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The Red Flags of Fraud

In a continuing series on fraud, this week’s column is about how to spot the signs that an employee may be engaged in fraudulent activity. Please see last week’s column, “Employee Tips Key to Fraud Prevention” for tips on decreasing fraud in your company.

It happens every day. Employees are caught stealing from their companies. Then the messy business of uncovering the amount of money stolen, how it was taken and how to prevent it in the future begins.

Fraud not only hurts businesses financially — an estimated $9 billion a year is lost to fraud in the US annually — but it takes a toll on the company in other ways. Employees are demoralized and time is lost to dealing with the results of the fraud.

A strong fraud prevention program is critical. Part of that program should include managers being trained to be on the lookout for red flags that employees may be involved in fraudulent activity. Here are just a few of those red flags.

imgres1. Refusal to take vacation and rarely taking personal or sick days

Isn’t that great to have such a dedicated employee? Except that often the employee who never takes off is not dedicated to the company. That employee is dedicated to continuing to perpetrate the fraudulent activity he or she has begun, and doesn’t take off work because of the risk the activity may be uncovered.

I’ve mentioned dear Aunt Tess in this column before. She was the beloved payroll clerk who showed up the day after she had major surgery to hand out the paychecks. In 25 years she hadn’t missed a payroll and a little thing like an appendectomy wouldn’t keep her away.

Turned out she had to show up to handle the paychecks for her non-existent employees whose creation had allowed her to steal around $100,000 year from the company.

Be wary of the employee who never takes off work.

2. Getting annoyed at reasonable questions or offering unreasonable explanations

If a simple question about how an invoice is handled, or who double checks the list of vendors or changes to payroll evokes a defensive or irritated response, don’t back down until you get an answer. The same is true if the responses don’t make sense or sound unreasonable. Guilty people will act defensive when questioned about why they do things a certain way.

3. An employee wants to remain in his or her current position

Staying in the same position is not necessarily a bad thing, and many people enjoy staying in a job that they feel comfortable with for years. But if that person turns down opportunities to advance or otherwise better his or her situation in some manner, that can be a warning sign that they are afraid of being unable to continue their fraudulent activity or that it may be uncovered if they leave or change their position.

4. An employee that exhibits behavioral changes, undergoes a sudden change in lifestyle or has financial difficulties

If an employee starts talking about his new lake home, wearing an expensive watch or driving a new car with no explanation for his new-found wealth, that may be worth a closer look. If she starts acting more stressed at work for no discernible reason and claims all is fine at home, that could be a sign that engaging in the fraudulent activity is causing stress.

Having financial difficulties can be a precursor to fraudulent activity. A law student in Atlanta was arrested for stealing more than $100,000 of jewelry at his part-time job at a department store. When he was caught, he said he did it because he had so much debt in student loans.

5. An employee has unusually close relationship with vendors

Friendships do develop in the business world when we deal closely with each other and are often a source of pleasure in our work environment. However, an employee that seems to spend a lot of time with a vendor could indicate a kickback scheme that involves vendor overbilling.

Be on the lookout for these red flags at your company. To learn more about why fraud occurs, read my next column later this week about the Fraud Triangle.

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Employee Tips Key to Fraud Prevention

The simple slogan, “If You See Something, Say Something ™” was first used by The New York Metropolitan Transportation Authority to raise public awareness about terrorism, and later licensed by the Department of Homeland Security (DHS) for a national campaign.

You may have seen some of their public service announcements that urge people to report suspicious activities to local law enforcement or in the case of an emergency, call 911.

I urge companies to institute a similar campaign to help them fight fraud. According to the Association of Certified Fraud Examiners (ACFE), the most common way internal fraud is detected is receiving a tip from someone. While many of these are received from employees, some come from customers, an anonymous person or even outside vendors who notice something not quite right. Just over half of internal frauds are detected with tips, according to the ACFE’s 2012 Report to the Nation on Occupational Fraud and Abuse.

if-you-see-something1In my career as the Turnaround Authority, I’ve uncovered fraud in all types of ways — through audits, following up on suspicions I had, or in one memorable case, installing fake cameras (until the company could afford real ones) to stem the problem of inventory walking out the door. But employee tips have also helped me uncover millions of dollars of fraud.

When I am working with an out-of-town company, I assure the employees that no one will lose their jobs for sharing information with me. Later I will drop into casual conversation the name of hotel where I’m staying. Then I ask them for restaurant recommendations around that hotel. I do this so they know where they can find me outside of the office if they wish to share sensitive information.

Once, in the middle of the night someone pushed a bunch of USB drives under my floor. The drives detailed where the company’s money had gone. I’ve also had file folders with documents with valuable inside information pushed under my door. Some people in hotels just wake up to a USA Today and a bill. I never know what surprises I may get!

