While high-profile cases such as
Tyco, WorldCom and Enron garner
the headlines, companies of all sizes can be affected by corporate fraud.
The types of schemes used to misappropriate funds vary in nature but are similar in
the fact that they can be extremely costly.
“The Association of Certified Fraud
Examiners estimates that the typical
organization loses approximately 5 percent
of its annual revenue to fraud,” says Kevin
Yardumian, vice president of Gumbiner
Savett Inc.
Smart Business spoke with Yardumian
about corporate fraud and how to go about
implementing fraud controls.
What types of corporate fraud are most
prevalent?
There are two basic types of corporate
fraud we come across quite frequently:
financial statement fraud, which involves
the misstatement of financial information
by the company’s management, and asset
misappropriation schemes, which involve
an employee using his or her position within a company to misappropriate company
assets or resources. While both types of
fraud can have a devastating effect on an
organization, asset misappropriation is
more common.
Some asset misappropriation schemes
that we’ve seen include:
- The establishment of a shell company,
which submits fraudulent invoices to the
victim company. The invoices may be for
nonexistent shipments or services or may
reflect inflated amounts for legitimate shipments or services provided by a third party
that have been diverted through the shell
company. This type of fraud is particularly
common in companies that purchase
goods or services overseas. - Shipments of inventory to unauthorized recipients. This is very common
among companies that don’t have accurate
perpetual inventory systems but instead
rely on periodic physical counts. - Check tampering and forged endorsement schemes
- Payroll fraud involving fictitious
employees - Employee kickbacks
- Diversion of cash receipts
- Fraudulent commission schemes
In addition to financial losses, what types of
collateral damage can a company sustain?
The majority of employee-related fraud
involving publicly held companies is never
prosecuted because of the impact that public knowledge of the fraud could have on
public confidence in the company and the
company’s stock price. For private companies, knowledge of fraud can diminish a
lender’s confidence in the company’s management. It may also encourage additional
fraud due to the perceived lack of controls
in place to detect and defer fraud.
How should a business go about implementing fraud controls?
When working with business owners to
establish an anti-fraud program within
their organization, we typically go through
a four-step process. First, we help the business owner understand some of the fraud
schemes that are most common for his or
her particular type of business, which we
base on factors such as the industry and
company size. Secondly, we identify the
assets within the organization that are susceptible to fraud. Next, we develop and
implement a system of controls to detect
and deter fraud within the organization and
to safeguard the assets susceptible to
fraud. Finally, we establish a program for
monitoring compliance with the system of controls and for updating the controls as
necessary.
How important is it to have open avenues of
communication for employees who suspect
foul play?
Very important. While every organization
should have a system of controls in place
designed specifically for that organization,
having an open line of communication with
employees is something that is important
for all organizations because it helps establish an anti-fraud culture. Some of the basic
steps an organization can take to establish
an anti-fraud culture include:
- Providing anti-fraud training to
employees that focuses on identifying
warning signs of fraud - Establishing an ethics officer within
the organization who meets regularly with
employees - Developing a corporate code of conduct that spells out acceptable versus
unacceptable behavior and specifies penalties for violations - Establishing a mechanism for fraud to
be reported by employees on an anonymous basis, such as a whistle-blower or
fraud hot line
If a company suspects that fraud has
occurred, what steps should be taken?
If a company suspects that fraud has
occurred, it should contact an anti-fraud
professional to assess the damages and to
implement controls to prevent additional
losses. There is very powerful technology
available to assist with this process. That
being said, the best time for a business
owner to contact an anti-fraud professional is before he or she suspects fraud.
The majority of our fraud-related work is
related to implementing controls prior to
the suspected occurrence of fraud, in
essence, a preventive maintenance engagement. Although sometimes when we perform this type of engagement we find that
fraud actually has occurred, it just wasn’t
previously suspected or detected.
KEVIN YARDUMIAN is a vice president of Gumbiner Savett Inc.
He is a certified fraud examiner as well as a CPA and works closely with business owners to minimize their exposure to fraud.
Reach him at (310) 828-9798 or [email protected].