Look who is cheating your company

Despite intense efforts to stamp out corruption, misappropriation of assets and fraudulent financial reporting, sophisticated criminals, dishonest employees or a combination of the two, continue to represent a real threat to the assets and reputation of any company. In the workplace, incidents of fraud are greater than ever. In a recent survey conducted by KPMG among the largest organizations across public and private sectors in Australia and New Zealand, total value of fraud reported is $154.9 million with an average value for each company of $714,000. Are you certain your company is not a victim?

Because of this problem, companies are implementing tighter controls and broader oversight. At the same time the accounting profession has adopted more rigorous auditing standards and procedures, and software developers are adding continuous monitoring features to back-office systems. It remains unclear whether these efforts are sufficient to mitigate the fraud problem.

Anatomy of fraud

To have a clear understanding of fraud, we need a clear definition of what fraud is.

In its simplest terms, fraud is a deliberate misrepresentation which causes another person to suffer damages, usually monetary losses. The term is used to describe such acts as deception, bribery, forgery, extortion, corruption, theft, conspiracy, embezzlement, misappropriation, false representation, concealment of material facts and collusion.

There are three elements of fraud: (1) a material false statement made with an intent to deceive; (2) a victim’s reliance on the statement and (3) damages or losses suffered by the victim.

Broadly speaking there are two types of fraud in the workplace — fraudulent financial reporting and misappropriation of assets. The former is usually committed by senior officials or management and involves altering financial statements. The latter is far more widespread and can be committed at any level by any employee — and in many different ways. This could range from simple theft of company supplies to false invoicing, lapping and kiting to the more sophisticated types of computer fraud.

Current literature abounds explaining why fraud occurs.  For example, research studies suggest fraud is more likely to occur when (1) someone has an incentive (pressure) to commit fraud, (2) there are weak controls or oversight which provide an opportunity for the person to commit fraud, and (3) the person can rationalize the fraudulent behavior (attitude).

This three-pronged framework, commonly known in fraud literature as the “fraud triangle,” has long been a useful tool for CPAs seeking to understand and manage fraud risks. The framework has been formally adopted by the accounting profession as part of SAS 99 “Consideration of Fraud”.

Profile of the perpetrators

Who are those who commit fraud?  What are their general characteristics? Based on a survey conducted by KPMG in 2004 among the top companies in the Philippines, the following is a profile of fraud perpetrators:

• They are male. Seventy-seven percent of the fraudsters were male.

• They are young. Seventy-eight percent were 26 to 40 years old. Being young, they are mostly risk takers and impatient. They are not afraid to fail and like to take shortcuts.

• They have been in the company for two to five years and have an annual income range of P100,000 to P500,000.

• They are college graduates and intelligent. 70 percent were college graduates. Many of them committed fraud for the challenge because they are bored with their job.

• Fifty-eight percent have never been charged or convicted of any crimes before they committed them while six percent of the fraudsters have been previously charged although not convicted. Because they have been pretty successful, one fraud has led to another, and a pattern is begun.

Interestingly, 23 percent of the companies surveyed said they have no knowledge of the criminal history of the fraudsters which indicates a possible gap in their screening procedures.

What to do in the event of fraud

So you think you’re a victim of fraud in your company, then the question is now what? Is it time to play “detective” and resolve the matter internally and recover the losses you’ve suffered?  Take it easy, it is far more complex and risky than you think and remember, the burden of proof lies entirely on you.

The following simple reminders are supplied to assist in the initial discovery of suspicion of a fraud:

Do not:

• Panic. Stay calm.  Stall for time. You need to think things over and learn important facts and plan well your next steps. You should proceed with skill, caution and confidentiality.

• Immediately confront the suspects — You will need to consider whether you should suspend any individuals that you suspect may have been involved. Remember nobody has been found guilty of anything yet.  Any move you plan to do should always be done in accordance with the company’s procedures.

• Interview any suspects on the matters under investigation unless you are qualified to do so. In most circumstances the first opportunity to do this will be in the disciplinary hearing held in accordance with your company’s disciplinary procedure. You may wish to interview other staff, but you should ensure that the results are capable of being used in any further investigations or hearings. As a consequence you may wish to engage specialists to undertake this or other aspects of the investigation.

• Limit the scope of your concerns to a specific issue - Stay focused on the facts.

Do:

• Maintain objectivity in your assessment. In addition, also critical here are: keeping the employee informed, exercising discretion in discussing the investigation, independently corroborating the facts and using the right investigative tools.

• Limit the number of individuals with whom you discuss your suspicions. Gossip both within and outside your company can be very damaging.

• Carefully preserve any evidence by removing access to documents and electronic media — The immediate thing that must be done is to secure the evidence as completely as possible. Suspects should not be allowed access to anything that they may possibly alter so as to enable them to hide their guilt and they should be discreetly escorted from the company premises by a suitable senior individual

• Call in the professionals — It is important that you get advice from somebody experienced in these matters at the earliest opportunity.

Most businesses which have been hit by fraud were unaware of it happening until it was too late. Don’t let this happen to you.  Start weeding out the pests and prevent opportunists by taking a closer look at your workforce.

(John S. Bala  is a Partner for Business Financial Advisory  Services of  Manabat & Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email [email protected] or [email protected]).