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 firstname.lastname@example.org.