Look close by to find corporate fraud

Screen-Shot-2014-04-01-at-12.44.29-PMWhistleblowers find what audits may not

Look around you. Whether you’re a CEO, entrepreneur, employee of a small business or a corporate conglomerate, statistics show someone in your office is committing fraud. Perhaps he or she is merely pilfering paper towels or medicine from the supply cabinet, but often the crime is far more severe.

Of course, only the more sensational cases of corporate or municipal fraud make national headlines — such as Rita Crundwell, former comptroller and treasurer of Dixon, Ill., sentenced last year to nearly 20 years in prison for stealing about $53 million during more than two decades as a city employee — while hundreds of thousands of other employees quietly and often brazenly pad their pockets across the nation.

“Economic crime remains a fundamental fact of life for every segment of the global business community — and is a persistent threat to business,” according to PricewaterhouseCoopers’ 2014 Global Economic Crime Survey.

During the past 14 years, nearly one in three business owners surveyed told PwC they’d suffered a “significant economic crime event.”

Not only that, but executives or others in upper management commit 11.9 percent of reported fraud, according to the Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse, and 22 percent of corporate fraud is perpetrated by someone in an internal accounting department.

“I like to say ‘trust, but verify.’ Even long-term trusted people still need to have oversight,” said Rand Gambrell, director of forensics and valuation services for BKD, LLP.

“Someone gets too trusting and too complacent, and so unfortunately there are people out there willing to take advantage of that.”

Corruption, bribes, kickback schemes, illegal gratuities — all of it happens daily in the corporate grind, and such things are difficult to trace, even through internal audits.

Afterward, the effects remain broad in time and scope.

Although economic losses can be substantial — especially as the full amount of monetary loss may not be discovered until months later — PwC survey respondents selected “damage to employee morale, corporate and brand reputation, and business relations as some of the most severe non-financial impacts of economic crime.”

“When taking into account the secondary damage, the true cost of … a single, high-profile incident [may include] … lost revenues, as customers look for other business partners; delayed entry to new markets due to regulatory issues; a battered stock price; and declining productivity and morale,” according to the PwC report.

Vulnerable industries

Not surprisingly, the most frequently targeted industry for fraud is banking and financial services (16.7 percent). Government and public administration are at 10.3 percent, followed closely by manufacturing at 10.1 percent. Next is health care at 6.7 percent.

Most vulnerable to frequency of fraud are smaller companies, which often don’t have enough employees to effectively divide tasks to increase security. Companies with fewer than 100 employees experience fraud at 31.8 percent frequency. Part of that can be attributed to larger companies being more apt to hire fraud investigators and have fraud prevention programs.

The type of organization targeted most is the private company (39.3 percent), followed by public companies (28 percent), government (16.8 percent) nonprofits (10.8 percent), and other (5.5 percent).

Industries with the highest median loss are mining ($500,000), real estate ($375,000), construction ($300,000), oil and gas ($250,000), banking and financial services ($232,000), manufacturing and health care (both $200,000), with education the lowest at $36,000, according to the ACFE report.

In addition, billing schemes (using straw vendors) in manufacturing are quite common, Gambrell said.

One significant fraud, which BKD investigated, involved a graphic designer who set up a fake printing company with a friend, who would then forward the print order to a real company. Afterward, the friend added 40 percent to the invoice before billing the victim company. For auditing purposes, all of the legitimate documents were in place, covering what added up over years to a $600,000 fraud.

Whistleblowers, unite

Ironically, perhaps, by far the most common method of detection remains tips, primarily from employees, but also from vendors and customers.

Joe Nacchio, the infamous former Qwest Communications CEO, was exposed by a whistleblower letter, eventually leading to his 2007 conviction for $52 million in illegal insider trading.

In the Certified Fraud Examiners’ report, 43.3 percent of initial detection of occupational fraud comes from a tip (up 3.1 percent since 2010), compared to the next highest — management review — at 14.6 percent. Surveillance or information technology controls are each less than 2 percent.

A tip from an insider may provide a company an opportunity to gather more evidence before confronting an employee or notifying the police or appropriate agency.

According to the ACFE report: “For instance, the outcome of a case might vary substantially if the first time management learns of an alleged fraud is through an anonymous tip, as opposed to a law enforcement action.”

At BKD, those tip statistics hold true for many of the investigations the firm has conducted for other organizations:

“Often, a vendor or employee ran into something [suspicious that caught his or her attention] that started the process,” Gambrell said.

Top-down priority

Vigilance grows increasingly necessary for companies that want to be safe from internal crime.

