Despite staggering statistics as to the massive scope of fraud in sheer dollar volume and the surprising vulnerability many companies are to white-collar crime, a shocking number of businesses are ill-prepared to prevent it, or are unsure of how to implement an effective prevention program.

Adding to that malaise is an economy that has prompted thousands of companies to make cuts in both personnel and resources - a lethal combination that serves as a veritable breeding ground for corporate and employee malfeasance.

According to the Association for Certified Fraud Examiners' study, Report to the Nations, a typical organization loses nearly 5 percent of its annual revenue to fraud with the median loss at about $160,000. Nearly one-quarter of all reported fraud exceeded $1 million.

And perhaps most disturbing of all was that the timeline for a fraud lasted some 18 months before being detected.

"Too many companies treat fraud as purely an accounting problem," explained John Warren, vice president and general counsel to the 58,000-member ACFE, which oversees the Certified Fraud Examiner credential. "But it's also a human and behavioral problem as well. There are three factors usually associated with fraud - opportunity, the ability to rationalize it and financial need. And in a depressed economy, it tends to set fraud in motion. For example, the Madoff fraud could have gone on for years had the economy remained solid. As long as stocks are high people keep investing. But once the market began to slide, people started asking for their money back and that's how it was discovered. And in a bad economy, companies usually cut back in non-revenue producing departments and too often that means units like compliance, internal audit and legal."

In fact, more than 80 percent of frauds identified in Report to the Nations were committed by individuals in one of six departments: accounting, operations, sales, executive/upper management, customer service or purchasing. Frauds committed by owners and executives were more than three times as costly as frauds committed by managers, and more than nine times as costly as rank-and-file employee frauds.

Experts say that examples of fraud can run the gamut, from large-scale embezzlement, creative accounting, fictitious securities trades and establishing dummy companies, to smaller-scope violations like submitting fake invoices and fudged expense accounts.

David Gannaway, a principal in valuation and forensic services at New York-based CPA firm Citrin Cooperman, agreed that a down economy often serves as the trigger for a fraud.

"Maybe at one time there were five people in a department and because of cutbacks and layoffs there's now only one. So that presents an opportunity. There's more pressure on management in terms of sales and profits and therefore they're less worried about oversight. Maybe you have an employee whose spouse gets laid off and now they have the same expenses but with only one income and asking themselves 'What am I going to do now?' That could make employees who would never have committed a fraud prior to that begin to rationalize what they're doing."

As validation, the most common behavioral red flags displayed by the perpetrators in the ACFE report were living beyond their means (identified in 43 percent of cases) and experiencing financial difficulties (36 percent of cases).

Gannaway recalled he was once summoned to perform an internal investigation for a nonprofit, which suspected that its chief executive was using company funds for personal use. It turned out the CEO was siphoning money to stay at five-star hotels in top resort communities.

"Unfortunately, there's no guarantee against fraud and there never will be," declared Barry Pollack, a partner in the law firm of Miller & Chevalier in Washington, D.C. "One big problem is that fraud is usually a lagging indicator if you will, and trails economic cycles usually by 18 months or so. Another is that complex cases against fraud are not put together overnight. It usually takes a year or two to get one together."

The ACFE also points out that roughly 85 percent of those who commit fraud had never been previously charged or convicted for a fraud-related offense.

"People don't just set out and say I'm going to commit a fraud," continued Pollack. "Most of the time they're good people who have complied with the rules. Then pressure sets in and they go closer and closer to the line."


Last year, the Center for Audit Quality, Financial Executives International, the Institute of Internal Auditors and the National Association of Corporate Directors published "Deterring and Detecting Financial Reporting Fraud," a report that uncovered three critical elements in combating fraud: setting the right tone at the top, professional skepticism and communication among management, the board and auditors.

"We all hear about tone at the top, but what does it actually mean?" asked CAQ executive director Cindy Fornelli. "It's this ethical culture that has to permeate the entire organization. It's set by the leaders of the organization, not only the CEO and CFO, but also the audit committee, internal audit and the external auditors as well."

To help combat and curb the frequency of fraud, the ACFE's Warren suggested that companies bolster training as well as establish a hotline where employees can submit anonymous tips as studies reflect that some 40 percent of occupational fraud is uncovered by a tip from an employee.

"There needs to be a tone at the top and that's established by training," echoed Warren. "Then you have to strengthen internal controls and have a segregation of duties. Those are probably the single best things to help prevention."

One firm that established a fraud assistance service was Akron, Ohio-based BCG & Co., whose portal provides resources and a hotline for users to detect and report fraud as well as other instances of unethical behavior and malfeasance. According to a BCG representative, all calls on the hotline are reviewed by experts credentialed with either the CFE or the American Institute of CPAs' Certified in Financial Forensics designations.

BCG has also extended this service to other CPA firms allowing them access to the hotline for their clients.

Bert Davis, a partner at the CPA and business advisory firm of Gilliam Coble & Moser in Burlington and Greensboro, N.C., and who has been doing investigative accounting for 18 years, advised that management familiarize themselves with the types of fraud that occur in specific industries, as well as implementing basic internal controls such as rotating and segregating employee duties.

"Some fraudsters are serial stealers," said Davis. "They've stolen before and may have been caught and terminated without being prosecuted. A thorough background check before hiring is a great prevention tool."

Pollack of Miller & Chevalier said another legal by-product that may serve as a deterrent are the exponential growth of fraud sentences for white-collar crime.

"It's sort of a scared-straight proposition," he explained. "The federal system guidelines for fraud have increased dramatically."

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