Fraud in the business world Featured

7:00pm EDT December 31, 2006

The savings-and-loan industry is closely monitoring news about how a loan officer for a national bank in Cleveland allegedly stole $29 million during the past decade.

Despite comprehensive internal and external controls, companies continue to suffer substantial losses from a multitude of fraudulent schemes.

Edwin Sutherland coined the term “white-collar crime” in 1939. White-collar crime, he said, was a “crime committed by a person of respectability and high social status in the course of his occupation.” Since that time, technology, extreme financial pressures and opportunity have combined to entice once-respected employees into financial scandals.

Smart Business recently spoke with Felix Lozano III, a partner in Assurance and Advisory Services at Whitley Penn LLP, about how to identify and reduce the opportunities for business fraud.

Is fraud more prevalent than in the past, or is it simply receiving more coverage in today’s news-hungry media?

I would say ‘yes’ and ‘yes.’ When you have managements of large publicly traded companies like Enron and WorldCom engaging in fraud at a corporate level, the scale is simply staggering, and that commands greater media attention. But beyond those very public spectacles, fraud is more pervasive than people realize. It’s estimated that as much as 5 percent of the gross domestic product is lost to fraud.

What are the most common types of fraud?

According to the Association of Certified Fraud Examiners, it varies by industry. In small, cash-type businesses, ‘skimming’ the cash before it hits the till is the most common fraud. In the insurance business, fraudulent billings are the most common; and at the corporate level, concealing liabilities or expenses tops the list. But at the end of the day, the type of fraud is only limited by the perpetrator’s imagination.

What new fraud schemes are being uncovered?

The Internet opened a floodgate to new types of schemes involving identity theft. The Federal Trade Commission receives hundreds of thousands of complaints annually involving identity theft and fraudulent credit card and debit card abuse. Bank losses to credit card fraud are off the chart. What’s more, these cases are rarely prosecuted. Also, we have conducted forensic audits on companies that have suffered fraud by employees using company-issued credit cards. We see this as a growing concern in the marketplace.

What types of companies have significant exposure to fraud?

Any type of company — and not-for-profit organizations — can have significant exposure. The key issues are employees who find themselves inside what is called the ‘Fraud Triangle.’ These employees may have personal financial pressures; they may see an opportunity to steal and not get caught; and they are able to rationalize the actions they take. Then again, they may just be greedy.

What behavioral factors might indicate that an employee is committing fraud?

That’s the rub. A person can have the most gold-plated rsum you can imagine and be no different than the bartender who skims off cash at a restaurant bar. The only difference is the scale. The former CFO of Patterson-UTI Energy was recently sentenced to 25 years in prison for embezzling $77 million. His CEO testified that, before the fraud came to light, the CFO was ‘like a son to me.’

Lifestyle issues are sometimes tell-tale signs. Are they taking trips to Europe or wearing Gucci shoes on a clerk’s salary?

How has technology impacted fraud?

It’s a two-edged sword. Some sophisticated fraud diagnostic software can run on a client’s accounting system.

On the flip side, a popular accounting software package for small businesses makes it easy to commit check fraud. A perpetrator can make a check out, print it, and then go back and change the name of the payee in the ledger to that of a legitimate vendor.

Can improved hiring practices help reduce fraud?

Absolutely. Background and reference checks are essential before hiring. If there is questionable behavior, chances are it has surfaced before.

On the receiving end, think about the position in which you are placing a new hire. Is this a position of trust? If so, are the appropriate controls in place to counteract personal financial pressure of a nonshareable nature? Or can the position be redesigned so as to reduce your trust reliance on the new employee?

FELIX J. LOZANO III, CPA, CFE, is a partner in Assurance & Advisory Services at Whitley Penn LLP. Reach him at (972) 392-6640 or