A Guide to Saving Your Company from Fraud

The last decade has revealed numerous instances of fraud within large corporations, such as those publicized in the famous Enron case.  These occasions have involved financial reporting re-statements and reporting errors that have significantly impacted shareholder information in the public stock markets.  These cases have not only created headlines for the media, but have brought about significant changes to legislation through the implementation of the Sarbanes-Oxley Act. This legislation was enacted in 2002 in response to several corporate reporting scandals.  It introduced sweeping compliance changes to these entities, including requiring improved internal controls over financial reporting along with auditing these controls by an independent accounting firm.   The number of corporate fraud cases pending at the Federal Bureau of Investigation has skyrocketed from 279 cases in 2003 to 529 cases in 2007 and still continues to rise. 

The fraud triangle

When discussing fraud, it is important to be aware of the fraud triangle, or the three components that contribute to a fraud occurrence.  By understanding these components, your company can take preemptive actions to mitigate the risk of fraud occurring in your business.  Here are the three components of the fraud triangle used to illustrate ways that fraud occurs:

• Pressure: Pressure is what usually drives a person to commit fraud at their place of employment.  These pressures are usually personal and cause the person to seek desperate remedy in order to get out from under their problems. 

• Opportunity: If a person is dealing with pressures, and they see an opportunity at work due to poor internal controls, etc., they may move a little closer towards the actual act of committing fraud at the workplace. 

• Rationalization: Rationalization is the final step a person takes in order to begin the perpetration of fraud.  Generally the person thinks there are no other options and they must go through with theft in order to escape from their problems. 

The perfect recipe for fraud

A Poor Economy: The economy also plays a major role in an increase of fraudulent activities.  For instance, executives are facing pressure to meet revenue and earnings targets.  The economy is causing people to have personal financial pressures that have not been experienced recently. 

Spending habits:  Although we are experiencing a downturn in the economy, household spending habits have been on the rise and savings levels have been on the decline for some time.  Such pressures are attributing to corporate fraud, regardless of the current economic woes.  Things as simple as rising health care costs are causing an inordinate amount of pressure on some families. 

Technology:  Technology is causing new ways to take advantage in the workplace. Companies that do not have adequate controls set up are more likely to allow instances of fraud take place.

Discontentment with corporations:  Feelings of entitlement seem to be increasing, and thus, individuals may be taking an opportunity to skim corporate assets to cover perceived shortfalls in compensation or other benefits. 

Declining morality:  Let’s face it; the definition of morality has become much more relative over the past several decades.  Ask ten people how to define a lie, and you will likely receive ten different answers!

How do they do it?

There are many types of fraud that could take place within an organization, reporting fraud is only one type.  The most common type of fraud is misappropriation of assets, otherwise known as theft. There are numerous ways people have figured out how to steal assets at work, but the following list briefly summarizes a few of the more common ways:

• Stealing cash prior to the cash being deposited in the company’s bank account
• Payroll checks issued to fictitious employees
• Operating checks issued to fictitious vendors
• False claims in expense account reimbursements
• Theft of equipment or supplies
• Fraudulent financial reporting that increases incentive compensation bonuses

Important steps for your company to take

It is essential, as you manage your business in these difficult times, to remain diligent in setting up appropriate risk management procedures to minimize fraud.  Having an established plan for internal controls and not taking them for granted is an important first step.  Controls protect the organization but they also protect employees from false accusations or even simple mistakes. 

Here are a few things your management team should be doing to put a stop to fraudulent activity:

• Segregation of duties is an essential risk mitigation policy when setting up controls; 
• The same employees should not be involved in all aspects of accounting cycles (revenues, disbursements, payroll, etc.);
• Sign off controls should be in place for inventory, purchases, and equipment tags; 
• Lock and control access to certain supplies, pharmaceuticals, and other valuables;
• Make fraud awareness a part of the corporate controls structure and be proactive, not reactive when assessing and managing the internal controls environment;
•  Management should perform surprise or unpredictable tests when reviewing transactions; and 
• Cross train people so that their functions can be performed by other staff members in their absence.

Of course, the goal of a good internal controls environment is to limit the opportunities people may have to commit fraud. Learning how to read people and be aware of the risks will help your management detect issues as they arise.  If you have people that seem to be having significant personal problems, be aware of their increased potential to commit a fraudulent act.    

If you would like to discuss these matters further or if you would like to learn how we can help your company set up a plan, please contact Feeley & Driscoll's forensic accountants by Email or call 1 (888) 875-9770 to learn more.

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