Business Fraud 101 Are You Protecting Your Business ?

? Despite the high profile fraud cases of recent years, employee fraud continues to grow, and by some estimates represents 5-7 % of sales.

Who commits fraud? The loyal employee, the new employee, the I knew he was up to something as well as the I never would have suspected employee all may commit fraud against their employer. All they need is incentive which may stem from any number of factors from their own personal lives (most likely) to their feelings about the company and opportunity when the likelihood of being caught is low due to a lack of processes within the company such as internal controls, monitoring of books and inadequate security. Lisa Epstein, in writing on financial fraud for dummies.com, (http://www.dummies.com/howto/content/basic-types-of-financial-fraud-in-businesses.html ), notes 4 basic types of financial fraud: Embezzlement (larceny): the illegal use of funds by a person who controls those funds. For example, a bookkeeper may use company money for his own personal needs. Many times, embezzlement stories dont make it into the paper because businesspeople are so embarrassed that they choose to keep the affair quiet instead. They usually settle privately with the embezzler rather than face public scrutiny. Internal theft: stealing a companys assets, such as office supplies or products the company sells. Internal theft is often the culprit behind inventory shrinkage. Payoffs and kickbacks: situations in which employees accept cash or other benefits in exchange for access to the companys business, often creating a scenario where the company that the employee works for pays more for the goods or products than necessary. That extra money finds its way into the employees pocket who helped facilitate the access. This is, in effect, bribery, but is generally unreported or underreported by a company, although sometimes employees are fired. Epstein gives an example of this type of fraud: Company A wants to sell its products to Company B. An employee in Company B helps Company A get in the door. Company A prices its product a bit higher and gives the employee of Company B that extra profit in the form of a kickback for helping it out. A payoff is paid before the sale is made, essentially saying please. A kickback is paid after the sale is made, essentially saying thank you. Skimming: employees take money from receipts and dont record the revenue on the books.

Epstein points out that any of these financial crimes can happen in a small business, but the one that hits small businesses the hardest is embezzlement. Embezzlement happens most frequently in small businesses when one person has access or control over most of the companys financial activities. For example, a bookkeeper may write checks, make deposits, and balance the monthly bank statement. The FBIs Financial Crimes Report to the Public published last year defines corporate fraud as

matters relating to fraud, theft, or embezzlement occurring within or against the national and international financial community. These crimes are characterized by deceit, concealment, or violation of trust and are not dependent upon the application or threat of physical force or violence. Such acts are committed by individuals and organizations to obtain personal or business advantage. The FBI focuses its financial crimes investigations on such criminal activities as corporate fraud, securities and commodities fraud, health care fraud, financial institution fraud, mortgage fraud, insurance fraud, mass marketing fraud, and money laundering. These are the identified priority crime problem areas of the Financial Crimes Section (FCS) of the FBI. and involves the following:

Falsification of financial information of public and private corporations, including: False accounting entries and/or misrepresentations of financial condition; Fraudulent trades designed to inflate profit or hide losses; and Illicit transactions designed to evade regulatory oversight. Self-dealing by corporate insiders, including: Insider tradingtrading based on material, non-public informationincluding, but not limited to: Corporate insiders leaking proprietary information; Attorneys involved in merger and acquisition negotiations leaking info; Matchmaking firms facilitating information leaks;

Traders profiting or avoiding losses through trading; and Payoffs or bribes in exchange for leaked information. Kickbacks; Misuse of corporate property for personal gain; and Individual tax violations related to self-dealing.

CNN.com, in 2009, quotes specialist Gary Zeune:Although there are "millions of ways to commit fraud, there are always three common elements in any employee fraud case -- incentive, opportunity and rationalization. Opportunity is created when a culprit feels there is a relatively low likelihood of being caught -- most often at private companies. They have less internal controls than publicly listed companies." In interviewing people convicted of fraud against their companies, CNN noted Mark Morze who said: Digging into accounting fraud means understanding "there is a big difference between truth and accuracy. Every financial statement I put together was accurate, but it wasn't truthful." Sam Antar, also guilty of fraud, used a number of complicated accounting tricks to dupe auditors. But some tactics were simple. These auditors from the Big Four accounting firms are usually single kids just a few years out of school. What do kids in their 20s think about all the

time? Sex. So he would pair "cute hot female" employees with male auditors as part of his distraction strategy.

Even very large organizations are at risk for fraud. Caroline McDonald, at CFO.com writes just last month: Fraud Reports Climb Still Higher; she indicates that Companies know that even a hint of potential fraud issues in their organization, whether true or not, puts their reputation at risk, not only with the public but also internally: Employees may begin to wonder about the companys ethics. Forensic accountant Jonny Frank states in the article that: compliance officers generally are doing a good job of pushing that message. Unfortunately, some companies finance teams are getting less involved as ethics and compliance controls mature. It becomes easier for the CFO to just hand off that responsibility to compliance. Jimmy Lin, also involved in corporate compliance and fraud protection, tells CFO.com that organizations are vulnerable if compliance enforcement is not a pervasive theme throughout the company. If functional areas, departments, and divisions arent working together to make sure fraud is addressed, then everybody is going to lose. The CFO has a crucial role to play in measuring the financial impact and reputational damage of fraud. The CFO should not just take an audit-type perspective. Rather, he or she should be an active and strategic participant in shoring up compliance and preventing fraud. For more information about protecting your business, contact the experts at YesCFO. We can assess your specific business needs, and recommend simple steps that will help you avoid costly losses. Please visit us at YesCFO.com