corner and internalize what has happened and figure out how to react.The English riots are obviously at the far extreme of those reactions. That said, companies can learn from what happened.

Since the recession began, companies have cut back expenses, using a broad range of tactics. From reducing headcount to cutting benefits, executives have gone back time and time again to capture savings. In most companies, free coffee in break rooms was a casualty long ago. It was either removed entirely or replaced by a cheaper brand that is supposedly coffee yet looks and tastes like dishwater. It’s a seemingly inconsequential action, but the strangest triggers can push people over the edge. At the same time, the pay gap between a company’s CEO and its employees continues to grow.

The more companies “take” from their employees, be it through revoking coffee and benefits or giving pay cuts, the more likely the employees are to rebel in some shape or form. In very isolated incidents, they will react with physical violence, but most will soldier on until they can’t take it anymore. With over 76% of former employees declaring that they are disgruntled, clearly companies are not winning many fans.

Let me be very clear: most of the steps that companies are taking to reduce costs are largely unavoidable. Without cuts in benefits, reductions in headcount, changes in 401K plans, etc., many companies would have closed their doors long ago. However, companies should acknowledge that cuts come with risks.

Each time a company “takes,” the risk that employees will react badly to the decision increases. Production can go down, employee departures can increase, and customer service can plummet. Not surprisingly, employee fraud can also skyrocket. My earlier post shows that employees need some form of rationalization to commit fraud. By continuing to make cuts, your company is providing the perfect excuse for an employee to “get even.”

Sooner or later, cuts will go to the bone and trigger a reaction. Please bear that in mind as you decide whether to remove coffee from the break room entirely.

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.

Don’t let the door hit you on the…

Source: Dmscs

An article in the Wall Street Journal today referenced exit interview statistics collated by the Corporate Executive Board (CEB). In 2008, the CEB reported that 42% of employees would not recommend their employer to others. In 2011, that number jumped to 76%.

“Big deal,” you say. Employees are being asked to work harder, and some of them are leaving. Disgruntled employees that are voting with their feet can’t harm your company, right? On the contrary! Let me share some thoughts.

  • The employees that are sharing this information during their exit interviews are being honest and forthright. How many employees choose not to answer questions truthfully as they exit a company? I would hazard a guess that a sizable percentage chooses not to bad-mouth their employer, no matter how disgruntled they may be.
  • If over 75% of employees that are leaving are disgruntled, what about the employees that remain? Surely some of the remaining employees are just as disgruntled as the ones that are leaving? The only difference is that they have chosen to stay—or they have no options outside of the company.
  • As soon as an employee becomes disgruntled, does he or she leave a company? Rarely. The anger and frustration normally fester and grow until the employee can no longer stomach working for a company that he or she hates. While the pressure builds and the resentment grows, it is realistic to assume that the employee’s performance will suffer.

All very interesting, but why include this in a blog about fraud?

Readers of this blog may recall my previous post where I discussed the “fraud triangle.” The triangle contains three elements: pressure, rationalization, and opportunity. Disgruntled employees don’t like working for their company. In fact, some may hate the company with a passion that’s normally reserved for mortal enemies. How hard do you think it is for them to rationalize that committing fraud is justified? Would committing fraud help them “get even” with their employer?

So, disgruntled employees have at least one component of the fraud triangle covered: rationalization. They also likely have the opportunity to commit fraud, as oversight and compliance efforts have been cut back in companies of all sizes. All that remains is a form of pressure to complete the triangle. That shouldn’t be too hard to find. Not many employees can claim to be better off today than they were five years ago.

Given my expertise, it is not surprising that I read the WSJ article and thought of the points raised above. What I hope you learn is that disgruntled employees leaving your company is not cause for celebration. It may be a symptom of a much bigger problem that might end up costing your company money. Lots of it. I hope that I am wrong, but history has a habit of repeating itself.

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.