Help Your Clients Detect Fraud

The Association of Certified Fraud Examiners’ “Report to the Nations – 2022 Global Fraud Study” revealed how occupational fraud is detected in business[1]. Occupational fraud occurs when an employee, manager, or executive of an organization deceives the organization through various illegal means, including the misappropriation of assets.

There are two methods of detection, passive and active. The passive methods generally result in longer-term schemes and are associated with higher median losses. These include notification by police, by accident, or by a fraudster’s confession. The active methods of detection involve processes or efforts designed to detect fraud that are shorter in duration and lower median losses. These include document examination or internal audit, reconciliation of cash and credit cards, employee training, monitoring financial statements, and hotlines.

The data highlights that when fraud is detected proactively, it tends to be caught more quickly and results in lower losses; in contrast, passive detection results in longer-lasting schemes and increased financial damage to the victim.

Occupational fraud cases detected from whistleblowers based on the size of the organizations include 33% seen from organizations with less than 100 employees and 44% from those with more than 100 employees. Currently, most tips are from emails, web-based reporting forms are second, telephone tips are third, and letters mailed to the organization are fourth.

Not all tips about suspected fraud are reported through a formal reporting mechanism. 30% of reports are made informally to individuals within the organization, such as their direct supervisors. But this study also clarifies that whistleblowers may reach out to various parties, such as executives, internal audit, fraud investigation teams, or their coworkers.

Because almost anyone in an organization could potentially receive a report, it is essential all staff is provided with training and guidance on how fraud allegations are handled within the organization and what to do if they receive a report about suspected fraud.

The most significant difference involves corruption, which is much more prevalent in larger organizations than smaller ones (54% and 24%, respectively). Misappropriation of noncash assets was also more than twice as common in larger organizations. Only two schemes occurred more frequently in smaller organizations than larger organizations: skimming and check and payment tampering.

Case Study: Theft by Controller Confirmed

A trusted long-term employee, a controller, embezzled a family-owned small business. He was abrupt and intimidating with employees and management and controlled the company’s finances. He set up a system wherein he paid vendors by check through Quickbooks. After cutting a check, he destroyed the invoices that documented the transaction, claiming it was per IRS regulations. He used this same system to help himself and his co-conspirator to money belonging to the company. His scheme was to write a check to himself and his associate and change the payee on the Quickbooks records to show that the payment was a draw taken by the owner. He employed this scheme for three years and accelerated it when he found out the owner’s son was studying accounting at the local university with the goal of providing oversight of the accounting system.

For months the owner suspected something was wrong because his bank account balance was not as large as he thought it should be, but because he trusted the controller, he dismissed his concerns. When the controller took a vacation and another employee stepped in to prepare checks for vendors, it quickly became apparent that something was wrong.

The company’s attorney called Sage Investigations in, and our investigator found it very strange that invoices were routinely destroyed. Our investigator immediately examined the controller’s Quickbooks files, specifically transactions over $1,000, and found some anomalies. Upon checking the bank statements, we located the check numbers that corresponded to the abnormalities and found that, in some instances, the payees in Quickbooks were different than the payees on the checks; we then discovered that the checks were actually paid to the Controller and the IT person (his co-conspirator).

We uncovered that the controller built a $300,000 home in Colorado, and the IT person built a $180,000 home in the Texas Hill Country, and neither home was mortgaged. The investigation ultimately revealed that they stole $800,000 from the small business over three years. Sage assisted in establishing a new accounting system, and a new controller was hired. The owner’s son graduated from the university and now oversees the accounting system and operations of the company. Result: The thieves were not prosecuted but entered into a private settlement, which was handled by company attorneys.

If your clients are experiencing any occupational fraud mentioned above, call Sage Investigations, LLC at 512-659-3179 for a free 20-minute consultation. Let Sage shed light on the truth for your clients. We look forward to hearing from you and building a solid relationship you can count on. Visit our website at Sageinvestigations.Com. Click to read about the Sage Team and their CVs.

[1] 2002 Report to the Nations