Calculating Fraud Loss: What am I Forgetting?

Fraud is like a box of chocolates. Okay, maybe not, but believe me when I say that workplace fraud comes in a variety of forms. Most of the time, identifying fraud is a difficult task for any manager, owner or accountant. However, determining the true loss can, at times, be very challenging…even tricky.

In many fraud litigation cases, the loss extends beyond the actual dollar amount appropriated and results in additional economic damages. This type of calculation will help identify the opportunity costs incurred and answer the “but for” questions that arise when a business falls victim to theft or fraud. For the purposes of this article, let’s put economic damages aside and focus on the big question on everyone’s mind after a fraud has been discovered: “How much did they take?”

Depending on the type of scheme perpetrated, various elements should be considered. When conducting a fraud examination, I usually ask myself if any of the following four factors apply:

Taxes

No, I am not referring to income tax. The sneaky devils that typically come into play here are payroll taxes and sales tax. For example, a few years ago we examined a fraud scheme where the perpetrator gave themselves unauthorized pay increases and fictitious overtime hours. In calculating the theft amount, it is common to calculate the loss as the gross amount overpaid to the individual. Unfortunately, the company who paid the wages also incurred additional, and unnecessary, employer paid payroll taxes. That’s 6.2% of the gross wages for social security and 1.45% for Medicare. This additional 7.65% is a loss that can be easily overlooked.

Sales tax may also be overlooked when dealing with unauthorized purchases schemes. A common example involves a perpetrator who orders additional items through a vendor that is routinely used by the business. For instance, let’s imagine that a company buys equipment and supplies from the same vendor each month.

Let’s also imagine an employee was purchasing additional supplies and equipment for personal use. Looking through the invoices, there may be 50 items purchased, but only five of those items were fraudulent. In these instances, the portion of sales tax applied to those items may be overlooked. These are costs that otherwise would not have been incurred. This brings me to my next point.

Shipping Costs

Using the last example, shipping costs associated with any fraudulent purchases may also be neglected. Depending on the size, weight and frequency of the products fraudulently purchased, shipping costs may account for a significant portion of the loss amount.

Benefits

Benefits may be another factor to consider and are often overlooked when dealing with payroll-related schemes. Going back to my first example, when a perpetrator fraudulently inflates wages they may also receive additional benefits tied to those wages. In the case we examined, the perpetrator was receiving retirement benefits as a percentage of their wages. When they gave themselves unauthorized raises, they also received additional contributions to their retirement fund. These amounts, in addition to employer-paid payroll taxes, were included in the fraud loss suffered by the company.

Fees

Fees can be tricky as most businesses have recurring fees that can easily go unnoticed. Fraudulent disbursement schemes are typically where fees need to be addressed. Here are some examples:

  • Misuse of a company credit card resulting in additional finance charges, cash back fees or over-limit fees incurred by the organization.
  • Fraudulent check or debit card payments by a perpetrator resulting in non-sufficient funds (NSF) fees or overdraft fees.
  • Transfer fees incurred as a result of fraudulent or unauthorized transfers from company bank accounts.

No matter how cut and dry a fraud scheme may seem, all costs associated with the activity should be considered. If you or your business has been the victim of fraud, consult with a professional fraud examiner. There could be more damage than you think.

Top 5 Reasons to Conduct Pre-employment Background Checks

Conducting thorough background checks will provide your company with the necessary information to protect itself and its employees. The following are the top five reasons to conduct pre-employment background checks:

  1. Falsified Resumes

If you receive a resume that is too good to be true, it probably is. Deception on resumes commonly entails falsifying education, stretching dates to cover employment gaps, enhancing job titles, embellishing job duties and achievements, fabricating credentials or licenses and inventing employers. A pre-employment background check will verify the accuracy of the information provided on the applicant’s resume.

  1. Falsified Identification

When an applicant falsifies their identification, they are usually trying to hide something. Here are examples of information that could be hidden with an applicant providing false information:

  • Misspelling of name to avoid a past offense from being reported.
  • Invalid Social Security Number to hide an alias.
  • False address history to avoid uncovering a criminal offense that was committed in another state or county.
  • Listing an education degree that was obtained through a diploma mill to hide not having a degree.
  1. Employee Theft

Past offenders have a greater tendency to recommit a crime; therefore a proactive pre-employment background check will uncover past criminal offenses and help protect your organization. The following fraudulent activities are commonly found in the workplace:

  • Skimming – Taking cash/check payments before they are entered into the accounting system and reporting fewer sales than actually turned in.
  • Lapping – Taking a customer’s cash/check payment and covering the theft by applying a different customer’s cash/payment to the account.
  • Fictitious Vendors – Submitting invoices for payment from a fictitious vendor.
  • Fraudulent Check Disbursements – Producing checks to non-business related payees or altering checks.
  • Ghost Employee Schemes – Setting up an employee in the payroll system that does not exist.
  • Theft and Sale of Inventory – Employees taking inventory without authorization and selling for personal gain.
  • Submission of False/Fictitious Expense Reimbursements – Employees submitting expense reports for items already covered by a company credit card or items not allowable for reimbursement per the policy manual.
  • Padding of Hours – Employees lying on timesheets.
  • Improper Use of Company Credit Card – Employees using company credit cards for non-business expenses.
  1. Reduction in Turnover Costs

Verifying the truth and determining what is embellished on an application/resume will help you choose the best candidate for the job and minimize your turnover rate. Hiring the right person prevents:

  • Restarting the hiring process.
  • Loss of income due to the position being vacant.
  • Lost customers.
  • Low morale of staff.
  • Prevents high turnover rate.
  • Damage to professional reputation.
  • Training of a new employee.
  1. Negligent Hiring

Negligent hiring defined as the failure to properly screen employees, resulting in the hiring of someone with a history of violent or criminal acts. It is important to remember that negligent hiring is a legal doctrine and employers are responsible and liable for the destructive actions of employees when due diligence (conducting background checks) would have revealed the employees’ propensity to commit such actions.