Fraud: Current Trends and Information

Trillions of dollars of revenue worldwide is lost due to fraud. According to the Association of Certified Fraud Examiners 2016 Report to the Nations on Occupational Fraud and Abuse, 5 percent of annual revenues are lost to fraud–that is $3.7 trillion worldwide. While the median loss was $150,000, 23 percent of cases involved losses of greater than $1 million. Typically, smaller organizations suffer the larger losses. It is important to be aware of the current trends in fraud so your company can avoid occupational fraud and abuse.

In 83 percent of fraud cases, the fraud involved asset misappropriation. Most frequently victimized were private companies and those in the banking and financial services industry. While employees were typically the perpetrators, owners and executives were the ones who generated the largest fraud losses. The primary weakness in many of these cases was lack of internal controls.

An example of poor controls in a small business can be seen in an actual fraud examination performed by Eide Bailly. The bookkeeper for a tile company was responsible for daily tasks including collecting sales receipts, completing deposit slips and making deposits. After a period of time, the bookkeeper began to remove checks and hid them in her desk. Later, when the daily sales included an amount of cash that matched one or several of the checks which had been set aside, the bookkeeper exchanged the cash for checks and made the daily deposit. No one in the company was aware the cash was missing until it was discovered revenue numbers would not reconcile. By the end of the scheme, the business lost more than $150,000.

Some simple controls could have prevented this scheme. Businesses should consider:

  • Using a hotline
    One way to stay on top of fraud cases is through the utilization of a hotline. More than a third—39.1 percent—of fraud cases were detected by a tip line, and in 51.5 percent of cases, employees were the source of the tip. Organizations with a hotline are 50 percent quicker at detecting fraud. Hotlines are beneficial for both the employer and the employee due to ease and anonymity.
  • Establishing preventative controls
    Preventive controls include deterring or preventing unauthorized transactions, requiring proper authorization, and instilling physical safeguards such as locks, keys and passwords. Another important preventative control is segregation of duties. Proper segregation of duties is imperative because when one person controls multiple phases of a transaction, the opportunity for fraud increases significantly. Nearly two-thirds of all frauds are committed by one person acting alone. By involving at least one other person, the risk of fraud can be greatly reduced. For example, having a second individual involved in documenting and verifying vendors can impact someone’s ability to introduce a false vendor into the company’s A/P process. One person documents the vendor’s information and a second individual then vets the vendors’ information prior to entering it into the company’s A/P system. This simple control can keep someone from submitting false invoices for services never rendered or requested. In one of our previous examinations, an A/P clerk used this specific scheme to embezzle $170,000.
  • Establishing detective controls
    Detective controls include independent checks to ensure that transactions have proper authority and are recorded correctly. For example, rotating job duties, a mandatory vacation requirement, and surprise audits are effective detective controls. Assuring adequate documentation and records are maintained is also an important detective control. Procedures should be implemented to ensure these detective controls are in place.

With appropriate measures in place, you can successfully decrease the risk of fraud in your workplace. While most frauds are uncovered by accident, it is important to remember to not overlook the most obvious signs. If you suspect fraudulent activity, employ the skills of a forensic accountant for detection and investigation.

The Financial Motivation to Commit a Crime

I previously presented at the International Association of Arson Investigators (IAAI) conference to fire investigators, insurance claims adjusters and county attorneys. My presentation was focused on determining/identifying financial motives for arson, or for that matter, any crime where the motive appears to involve financial gain. The process used by accounting professionals to identify motive is referred to as financial forensics.

Financial forensics is defined as a financial analysis and examination used to assist in the determination of a possible motive to commit a crime/fraud. A key element in the investigation of a financially-motivated crime is gaining an understanding of the perspective of the possible culprit. For example, the culprit may ask: “Does the relief from personal financial pressure outweigh the cost (risk) of prison, continued financial hardship and even the cost of damaging my own moral compass?”

Capture

The Fraud Triangle describes three elements present when a financial crime is committed: pressure, opportunity and rationalization. The analyses performed by fraud investigators focuses on the pressure(s) present in an individual’s life causing them to commit an act they may not normally commit. What were the financial pressures leading up to the event, on the event date and/or following the event? The following circumstances may lead to deteriorating financial condition and may create a financial motive to commit a crime:

  • Marital dissolution
  • Substance abuse
  • Addictive behaviors (gambling, shopping, collecting)
  • Bankruptcy/Insolvency
  • Loss of income (job)
  • Unpaid taxes
  • Insured arrested/attorney fees needed
  • Recent business partner split or dissolution

 

 

Case in point

In 2003, fraud investigators from Eide Bailly were asked to review the personal financial position of a woman who was accused of shooting and killing her boyfriend. The prosecutor and the investigating law enforcement agency suspected the crime was financially motivated. Eide Bailly’s fraud investigators reviewed the woman’s finances. Our findings indicated that leading up the event, the woman had amassed $37,000 in credit card debt with expenses exceeding her income by $52,000. The State was also able to demonstrate that the credit cards and associated debt were in her boyfriend’s name without his knowledge. In addition, the credit card statements were sent to a Post Office Box of which she had had the only access. The belief was that the victim/boyfriend was close to, or had discovered, these financial forgeries and debts, which ultimately led to his eventual murder. The culprit was found guilty and sentenced to thirty-five years in prison.

In 2010, Eide Bailly was retained by an insurance company to review and examine financial accounts for a business owner who lost his home and two at-home businesses due to suspected arson. Our fraud investigators’ analyses and financial trending charts showed an increasing number of delinquent payments, increasing amounts of debt and personal insolvency as of the date of the fire. In addition, our fraud investigators included in their analysis a projection of the financial position the business owner would have been in six months following the fire, if the fire had not occurred. The case never proceeded to trial, and our financial motive theory was never tested. However, the insured ultimately settled for an amount far less than their coverage.

It is also important to note that personal enrichment, also known as greed, is sometimes the sole motivation for financial crimes; not all financial crimes include the presence of financial pressure. Often times, these financially motivated crimes are easier to prove.

Fraud Facts

Fraud Facts

Eide Bailly’s Forensic Accounting team provides services in preventing, detecting and investigating fraudulent behavior and financial crimes. Our services include fraud detection and investigation, internal controls examinations, fraud awareness training, employee background checks and hotline reporting.