Essentials of corporate fraud

207 Pages·2008·0.787 MB·English

by  Tracy Coenen

ESSENTIALS
of Corporate Fraud
Tracy Coenen
John Wiley & Sons, Inc.
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LibraryofCongressCataloging-in-PublicationData:
Coenen,Tracy,1972-
Essentialsofcorporatefraud/TracyCoenen.
p.cm.—(Essentialsseries)
Includesindex.
ISBN978-0-470-19412-6(pbk.)
1. Corporations—Corruptpractices. 2. Fraud. 3. Fraud—Prevention. I.Title.
HV6768.C642008
364.1603—dc22 2007045811
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
Contents
Preface xi
Acknowledgments xiii
1 TheFraudProblem 1
2 PeopleWhoCommitFraud 25
3 RedFlagsofFraud 47
4 AssetMisappropriation,Bribery,andCorruption 71
5 FinancialStatementFraud 95
6 FraudDetectionandInvestigation 121
7 FraudPrevention 147
8 BestPracticesinFraudManagement 171
9 TheFutureofFraud 189
Index 201
ix
Preface
C
orporatefraudcontinuestofascinatethemasses,yetcompanies
as a whole have not been terribly effective in significantly
decreasing the occurrence and cost of occupational fraud.
While regulations have forced management to review policies and
procedures, a wide-scale shift toward proactive fraud prevention has
not occurred.
Understanding the root causes of fraud and learning about the
most effective fraud prevention techniques are critical to reducing
theincidenceofcorporatefraud.Along-termreductioninemployee
fraud is not achieved easily, yet a company that is committed to
improving fraud prevention efforts can begin with some basic
improvements.
Thisbookisintendedforexecutives,attorneys,andauditorswho
need a basic understanding of corporate fraud. It addresses some of
thecausesoffraudandthecharacteristicsof thosewhocommitfraud.
Thebookexamineswarningsignsoffraudwithincompaniesandthe
process of conducting a corporate fraud investigation. It further
discussesopportunitiesfor proactivefraudprevention, whichinclude
educating employees and implementing polices and procedures spe-
cifically designed to prevent fraud.
xi
Preface
Thetopicoffraudisaddressedbroadly,asthebookisintendedto
give an overview of fraud methods and results. Companies are best
served by involving experienced anti-fraud professionals when they
attempt to detect, investigate, and prevent fraud.
xii
Acknowledgments
I
offer my thanks to my family, friends, associates, and clients who
have extended their support throughout my career. It has been
quitearide,andtheyhavesupportedallofmyeffortsatmarketing,
public relations, professional development, and growing my fraud
investigation practice. Without them, I would not be where I am
today, professionallyor personally.
Aspecialthanks tothosewho lovemeunconditionallyandcheer
meonthroughallof life’schallenges.Youhavemademestrongerand
have encouraged me to strive for more.
Thank you to Wiley for offering me this opportunity and for
making the process so easy and enjoyable.
xiii
CHAPTER 1
The Fraud Problem
After reading this chapter, you will be able to
(cid:2) Understandtheresultsoffraudpreventioneffortsover the
lastseveralyears.
(cid:2) Identifythethreemaincomponentsof anyfraudscheme,
traditionallyknownasthefraudtriangle.
(cid:2) Discussthevariousactionscompaniestakeagainstthose
whoperpetratefraudandthereasonswhytheydonotini-
tiatecriminalprosecutions.
Internalfraudatcompaniesisabigenoughproblemtobeconsidered
an industry unto itself. It is estimated that organizations lose an aver-
age of 5% of revenue annually to internal fraud, which equates to
$652billioninlosseseachyearjustintheUnitedStates.1
1
The Fraud Problem
Peopleoftenwonderwhysomuchfraudoccursandwhyitisnot
caught sooner, thereby limiting the losses. The answer is simple.
Companies have systems in place to help ensure that accounting
transactions are recorded accurately and that proper procedures are
followed. Companies have policies to guide the behavior of people
whowouldgenerallystrivetoactinanethicalmanner,butoccasion-
ally need rules to dictate their behavior. Those systems, procedures,
and policies often work to catch errors and honest mistakes in the
accountingprocess.
However, when an employee is committing fraud, he or she is
deliberately trying to thwart those systems and policies. The person
is purposely circumventing the system, while at the same time at-
