Fraudsters Prey on Corporate Coffers

CUNA’s E-Scan Website
July 7, 2010 | COMMENTS

Internal fraud is a constant concern for credit unions, but plenty of other firms are losing money in the worst possible way — through theft. Companies that fell victim to fraud in recent years suffered a median loss of $160,000, according to a biannual study from the Association of Certified Fraud Examiners (ACFE). Twenty-five percent of the nearly 2,000 cases examined involved a loss of $1 million or more.

Those figures, reported on CFO.com, are based on nearly 2,000 respondents, 60% of whom were from the United States, who detailed the single biggest fraud they investigated between January 2008 and December 2009.

As for how the scams were detected, the results aren't heartening. The cases lasted a median of 18 months before being exposed, and fewer than 5% were detected by external audit firms. But don't blame those firms, cautions report co-author and ACFE general counsel John Warren. "Fraud is not an accounting issue, it's a human issue," he says.

Among the study's findings:

• The most effective fraud-prevention tactics were "non-accounting controls," such as hotlines and training-and-support programs for both employees and managers.
• Of the top eight controls ranked by effectiveness, only one—the surprise audit, which cut fraud losses by 51%—is part of the traditional accounting-based control structure.
• Financial-statement review, internal audits, and certifications by CEOs and CFOs all ranked below the non-accounting controls in terms of effectiveness in preventing fraud.

If auditors are going to do a better job, they're going to need better training. So says Sam Antar, former CFO of Crazy Eddie Inc. and a convicted felon who now consults with companies and federal law-enforcement agencies on white collar crime prevention.

"Auditors are trained to look for bookkeeping errors," Antar. "They're not required to take a single course in forensic accounting or criminology."

For now, the most common method of catching a fraudster is a tip-off, according to the ACFE. In fact, tips expose fraud three times as often as do management reviews, internal audits, or account reconciliations.

Informants usually fall into one of three categories: ex-lovers, ex-employees, and ex–business partners, says Antar, whose own inflation of sales figures, money laundering, and inventory fraud was revealed via a tip.

Internal informants also provide tips, but the ACFE's Warren says that in many cases an unsupportive corporate culture and poor employee training leave potential whistle-blowers unsure of whom to talk to, how to report a suspected crime, or just "afraid of retaliation."

That fear is justified, Antar says, as criminals “don't go down without a fight." To fight back, companies may need to raise the level of their own game, or say goodbye to losses that the ACFE says typically equal 5% of company revenue.

This article originally appeared on CUNA's E-Scan Online Research & Advice Portal. Reprinted with permission.