According to the Web site for the
Federal Bureau of Investigation, corporate fraud cases have risen every
year since 2002. For fiscal year 2006, the
FBI investigated 490 corporate fraud cases
resulting in 171 indictments and 124 convictions of corporate criminals.
By definition, management fraud
involves falsifying financial information for
the benefit of the person committing the
crime. This includes false transactions and
accounting entries, bogus trades, and self-dealing by corporate insiders, including
insider trading, kickbacks, backdating of
executive stock options, misuse of corporate property for personal gain and individual tax violations.
Smart Business asked Theresa Mack,
CPA, for warning signs that management
fraud is taking place. Mack, a former special agent of the FBI, is senior manager,
investigations, for Cendrowski Corporate
Advisors LLC, based in Bloomfield Hills.
What are the most telling signs that fraud is
occurring?
Indicators usually exist before the crime
is apparent. After the fact, people often
look back and realize the signs were there.
Perhaps the person was heavily in debt, living beyond their means, had expensive
habits, spent a great deal of time socializing
or had a problem with drinking, gambling
or drugs. Maybe there was a change in his
or her behavior. Perhaps there were family
or emotional problems and the person
started showing signs of desperation.
Sometimes there are job performance
problems — but not always.
What are some of the personal attributes
associated with people who commit management fraud?
They are very self-centered. Their opinion of success equals money. They place a
high value on money, and as such, they
don’t treat people so much as humans, but
more as tools they can use to achieve financial success. They are flashy and like to display their wealth. They also feel they are
above being held accountable either
because of their position or stature. They waive or override internal controls
because they reason, ‘they don’t apply to
me.’ They are usually in high positions
within their organizations and usually take
someone in their confidence. However,
having certain personal attributes is not a
sole indication that someone is more likely
to commit fraud than others. It does occur
that an individual who suffered a catastrophic loss in his or her own mind, say
large stock losses or other financial losses,
that he or she feels compelled to commit
fraud in order to recoup the lost funds.
Of these, which are the most prevailing?
That the person lives above and beyond
his or her means. Fraud is about greed.
Those who commit fraud are very caught
up in their need for money. This need
drives many individuals. There are some
cases where people will rationalize what
they are doing — say because they need
money to help a sick relative — but the
norm is people who want more than they
can afford.
Once fraud is suspected, what is the next step?
The company should retain an experienced, outside professional to conduct an investigation. This firm will review the
company’s processes; conduct a thorough
background investigation of the person
suspected; and interview anyone involved
to gather more evidence. While reviewing
the company’s processes, the investigator
will examine A/P, A/R, purchasing, payroll,
cash receipts, inventory. They are looking
for the ‘holes’ to figure out how the person
defrauded the company.
During the background investigation, the
examiner will look at the person’s standard
of living, assets, indebtedness. What is this
person all about? Do they have vacation
homes, boats, expensive and/or numerous
vehicles? Are there any judgments, legal
problems? Are they being sued? There is a
great deal you can access through public
records on the Internet. The investigators
will find out everything they can before the
company confronts the suspect. This is just
an overview of the areas to examine, it is
not at all restricted to this, but rather each
case is treated differently on a case-by-case
basis due to the circumstances.
What can companies do to help prevent fraud
in the first place?
Strong internal controls are the biggest
factor in deterring fraud. Have your internal controls assessed by an outside, independent firm. The firm will ensure there
are enough controls in place and that there
are no holes and gaps. Equally important is
a culture that does not condone fraud —
one that requires internal controls to be
adhered to. A code of ethics should be
maintained from the top down. When the
ethics are violated, make sure there are
serious repercussions and that everyone
knows it. In today’s business climate, all
owners and board members need to have
an in-depth knowledge of how the company runs. A hands-off approach no longer
works. Too much is at stake.
THERESA MACK, CPA, is senior manager, investigations, with
Cendrowski Corporate Advisors LLC, Bloomfield Hills. Reach her
at (248) 540-5760 or [email protected].