Upper management needs to be aware of the ongoing risk of fraud and make detection and prevention a high priority. Part of that includes asking employees to also be aware and observant. The old adage, “the more the merrier,” certainly holds true here, as increasing the number of people attuned to the possibility of corporate fraud may very well decrease its incidence or at least shorten the duration.

“That’s what makes hotlines effective,” Gambrell said. “If a business has 100 employees, that’s 100 sets of eyes looking at how things run. In most cases of fraud, there were employees aware — they knew something wasn’t quite right.”

One of the simplest prevention methods involves segregation of duties.

“It’s difficult for small companies, but if at all possible, they need to have different people handing [various] aspects of the finances,” Gambrell said.

For instance, in the Crundwell case, when she went on vacation, a family member picked up the city’s mail, keeping letters addressed to Crundwell from phony bank accounts, before handing over legitimate mail to city officials.

“Something as simple as having someone else check the mail could have prevented much of that fraud,” Gambrell said.

Other red flags include lifestyle clues, such as people living beyond their means.

Gambrell tells the titillating true tale of an accounts payable manager who showed up for work in a new cherry red Jaguar, which caught attention for more than its bright color.

During the same time period, this employee had purchased a new home. Records showed the house had been paid for in cash, on a modest salary.

Between the luxury home and car, “obviously she had another source of income than her job,” he said.

Executives and employees most prone to perpetrating fraud include those with gambling problems, alcohol or substance abuse, or those with large legal or medical bills, he said.

Often, fraud begins inconspicuously, a few dollars or a hundred here or there. Most employees or managers don’t plan to continue stealing indefinitely.

“People think they will just borrow the money from the company and repay it. And soon the amount of theft is so large they can’t repay it, so they continue committing fraud to hide the [original] smaller fraud,” Gambrell said.

Such logic may eventually add up to prison time.

Establishing a hotline

Last year, BKD’s Forensics & Valuation Services division launched IntegraReport, a subscription service that allows vendors and employees to report suspicious activity via an anonymous phone hotline or Internet-based portal.

Basic service includes: access to IntegraReport phone hotline and Web-based portal for all employees; hotline monitoring by BKD fraud professionals and routing to three individuals designated by the organization; verbatim transcripts, and reports of the tips, classified within five categories, according to BKD’s website.

To ensure the highest safety, Gambrell and BKD strongly suggest that a company designate two or three people to receive the fraud tips, to maintain checks and balances within the company. For further safety, all of them will be notified at the same time.

When companies install hotlines, fraud discovery, of course, greatly increases.

“Organizations with some form of hotline in place saw a much higher likelihood that a fraud would be detected by a tip (51 percent) than organizations without such a hotline (35 percent),” according to the ACFE report.

Executives, employees, managers, beware — fraud surrounds many businesses.

“Unless you’re a one-person organization, I can almost guarantee you have some level of fraud taking place,” Gambrell said. “If you don’t have fraud in your company, you’re the exception — not the rule.”

One Response to Look close by to find corporate fraud

  1. What about healthcare whistle blowers! I’m blowing a whistle!!!!

    My name is Dr. Tomasulo practicing in Colorado Springs, so my opinion is more of an expert opinion from real world exposure rather than having a political agenda.

    The quote of “Dr. William Burman, executive director of Denver Health’s public health department, said additional Medicaid recipients allow medical providers to get paid to treat patients.”

    Unfortunately, medicaid reimburses at such a low rate that the majority of doctors do not accept new medicaid patients. This results in government funded clinics such as Peak Vista to manage the vast majority of new medicaid patients. However, access to appointments do not facilitate the ability to take care of things such as a common cold. Since medicaid recipients have minimal to no financial burden to be seen and minimal primary doctors to see them, they go to the most expensive place in the world to get help. THE EMERGENCY ROOM! So when you add 158,521 new medicaid recipients to a system that is already stretched to it’s max it does not take a genius to see that this will increase the burden and fiscal budget needed to support the new recipients.

    “But Susan Birch, executive director of the Colorado Department of Health Care Policy and Financing, said the Medicaid expansion will not impact the state budget but will help get costs under control.”



    I submitted a pilot program to Gov. Hickenlooper and Mayor Steve Bachs’ offices that would ultimately save Colorado Springs $180,000,000.00 annually in regards to medicaid patients, incentivize doctors to see medicaid patients, and open 24/7 access to avoid the ED for routine care. Their response: no one returns e-mails or phone calls.

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    Dr. Mark Tomasulo

    Dr. Mark
    April 10, 2014 at 10:12 am