Fraud/Theft Deterrence

The Association of Certified Fraud Examiners (ACFE) defines fraud/theft as: “The use of one’s occupation of personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”

Fraud and theft schemes can be as simple as pilferage of company supplies or as complex as sophisticated financial statement frauds. Fraud and abuse imposes enormous costs on organizations. Regrettably, the actual cost of fraud is unknown and unknowable because not all frauds are uncovered. Of those that are uncovered, not all are reported or prosecuted. Some statistics according to a study conducted by ACFE and published in their “2006 Report to the Nation” include:

• The median loss in the study from asset misappropriations is $159,000.
• Small businesses (less than 100 employees) continue to suffer disproportionate fraud losses. The median loss for small businesses was $190,000. This was higher than the median loss in even the largest organizations
• The Healthcare industry experienced the fourth highest level of incidents of asset misappropriation with 89 cases (8.6%) and a median loss of $160,000.
• Nearly 90% of fraud cases involve cash misappropriations.
• About one-quarter of the cases involved losses of at least $1 million.
• Participants in this study estimate US organizations lose 5% of their annual revenues to fraud. This figure applied to the US Gross Domestic Product translates into approximately $652 billion in fraud losses—about $4,500 for every worker.
• The size of the loss is strongly related to the position of the perpetrator. Frauds committed by owners or executives caused a median loss of $1 million. This is nearly five times more than the median loss caused by managers, and almost 13 times as large as the median loss caused by employees.
• The effect of collusion, when two or more perpetrators were involved in the scheme, was almost five times greater than with a sole perpetrator.

Who Commits Fraud?

Fraud in committed by an employee who is either dishonest or able to rationalize theft, notices or creates an opportunity to steal, and feels some sort of pressure to do so.

According to ACFE’s “2006 Report to the Nation”, most of the occupational fraud schemes involved either the accounting department or upper management. Just over 30% of the occupational frauds were committed by employees in the accounting department, and slightly more than 20% were committed by upper management or executive-level employees. The next most-commonly cited department was sales, which accounted for 14%.

Major Categories of Fraud

Misappropriation of Assets, also known as employee fraud, is any scheme that involves the theft or misuse of an organization’s assets.

Corruption, also known as external fraud, is any scheme in which a person uses his or her influence in a business transaction to obtain an unauthorized benefit contrary to that person’s duty to his/her employer.

Financial Reporting Fraud, also known as management fraud, is the falsification of an organization’s financial statements to make it appear more or less profitable.

Examples/Cases

The following are some actual fraud cases that occurred:

1. An office manager fabricated an employee saying that this person worked at nights. She created a bank account for the phantom employee with the money automatically deposited (and subsequently withdrawn by the scheming manager).
2. A former bookkeeper for a doctor’s office pleaded guilty to stealing more than $2.3 million from her employer to buy lottery tickets. She spent as much as $6,000 a day on Pick Three, Pick Four, Mega-Millions and scratch-off lottery games. As the bookkeeper of the medical office, she could move money from one account to another. The doctors trusted her. Over the course of approximately 41 months, she wrote company checks to cash, petty cash or herself, then listed the name of the vendor in the QuickBooks computer program. She started by taking small amounts of money and worked her way up; the average amount was $3,000.
3. A secretary at a surgeon’s office placed and received orders for medical supplies; she was one of a two person office staff and a long-time trusted employee. She regularly placed and received orders of hydrocodone using the doctor’s name, but paid for the shipment with her own money leaving virtually no trail in the books. She also helped herself to blank prescription pads. One day the doctor came out of surgery to be greeted by three FBI agents. The amount of hydrocodone that was being ordered by his office was three times greater than any other purchaser in this area.
4. A front desk coordinator at a medical clinic had authorized access to patient information. She allegedly downloaded and printed information about patients, which included Medicare beneficiary numbers, social security numbers, birth dates and home addresses. She sold this information to her cousin who used it to seek more than $2.8 million fraudulently from Medicare. The coordinator’s fraudulent activities were uncovered when a fellow employee learned of her activities and turned her in, at which time the clinic notified the authorities.

Fraud Prevention Through Deterrence

At Kopin & Company, CPA, PC, we feel that the most cost effective way to deal with fraud is to prevent it. Efforts to recover stolen property yield dismal results. Businesses are hesitant to take legal action against the offender because they are embarrassed or fear bad publicity. Fraud detection efforts usually occur as a reaction to fraud after it is suspected or discovered. These efforts are frequently expensive and time consuming. The odds of quantifying the exact amounts stolen are slim. For small businesses, only 20% recover the original loss, and fully 40% recover nothing at all.

Kopin & Company, CPA, PC will develop a fraud/theft prevention program which will include:

• Obtain an accurate picture of the organization’s current state of fraud risk including:
  • Analysis of the likely baseline behavior of the organization
  • Develop a benchmark against best practices
  • Interview management
  • Collection of additional information on high-risk areas
• Design and Implement a Fraud Prevention Program
  
• Monitoring

At all stages of the program, Kopin & Company, CPA, PC will keep the client informed regarding its progress, and of any discrepancies or unusual items discovered.