This is part one in a series of several installments on the subject of fraud. This first installment asks who commits fraud. Future installments will discuss ways to prevent fraud, how to find fraud and what to do when it is found. -DP
The challenge for capitalism is that the things that breed trust also breed the environment for fraud.
- James Surowieki
The famous comic book investigator, Fearless Fosdick* heard a rumor. His arch enemy Anyface* was back in town. And Fearless knew where Anyface was going to be. With a knowing smile, Fearless grabbed his gun, went to the busy street corner at the allotted time, sat on a bench and awaited the fateful appearance of Anyface.
Now, Anyface had gained his moniker appropriately - he was such a master of disguise that you could never tell who he was. Fearless had a plan, though. He pulled his gun and shot every person that passed his corner. He saw a businessman and shot him. He saw a housewife and shot her. A priest. A librarian. A banker. All shot.
Satisfied that he must have killed Anyface, Fearless smiled and left the scene, walking over his victims and fully self-assured that the ends justified the means.
After Fearless is gone, though, the bench he sat on gets up and walks away.
Fraud is insidious and evil. It can take many forms and I have seen it turn otherwise trusting business owners into bitter, angry tyrants. And often, even after going on a rampage where nobody but the most trusted are left standing, the object of their frustration remains right under them. In Fosdick's case, Anyface was quite literally beneath him and he never knew it.
The reason I start with Fearless is that fraud can happen at any time to any business and can be perpetrated by any employee, subcontractor, vendor or customer you deal with.
Management and business owners are not exempt from committing fraud, either. It is not uncommon for them to commit fraud against lenders, investors and regulatory agencies.
What is Fraud?
According to the Association of Certified Fraud Examiners (ACFE), fraud is an intentional act of deceit that results in a perpetrator gaining an unfair advantage over another person. Legally, for an act to be fraudulent, there must be:
a. A false statement, representation or disclosure,
b. A material fact which induces a person to act,
c. An intent to deceive,
d. A justifiable reliance;
e. An injury or loss is suffered by the victim.
Direct or indirect financial benefit is usually the reason people commit fraud and the result is always some sort of injury to another person's rights or interests. This can take the form of false or misleading information, obfuscation of the truth, outright lies, tricks, confidence schemes, outright theft and misappropriation of assets. The costs are measured in the loss of assets, revenues or reserves.
The ACFE prepares a bi-annual report on occupational fraud. The 2012 version studied 1,388 cases and highlighted a group of very interesting statistics:
- The average business lost 5% of its gross income to fraud,
- The median occupational fraud lasted 18 months and cost the company $140,000,
- Frauds committed by high level employees or owners are almost always more expensive than others - in fact, they were triple the average loss,
- 20% of the frauds studied caused more than a million dollars in losses,
- 77% of the frauds were committed by employees in the following departments: accounting, operations, sales, executive, customer service and purchasing,
- Prior to the fraud, 85% of the perpetrators had never been convicted or had their employment terminated because of fraud,
- And, in my mind one of the most compelling statistics; 27% of all frauds were committed by employees that have been with the business for more than 10 years. This means that many times, those that you think you can trust most are the ones you need to watch the closest.
The National Center for Crime Data also released the following statistics:
- 80% of the frauds they studied were the work of insiders,
- 30% of all business failures are caused by fraud,
- At one point in time, 45 of the 100 largest military suppliers were under investigation for fraud,
- 44% of all restaurant employees admit to stealing food or money from their employers.
Characteristics of the perpetrators
- Living beyond their means: The accounts payable clerk that drives the Porsche or takes exotic vacations every year may bear watching.
- Experiencing financial difficulties: Collection calls, levies, garnishments are all red flags that these folks may be desperate.
- Exhibiting control issues or protectiveness about their work: Classic red flag.
- Unusually close association with vendors or customers: They may like him for a reason.
- Over-the-top deal-maker: This guy can convince you of anything and may be willing to fudge everything.
- Divorce or family problems: This can cause similar types of desperation to the ones with financial difficulties.
- Irritability, suspiciousness or defensiveness: Speaks for itself.
- Addiction problems: This is an unfortunate and insidious problem that causes a different type of desperation in people and has to be confronted if it becomes known.
- Refusal to take vacations: There is a reason they don't want to be gone.
- A discontent, whether vocal about it or not: They mentally justify their behavior because they are getting back at YOU.
- An overly enthusiastic person who tells you not to worry and that they can do it all: They can't do it all and you shouldn't let them try.
Much as Fearless had to fear everybody on the street corner, these statistics and characteristics may make you feel like you have to fear everybody you work with. However, these are just signs to watch for and hopefully I have been able to help you start to think about your organization as well as your employees. Unfortunately, it is a matter of keeping an eye on everyone and still trying to enjoy relationships with them. In the future installments of this series, I will hopefully give you some tools that will help you sleep at night knowing that you have covered your bases adequately enough.
*Fearless Fosdick was a comic strip within the Li'l Abner comic strip that was published for several decades. It was originally a parody of the Dick Tracy series, but grew to have its own following due to the heavy dose of satire that the author (Al Capp) injected into the strip.
My re-telling of this episode is based on an old memory, so it may not be exact. I am happy to accept edits if there is anyone out there that has the original.