Whether or not you buy into the theory that fraud and embezzlement are more prevalent in today’s business world than they were in the past, you at least have to admit that they do, indeed, exist — and that they have dire consequences. Fraud at publicly-held companies can drive stock prices down. Fraud at privately-held companies can put them out of business. Negative publicity can affect company morale and culture. Customers can stop doing business after seeing corporate “dirty laundry” aired out in newspapers and business publications.
But in all cases, management sets the tone and corporate culture.
“An effective fraud prevention message starts at the top,” says Frank Suponcic, a principal and Certified Fraud Examiner at Skoda, Minotti & Co. “If management demonstrates a sound ethical approach to managing the company, it will disseminate down to the staff employee.”
Smart Business talked to Suponcic about how to minimize the chances that your company will be a victim of fraud and/or embezzlement.
What’s the difference between fraud and embezzlement?
By definition, embezzlement is the wrongful appropriation of money or property to which it has been lawfully entrusted, most commonly with cash or even inventory. Usually, the person committing the act of embezzlement is benefiting personally.
Fraud is any intentional and willful act to deprive one of property or money by deception. Such an act may or may not personally benefit the person perpetrating the fraud. For instance, if Wall Street is expecting a publicly-traded company to reflect earnings of 4 cents per share, and in reality the company is only earning 2 cents per share, a person in a position of authority might be persuaded to record revenues in advance of them being earned or to delay recording some expenses.
Why are fraud and embezzlement becoming so prevalent?
They’ve always been present in the business community, but there is a greater awareness these days as a result of the national scandals like Enron and WorldCom. But today we’re more aware of it, because they are getting a lot more notoriety. These actions are no longer swept under the carpet because the carpet’s bulging; there’s no more room under it.
What types of companies are most at risk?
Smaller companies with fewer controls are more vulnerable. But companies with annual revenues in the multi-millions — ones that you think would have adequate safeguards — are victims as well.
A lot of the crimes against the larger companies are the result of management overriding the established internal controls. CFOs and CEOs have almost carte blanche authority in some of those companies. Consequently, the dollar losses are greater, though statistically there are fewer instances of financial crimes discovered among larger companies.
What are the most common fraud controls?
Those in management have a fiduciary responsibility to protect their company’s assets. Too many of them don’t ask for help to prevent an asset misappropriation. People are entrenched in their daily activities and have a false sense of security that their existing internal controls are effective. Most financial crimes are based on a violation of trust. Good people, at times, do bad things. We’ve seen an increase in the amount of smaller privately held companies — companies with revenues from $1 million to $10 million — that want us to help them determine where they are vulnerable and, more importantly, how they can strengthen the existing internal controls.
The greater segregation of duties a company has and the more people involved in a transaction, the less likely a fraud will occur — unless the people involved collude.
We’re seeing more companies inquiring about establishing fraud policies wherein the employees sign an acknowledgement of a corporate fraud policy that highlights a corporate lack of tolerance. The policies can include civil prosecution, criminal prosecution, paying restitution and, certainly, termination.
Years ago, more often than not, when a company became a victim of an embezzlement, the company would fire the employee, demand its money back and just go back about its business. They didn’t like going down the path of criminal prosecution, because it took productive personnel away from making money.
Can audit committees have a positive effect on minimizing corporate fraud and embezzlement? How?
Any measure is a good measure. The more eyes that are looking at transactions, the less likely there is to be improprieties. Audit committees are more prevalent in publicly-held companies where there’s more emphasis on earnings and meeting Wall Street expectations. That’s where you’re seeing more fraud than embezzlement.
If management suspects that fraud has occurred, what steps should be taken?
First thing is to contact their attorney, a CPA, or a Certified Fraud Examiner to come in to quantify the loss and basically put the case together. Then it’ll be management’s option as to how to proceed with regards to litigation.
FRANK SUPONCIC is a principal, a Certified Public Accountant and a Certified Fraud Examiner for Skoda, Minotti & Co. Reach him at (440) 449-6800 or [email protected].
