How would your company fare if it lost over $300,000 a year to fraud for several years?

Last time I discussed the broad categories of fraud and the average impact they had on companies. Now I want to discuss more about fraud variations and what you can do about it.

If you are a business with less than 100 employees billing schemes and corruption are most likely to impact your operations. Your industry plays a role in the types of fraud you may be at risk for as well. According to the Association of Certified Fraud Examiners if you are in warehousing, transportation or manufacturing half of all reported fraud schemes involve corruption. Manufacturing, education and health care suffer from fraudulent billing ploys a third of the time.

As you can see, certain industries are vulnerable to specific types of fraud which has both good and bad consequences. The operations of a company determine which schemes are most likely to be successful for a fraudster. The good news is that each company can direct specific preventative measures against likely schemes.

Billing schemes result in your company making payments to parties that have not provided appropriate services to you. When combined with insider corruption the results can be devastating. A recent case from eastern North Carolina involved both.

The CFO of a company hired an acquaintance to perform renovation projects for the firm without taking bids from other contractors. The result was substandard work at an inflated cost. The CFO created fraudulent invoices over almost three years to pay the contractor more than $1,000,000 for work that had not been performed and for overpriced materials. The contractor then paid the CFO about half that as a kick-back from the fraudulent disbursements. The CFO used the funds plus company credit cards to purchase a boat, pay down the mortgage on his vacation home and cover personal credit card bills.

Once the FBI and IRS (among other agencies) finished their investigation the CFO pled guilty. He was sentenced to a combined 78 months of prison and supervised release. He also had to provide restitution of over $700,000.

How could this theft have been stopped?

Black Claw Hammer on Brown Wooden Plank

The Chief Financial Officer for a company should be above reproach but clearly anyone can be tempted and then make bad decisions. The first way to stop fraudulent activity is to follow former President Ronald Reagan’s credo, “Trust, but verify”.

Company credit card reimbursements for senior managers should be scrutinized frequently by the owner or an outside auditor. Instead, in this case it appears that the CFO had no one reviewing his expenditures.

Management should also have created a policy that renovation or construction projects over a certain cost would have to be handled by a committee of 2 or 3 people instead of one person. Other reasonable protections would be to insist that such projects be sent out for bid to several companies (at least 3). Each bidder would have to be vetted by the committee through references on other similar projects that had been completed. Based on this policy the CFO’s acquaintance would not have qualified and the loss could have been avoided.

Remember this equation:

P > I + FL + LR
Prevention is greater (better) than Investigation + Financial Losses + Lost Reputation

Prevention is always better (and less expensive) than the alternative!

There are many other simple methods that company management could have used to protect itself. In future posts I will cover some of these.

If your company has been a victim of fraud let me know if you are willing to discuss it with me.  It would be helpful to other entrepreneurs to hear about real life examples of fraud, loss and recovery.