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Protect yourself by understanding, identifying risks and not letting your personal feelings get in the way
By Betty Lin-Fisher Beacon Journal business writer
Published on Monday, Nov 26, 2007
Think of corporate fraud and most likely you'll recall big names in the news — executives who bilked companies and investors of millions of dollars.
But corporate fraud happens to businesses of all sizes, including small businesses and even nonprofit organizations.
And it happens in a lot of scenarios — from stealing cash or equipment to working with an outside vendor to steal from the company.
According to a study last year by the Association of Certified Fraud Examiners, occupational fraud and abuse caused a median loss of $159,000. Nearly one-quarter of the cases caused at least $1 million in losses and nine caused losses of $1 billion or more.
Small-business losses to corporate fraud are disproportionately larger, according to the report: The median loss suffered by a small business with fewer than 100 employees was $190,000 per scheme.
With small businesses, often the boss lets his or her guard down, said Ray Dunkle, a certified public accountant with the Akron firm Brockman, Coats, Gedelian & Co. Dunkle also is a certified fraud examiner through the Association of Certified Fraud Examiners.
''It's nice people who you think are honest and hardworking. You're glad you have them in your office and you would hate to see them go,'' said Dunkle, who specializes in corporate fraud investigations.
When Dunkle sits down with an owner whose business has been the victim of fraud, ''They never say to you, from the first interview, I thought he was going to steal from me.''
Small businesses are more susceptible to corporate fraud because of the circumstances owners put themselves in, said George P. Farragher, executive director in Ernst & Young's Fraud Investigation & Dispute Services practice.
''They trust the bookkeeper, who's been there for 30 years. He or she is known by the family members. Or the guy who is doing the buying — he's been here for 25 years and by the way, he's very close friends with the vendors and they go golfing with each other on Thursday nights. (Fraud) is not on
their radar screens,'' said Farragher, who is based in Cleveland and also is a regent on the board of the Association of Certified Fraud Examiners.
''You've got to protect yourself. Don't let your personal feelings get in the way of your business sense,'' he said.
Fraud isn't always perpetrated by just one person. It could be more than one person inside a business. Farragher said there are even what he calls ''predatory vendors'' — people who work with a buyer at a company over time and slowly persuade the buyer to overbill the company and pocket some of the cash or commit some other fraud.
Balancing act
So how does a business owner, particularly in a small-business setting, balance being proactive about avoiding corporate fraud against getting paranoid that every employee is stealing from the company?
It's all in the preparation, Farragher said. If you work with someone to understand and identify your risks, then you'd know where to focus your time and look for indicators, he said.
''It doesn't have to be going in there and checking the desks every night when employees leave. If you have a bookkeeper who you have a lot of trust in and all of the sudden she's living a flamboyant life and going on vacations, you may want to look at that,'' Farragher said.
But sometimes the person who is defrauding you is not making it obvious.
The typical profile is someone who hasn't committed a crime before, is an employee who has been around three to five years, is not antisocial and generally is a junior manager, said Dunkle, although Farragher said the profile can vary by industry.
Typically, a fraudster is a man, though Dunkle said he has seen examples women committing fraud as well.
There are three elements for a person to commit a fraud: motivation or pressure, opportunity and rationalization, Farragher said. It's often referred to as a ''fraud triangle,'' Dunkle said.
There's some sort of pressure, such as high levels of debt (overspending on a credit card, living beyond a person's means, etc.), drug, alcohol or gambling abuse, an extramarital affair (trying to wine and dine two people) or not feeling appreciated at the office (''I'm not paid what I'm worth, so I'll take some more'').
Then there's the opportunity — the boss has put too much trust in the person or has not taken the proper proactive steps, such as reviewing bank statements instead of having them sent directly to the accounting department. Often, accounting departments are hotbeds of fraud because they have the easiest access to the money and books, Dunkle said.
The last element is rationalization. Either the person thinks no one will get hurt, it's only temporary or says, ''I'll pay it back.''
Be proactive
In the past, fraud examiners typically were called in after a fraud happened, but more recently some companies are asking experts to come in regularly, to be proactive.
''To spend some money to look at your company from an anti-fraud perspective is money well spent,'' said Farragher, who also suggests finding a certified examiner through his association.
Said Dunkle: ''I don't know of any business owners that haven't invested in fire insurance, but the odds are they will never use it and they know that. Very few business owners have invested in fraud prevention, but the odds are they will fall victim to fraud.''
Betty Lin-Fisher can be reached at
330-996-3724 or blinfisher@
thebeaconjournal.com.
Think of corporate fraud and most likely you'll recall big names in the news — executives who bilked companies and investors of millions of dollars.
Get the full article here.
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