Companies should have fraud awareness training for managers and employees. The ACFE recommends these programs include what actions constitute fraud, how fraud hurts everyone in the company and how to report any suspicious activity.

Frequent communication is critical to letting employees understand that the company is dedicated to fraud prevention. This can be done at meetings, in newsletters and on the company website. It is also important to let them know, as I always make a point of doing, that employees will not lose their jobs if they report something suspicious. They must feel protected from retaliation.

Many companies successfully use hotlines where employees can make anonymous calls. They can also set up an online reporting system.

Early detection is crucial to cutting the cost of fraud. The ACFE reports that the average fraud scheme lasts about 18 months before discovery and that U.S. businesses lose more than 6 percent or revenues each year due to fraud.

In my next column, I’ll talk about the behavioral red flags that are often associated with fraudulent conduct. What should you be looking out for?

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Fraud Prevention Tips from a Former Con Man

Talk about using your super powers for good. Before he was even old enough to vote, Frank Abagnale became one of the most notorious con men in history. From the age of 16-21, he posed as a pediatrician, lawyer, sociology teacher, film director and even an airline pilot to hitch rides all over the world. He estimates he flew a million miles to more than 26 countries, all in his impressive Pan Am uniform he got by calling the company’s headquarters and telling them he had lost his while traveling.

He also defrauded a lot of banks. After stealing more than $300,000, he was caught and served time in France, Sweden and the United States. After being granted parole at the age of 26, he was hired by the FBI and is now a respected authority on forgery, embezzlement and document fraud.

Once a notorious con man, Frank Abagnale is now a respected authority on fraud prevention. “What I did 40 years ago is 4,000 times easier to do today than when I did it," he said.

Once a notorious con man, Frank Abagnale is now a respected authority on fraud prevention. “What I did 40 years ago is 4,000 times easier to do today than when I did it,” he said.

After appearing on Johnny Carson’s show nine times, Frank was urged by him to write a book. “Catch Me If You Can” is the fascinating story of his life, which Steven Spielberg made into a movie starring Leonardo DiCaprio in 2002.

Frank also started his own company, Abagnale & Associates, to educate others on fraud prevention. Looks like he’ll never run out of work. Fraud is still a huge problem in the U.S., costing more than $900 billion a year.

According to the most recent Payment Fraud and Control Survey, 87 percent of cash managers, analysts and directors claim to have incurred instances of check fraud in 2012.

Although claims have been made for years that the U.S. would soon be a checkless society, around 75 percent of payments from one company to another are still made by check. Abagnale believes the U.S. is still 20-30 years away from being completely paperless. And it’s never been easier to create a counterfeit check.

“What I did 40 years ago is 4,000 times easier to do today than when I did it,” he said in an interview on CNN, talking about his counterfeiting. Back then he needed an entire room to set up a large press to create fake checks, a tedious process. Today all you need is a stolen check for the account number, a laptop and a scanner.

Frank shares tips on how to prevent all types of fraud. Here are a few of his tips for businesses:

• Tear out the hard drive of any printer or copier you discard. They store images of everything that is copied on them, some of which may be confidential information. Be sure to destroy any hard drives before getting rid of them.

• Use a black uni-ball 207 pen when you sign documents, especially checks. The ink in these pens forms a bond to the paper that prevents the signature from being stripped. It is the only pen whose ink cannot be altered by chemicals or solvents.

• CFOs and chief auditors need to play an active role into the purchasing of the company’s checks. Purchasing agents often opt for the cheapest checks. Companies need to invest in checks that contain the latest security features. These include Thermochromatic inks that react to temperature changes and cannot be replicated and prismatic backgrounds with multiple colors that are difficult to reproduce.

For more fraud prevention tips from Frank, buy his book “The Art of the Steal: How to Protect Yourself from Fraud, America’s #1 Crime.” (There are also plenty of tips in my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEO’s Mistakes.”)

Frank has made it his life’s mission to prevent people being stolen from. “If you make it easy for someone to steal from you, someone will,” he says. “Don’t make it easy.”

As the Turnaround Authority, I’ve worked with many companies that made it way too easy for employees to steal from them. One of my favorite stories is about a company in Dallas that had invested in surveillance equipment to keep a watch on inventory that might walk out the door. The problem was that the surveillance room was kept unlocked.

This was back in the days of cassette tapes, so after somebody stole some inventory, he or she simply went to the surveillance room and either erased or replaced the tape. One thoughtful fellow merely placed the tape player on pause, then restarted it when he was done.

While some thieves have to be incredibly creative, like Frank, to steal, others merely jump on an available opportunity. Don’t give them one.