tempting to conceal his or her actions. While systems, policies, and
procedures may be reasonably good at bringing errors to light, they
typically cannot and do not expose fraud. Fraud constitutes a pur-
poseful disregard for the system and a deliberate attempt to violate
that system for personal gain, and most companies’systems aren’t de-
signedtostopthis.
Therearealsothecompaniesthathaveinadequateor nonexistent
systems to ensure accurate accounting records and financial state-
ments. Those companies can barely keep adequate and reliable re-
cords, even with honest employees. But if they can’t even ensure a
basic level of accuracy, management will hardly be able to prevent,
detect,andstopfraudfromwithin.
Internal fraud itself is troubling. Companies entrust their emp-
loyees with assets, information, and customers. Business cannot be
done unless companies put trust in people to sell their products or
services, deliver them, collect the money, and keep accurate records.
2
Progress?
Employees must be charged with growing and managing the busi-
ness, as well as doing what is in the best interest of the owners and
the rest of the company. When those trusted people steal, it can be
disheartening. Maybe even more troubling is the fact that so little of
theproceedsoffraudareever recovered.
A2006fraudsurveybyKPMG2foundthatin42%ofmajorfrauds,
noneofthestolengoodsor moneywasrecovered.None.TheAssoci-
ation ofCertified Fraud Examiners (ACFE) foundequally disappoint-
ing results in its 2006 survey of fraud examiners. In 42% of internal
fraud cases, there was no recovery of money or assets, and in 23% of
cases, the recovery amounted to 25% or less of what was stolen.3 As
bothofthesestudiesshow,closetohalfofinternalfraudvictimscannot
count on recovering any of the proceeds of fraud, and another one-
fourthwillrecoveronlyafractionofwhatwasstolen.Clearly,compa-
niescannotandshouldnotexpecttorecoverfraudproceeds.
P
rogress?
With the focus on fraud since the big cases of Enron, WorldCom,
and Tyco, an important question is whether or not companies are
making any progress in the fight against fraud. Has the focus on
the fraud issue caused them to tighten controls and take swift action
against perpetrators, or have companies remained largely complacent
infightingfraud?
The general consensus seems to be that companies have made
some progress in protecting themselves against fraud, but still there
hasnotbeenanoticeabledecreaseinfraudoverall.Somemightargue
that the progress has not been swift enough, and that is why no real
3
The Fraud Problem
results have been seen. It also may be that companies have been so
focused on compliance with Sarbanes–Oxley, that most of the meas-
urestakenaremerelyfor thesakeofcomplianceandnotdesignedfor
true fraud prevention. Companies may think that they have im-
proved in terms of fraud prevention and detection, but that self-
assessment can often be overlyoptimistic. Until a marked decrease in
fraud is seen worldwide, the idea that companies have been effective
atreducingfraudisdubious.
The ACFE conducted studies on fraud detection, investigation,
andpreventionin1996,2002,2004,and2006.Ineachofthesestud-
ies, Certified Fraud Examiners were asked to estimate the amount of
revenue companies lose each year to internal fraud. In the 1996,
2002, and 2004 reports, Certified Fraud Examiners estimated that
6%ofrevenueswouldbelostbycompaniesasaresultofoccupational
fraud and abuse. When applied to the U.S. gross domestic product,
thatwouldtotal$600billionin20024and$660billionin2003.5
Fivepercentofrevenueswereestimatedtobelosttointernalfraud
in2006,6a1%decreasefrompreviousestimates.Whenappliedtothe
2005U.S.grossdomesticproduct,thisisanestimated$652billionlost
tooccupationalfraud.It’simportanttorememberthattheseparticular
figures are all estimates and there is much room for error. The most
important conclusion we can draw from these surveys is that profes-
sional fraud investigators don’t think the instance of employee fraud
hasdecreasedtoanygreatextentduringthepastseveralyears.
And let us not forget that anyestimate of the total cost of fraud is
justthat—an estimate.Thereisnowayforanyonetoknowtheexact
total impact offraud, becausewe knowthat alot offraud goes unde-
tected. All we are left to do is make educated guesses about the total
4