For some years now, my colleagues and I have been busy speaking at conferences virtually about fraud and fraud prevention. In a spoof of the Academy Awards, we would count down the top 10 fraudsters of the year and present them with their “Fraudie” award, then discuss lessons learned from each fraud.
We customized this to be specific for governmental entities, not-for-profits, and private companies. However, what I have come to realize after three years of doing this is that it didn’t matter which sector I was speaking about or which year I was looking at, there were certain recurring themes. Below, I’ve gathered those common trends that I’d like to share with you:
1. Certain Fraud Schemes Make the List Repeatedly
Running Personal Purchases Through the Organization
This is accomplished in a variety of ways. The simplest method involves fraudsters charging their personal expenses on company credit cards. The most frequent abuses are purchases of gift cards (usually nice round numbers ending in five or zero) or gas purchases. We are also seeing an increase in charges to online services such as PayPal, eBay, Zelle, Venmo, Apple Pay, Amazon, Walmart, etc. in an attempt to obscure the nature of the purchase.
Additionally, we see personal invoices run through the check disbursement process as business expenses. One “Fraudie” winner charged her organization for her personal moving expenses, home cleaning, divorce lawyer, home remodeling, and travel for her family to Poland, Germany, Thailand, Canada, Florida, New York, and Texas.
Employees make up fake companies then run invoices from these companies through the check disbursement process. These fake companies are also used to inflate costs on legitimate purchases. An employee orders needed goods from a legitimate vendor, then submits inflated invoices from the fake company to the organization for these goods and pockets the markup. One example is a not-for-profit executive director that set up a fake company to act as general manager of a construction project, then inflated construction invoices by $885,000.
Checks or Wires to Self
Some fraudsters lack imagination or are confident that no one is watching what they are doing. They’ll write checks to themselves or wire money directly out of bank accounts to their personal accounts. Sometimes they will change the payee in the general ledger to a legitimate vendor to try to cover up the theft. One offender had a gambling problem and made cash draws on the organization’s credit card while at a casino.
This can happen in a variety of ways, including inflating the pay rate, having negative or zero amounts for deductions, getting two paychecks, inflating overtime, or creating ghost employees.
One city manager inflated his pay from $69,000 to $287,000. He needed an accomplice to make this happen, so he colluded with the finance officer who raised her pay from $59,000 to $216,000. Working together they were able to keep this from the Board in the financial reports and budget.
2. Fraud Isn’t Just for Accountants
Recent culprits include a water district executive director who stole $25 million of federal water and a school cafeteria manager who stole $1.5 million of chicken wings from a school district — even though the district doesn’t allow chicken wings in schools because of the choking hazard of the bones.
There was an IT director who stole $1 million by submitting invoices from two fake companies for services never performed, and a department head who stole $1.7 million by purchasing equipment then selling it and keeping the proceeds. Unbelievably, there was even a university program manager who purchased $11.5 million of Visa gift cards by charging them to other departments, then spent them on salacious websites.
3. Too Much Control Over a Process is a Frequent Cause
Regardless of whether your organization is large or small, an independent employee needs to be looking at reconciliations, especially for bank statements, the payroll register, and credit card statements. Remember that others outside of accounting staff have the ability to commit fraud. Think about controls over procurement and safeguarding property, equipment, and other noncash items that may be of value (like the chicken wings, computers, or Visa gift cards mentioned in the examples above). Allowing these areas to go unchecked is inviting malfeasance.
4. Frauds Start Small
Many of our “Fraudie” winners made the list because they were allowed to steal over an extended period before they were caught. Most cases of fraud start small, but as the perpetrators become more confident that no one is looking, they ratchet up the amounts stolen each year. This can make it difficult to catch in the budgeting process.
It often takes a combination of controls to detect these frauds, which brings me to my final point:
5. A Whistleblower Policy Can Catch Many Fraud Cases Sooner
The Association of Certified Fraud Examiners has been putting out biennial studies about fraud since the mid-90s. In every one of those studies, the number one way fraud is caught is by another employee seeing something and reporting it. Thus, you’ll want to put a process in place to make it as easy as possible for employees to speak up, such as with a whistleblower policy. This policy is communicated to all employees and tells them what to do if they suspect something. It also states that they will be protected from retaliation for coming forward.
My hope in pulling these trends together for you is that you consider them and assess how they might apply to your organization. More importantly, my other hope is to never have to present someone in your organization with a “Fraudie” someday.
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