April 16, 2015

I recently read an article about a utilities provider in Bristol, Virginia, that is picking up the pieces and investigating the depth of an alleged fraud that officials believe spanned 8 years. This story is a great example of the power of hotlines, but not necessarily from the point of view you might expect (or have read from me in the past).

The scheme involved two former executives of the utility and two former contractors hired by the utility to help them build out their fiber-optic cable network. The executives allegedly conspired with the contractors to defraud the utility of more than $1 million over a period of 8 years.

It all allegedly started in 2006, when an executive asked a contractor to make kickback payments to a shell company owned by him in exchange for the utility’s business. This went on for over three years until that utility executive retired. You might think that the scheme would stop there, but a year later it started up again when the executive’s replacement picked up where he left off. The scheme was so effective it basically got handed down to the next generation, either by intent or by word of mouth.

Kickbacks, which fall into the often overlooked fraud category called corruption by the Association of Certified Fraud Examiners, are one of the most difficult forms of fraud to detect. The kickback payment typically leaves very little in the form of a paper trail in the company’s accounting records, so personnel inside the company won’t usually detect it.

In this case, the utility had an anonymous tip line in place, but it wasn’t utilized or well known. In the aftermath of the fraud case, the utility has come out and publicized the existence and importance of this resource. From the article (published on Tricities.com ), an executive said, “The gifts [the executive] allegedly got are against our policy, but we didn’t have a mechanism in place to catch his conduct.” He went on to say, “We’re going to do some type of code of conduct with contractors so they know what we expect and, also, they know — if they’re being asked to give these kickbacks – who they contact to get out of that process…If they want to do things the right way, they know they have a partner.”

Particularly in certain industries, like those that have significant contracted projects with bidding arrangements, the incentive and opportunity are strong for a kickback scheme. The need for an anonymous reporting mechanism – one that is published and discussed not only to internal employees but to every contracted vendor as well – is really pronounced in these cases. Like most fraud cases, someone probably knew this was going on, but they didn’t know where to turn to get it off their chest.

This utility’s risk assessment process should have identified kickbacks as an inherent risk to its industry and one that could both have a significant financial loss and a higher likelihood of occurrence. This would be a red-hot risk for which specific resources would need to be devoted. From the sounds of it, the control was available for the utility but the connection between the risk and the control wasn’t strong.

An anonymous hotline is a really powerful tool for a company to use in its fraud prevention program. However, it must be deployed to address specific risks that fit the risk profile. These resources aren’t just for employees…they are for vendors and customers as well.

To learn more about hotlines or to see an example, contact me or visit the Clark Nuber Fraud Reporting Center (an anonymous hotline service hosted by Clark Nuber).

© Clark Nuber PS and Focus on Fraud, 2015. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Focus on Fraud with appropriate and specific direction to the original content.

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.