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Putting the CEO in Time-Out

Angered at rumors that the co-founder of Specialty Medical Supplies was shutting down its factory near Beijing, the workers took the next logical step: they locked him in his office.

Despite his claims that employees are not losing their jobs when he moves part of the operations of the company to India, around 80 of his 110 employees have blocked entrances and locked Chip Starnes in his office for a week, according to an article in the Wall Street Journal.

While I don’t condone such drastic action, I will admit to having been tempted to put some of the CEOs I’ve dealt with as a turnaround authority in time-out. Just for a while so they could consider their less-than-desirable behavior.

There was the guy whose ego was so large he refused to admit that he has missed some major errors in cost accounting and tried to cover up the cash shortfall, which led to a series of problems with the business that ultimately cost it $8 million in equity. The bank called the loan and he lost his fortune.

Or the CEO who changed his sales manager’s commission structure after exceeding yearly goal for the following year so wouldn’t make more money than he did. The sales manager went to work for his competitor and the CEO was fired.

I once worked with a CEO who was convinced that people would respond to solicitations at a higher rate if they were mailed from within their home town. So he spent about $400,000 a year having trucks drive the solicitations all over his company’s territory to get a local postmark on them, despite the fact there was no evidence to support that theory.

Perhaps the CEO that may have saved his company and his marriage if he put himself in time-out for a bit was the one who was married, yet managed to have a photo of him and his girlfriend having a grand old time on a yacht on the cover of a national magazine.

A nice payback for the CEO and his wife who ran a multi-million dollar company but rationed toilet paper and caffeinated coffee to their employees would have been for them both to spend a few days confined somewhere. Without it.

There are stories like this happening every day. You can read plenty more of my stories of CEOs behaving badly in my new book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes.”

If only these CEOs’ employees could have locked these guys up for a bit and fed them a continuous diet of General Tso’s chicken until they came to their senses, would the outcome have been different?

There’s no way of knowing and it probably wouldn’t be good for my business to be known as the guy who recommends locking up CEOs.

I’ve seen no evidence that Mr. Starnes has done anything wrong, other than suffer a communication problem with his Chinese employees. But, he weathered the confinement okay, despite three meals a day of sweet deep-fried chicken.

And he did do one thing every CEO needs to do: think ahead and expect the unexpected. When he constructed his office, he had the foresight to put a toilet in.

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5 Tips for Successful Family Businesses

You’ve heard the definition of a dysfunctional family? One that has more than one member in it. How about if you take that dysfunctional family and try to run a successful business with it? Getting a new business off the ground is difficult enough, and adding the complications of family relationships can only make it that much tougher.

According to the Family Business Institute, only about 30 percent of family businesses survive into the second generation. About 12 percent are still around for the third, but only 3 percent make it to the fourth generation.

Here are a few tips to help your family business survive to the next generation.

1. Put the right people in the right jobs

This is a key component for the success of any business, but becomes particularly true for running a family business when you may feel pressured to hire Uncle Marvin for your open sales position because he just got laid off.

What if Uncle Marvin’s background is in accounting and he’s known as the family introvert? Just because a family member needs a job doesn’t mean they should have one in your company. Make sure you find the best people with the right skills for any position.

2. Hire outside help

In addition to needing an outside perspective on occasion, outside consultants can help with conflict resolution between family members and offer an unbiased perspective on needs the company may have. You’ve heard the expression, “Don’t air the family’s dirty laundry.” Well, that’s exactly what you need to do with consultants.

Don’t be afraid to tell them about your brother Joe’s absenteeism due to his alcoholism if he or she needs that information to make decisions about the future of your business.

3. Communicate regularly

Again, communication is critical for any business to success. Perhaps in family businesses you run a greater risk of miscommunication of key information if employees aren’t properly informed, as they are seeing each other outside of the office. Make sure that all employees understand the long-term goals and vision of the company and are well informed of any developments.

You may want to set up weekly or monthly company-wide meetings as a means to communicate and allow for questions.

4. Have the same standards for everyone

Nothing demoralizes co-workers faster than having different standards for employees. If your company has non-family members working for it, you especially need to pay attention to this one.

Don’t allow your son to take off every Friday afternoon for his ski lesson while others are left to cover for him, or promote family members at a quicker rate than others in similar positions. Have the same vacation policies and compensation guidelines for everyone.

5. Have a succession plan

I’ve written about this before in a previous column:  the greatest threat to a family business is the failure to plan and manage succession well. I can tell you from personal experience how important this one is. I encouraged my dad to take an offer of $5 million to sell his company. He refused. Fast forward ten years and dad, who now had dementia, had been swindled out of money and the company ends up being worth nothing.

