Contrary to myth, occupational fraud, or white-collar crime, can attack any business at any time, especially companies that do not recognize or refuse to deal with its devastating potential.
A recent study by the Association of C e r t i fi e d F r a u d Examiners estimated that 6 percent of all revenue is lost to fraud annually. That translates to more than $660 billion in annual losses across the country.
The reality is fraud affects us all. When fraud attacks, people lose jobs, and companies can fall into bankruptcy. Good examples are Enron, WorldCom and Tyco.
Fraud is all about betrayal of trust. Often, the most trusted employee turns out to be the one who walks off with the company's assets.
The differences between occupational fraud and a bank robbery are the elements of violence and concealment. A bank robber sticks a gun in your face, demands money and runs off, not bothering to conceal the theft. In contrast, the employee committing fraud comes into work daily, greets the boss, sits down at his desk, and quietly conceals the theft through an ongoing scheme.
So what causes fraud, how do you know if a fraud scheme is under way, and how can fraud be deterred in our businesses?
Fraud occurs when employees perceive an unshareable pressure and discover an opportunity to steal, conceal and convert company assets to personal use. Then, they rationalize that it is acceptable to carry out those plans. This is the theory of Donald Cressey, a former professor at Indiana University.
Often, the unshareable pressures are financial problems traceable to extramarital affairs, gambling and drug addictions, or just living a lifestyle they can't support. Some pressures are non-financial, involving motivations to "get back at the company" for perceived unfair practices.
Sometimes, greed and the ability to control other employees are enough to motivate employees to commit fraud. Such was the case with fraud involving former Tyco CEO Dennis Kozlowski.
Opportunities to steal include situations where internal controls are weak and employees can gain access to cash or noncash assets and conceal the deed. Opportunities also exist where employees collude to commit fraud even though internal controls may be strong.
Rationalization of the fraud act may involve beliefs that "the company owes it to me" or "I deserve it and they'll never notice."
Indications fraud may be under way include observing sales are on the rise, but cash is not keeping pace.
You detect complex accounting entries close to year-end. Documents appear altered or begin disappearing, duplicate payments show up, accounts receivable rise, or accounts payable increase. Management takes short cuts, adopts unorthodox approaches to enhance profits, and disregards internal controls and regulatory agencies.
You may also notice changes in behavior and lifestyle of an employee, such as spending long hours at work without cause, discontinuing vacations, buying inappropriate gifts, avoiding eye contact and living a lifestyle that appears to exceed income.
Deterring fraud in the workplace requires a top-down approach. Management sets the tone by promoting and adhering to a strong fraud-resistant and ethical company culture. Companies should launch an assessment of their internal controls and determine where risks of asset misappropriation and fraudulent financial statements exist. Where weaknesses exist, they should impose controls and monitor for compliance.
Finally, companies should implement a fraud policy clearly stating the expectations for employee behavior. The policy should also encourage employees to report any signs of fraudulent activity in a confidential manner. Monitoring this program with diligence is essential.
John H. Straub is the managing partner of Straub Forensic Consulting, an Indianapolis-based CPA firm. He is a CPA and a certified fraud examiner. Straub Forensic Consulting specializes in fraud detection, prevention and litigation support.