For more tips on how to pick a successor, see my previous blog post on Filling Your Own Shoes.

Family businesses do thrive. In fact about 35 percent of Fortune 500 companies are family-controlled. You just need to pay attention to how your family members contribute to the success of yours.

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The Fun Side of Family Businesses

I’ve seen the ugly side of family businesses. One of the low points was one I’ve mentioned before – when I saw a son pull a large kitchen knife on his mother. And he wasn’t getting ready to slice her a nice piece of pie.

Running a successful family business while keeping peace within the family is a tricky business, and many families fail miserably, resulting in violence, lawsuits and even the complete failure of the business.

Owners of several media companies, the Bingham family was one of the richest in Kentucky. The family became embroiled in family feuds, communicating by memos rather than directly. The late Barry Bingham Jr. said, “The family position has been basically one of not seeing much of each other.”

Tired of the bitter fights between Barry Jr. and his sister, Sallie, Barry Bingham Sr. finally just decided to sell one of his newspapers, The Courier-Journal, to Gannett.

So I thought it would be a good antidote to this negative side of family businesses, which employ 62 percent of the U.S. workforce, to highlight some businesses where the families enjoy each other around the dinner table and the conference table.

• There’s no business like “sno” business for the Backora family in Omaha, NE where for more than 50 years members of the family have been selling cotton candy and snow cones out of the Sno Floss stand at TD Ameritrade baseball park.

The company began with Wayne Madison, nicknamed “Candyman,” and his wife, Marcy. Adam Backora started working when he was 12 and now he’s known as the Candyman, according to a recent article. Life still seems sweet for the third generation of the Backora family, who have the reputation of selling the best cotton candy and snow cones in Omaha.

• Betty Lou and Bill von Rutenberg opened the Nibble Nook restaurant in Madison, WI in 1960 on the shore of one of Madison’s many beautiful lakes. That business expanded to include three restaurants and Betty Lou Cruises, named after their late mother. The three sons, Bill, Jack and Robert, now operate Von Rutenberg Ventures, each running a division of the company and happily ferrying passengers around on the Betty Lou and welcoming them to their family restaurants.

• Everything’s coming up sunflowers for the West family in Rutledge, GA where five generations have lived on and run The Sunflower Farm. W. West and his wife Pauline purchased the property for cotton and hog farming, eventually planting sunflowers that turned into a farm where people can cut their own sunflowers. The farm is now home to a yearly Sunflower Festival July 6 and 7, where guests can enjoy activities on the 15-acre sunflower field.

The Sunflower Farm is thriving, as are the family members. As they say on their website, “We grow family as well as we do our sunflowers.”

Not all families in family businesses can say the same thing. How can your family business be more like the Wests and less like the Binghams?  In my next blog, I’ll offer some tips on how to make a family business successful.

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5 Mistakes to Avoid When Selling a Business

Most likely the biggest financial transaction you’ll ever be involved with, selling a business the right way is crucial to your future financial health and the continuation of a business that you’d like to see succeed.

Selling your business is literally, a Big Deal. Here are some mistakes to avoid when selling yours.

1. Identifying the best buyer early and negotiating only with that entity

Wow, that was easy. You’ve already found a buyer and now you just need to negotiate on price. You’ve told all the other potential buyers the business is sold. So many things can happen to derail a deal — problems with financing, inability to come to terms on the value of your company, negotiations that lead nowhere. Sometimes the buyer changes his mind and walks away from the deal.

photoA friend of mine has a big rock in his office with block letters on it that read, “Nothing is set in stone.”  Remember that when negotiating the sale of your business and keep your options open when identifying and negotiating with buyers.

2. Considering only the dollar amount when looking at offers

If this is a business you started, or a family business you took over, chances are you care a lot about its ability to thrive. And its reputation. As Warren Buffet said, “It takes 20 years to build a reputation and only five minutes to ruin it. If you think about that, you will do things differently.”

If you care about continuing the reputation you’ve built up for your company, take a deep dive into the culture and reputation of the companies looking to buy yours.

3. Handling the sale yourself

The saying goes that a man who is his own lawyer has a fool for a client. I would venture to say the same thing about someone trying to sell his business on his own. You need to hire business professionals, which may include tax lawyers, business advisors and a business broker. Some people try to save money, figuring they can handle the whole thing on their own. Respect your business and your time enough to hire someone to get the best possible deal for you.

4. Setting a price based on what you think your company is worth

Although you should be aware of a general market value of your business, to get its true worth you need to go through a thorough valuation process. Hey, maybe you’ll be pleasantly surprised and find out it’s worth more than you thought.

5. Not seeing your business realistically

In a recent Dove ad, women described themselves to a forensic artist who then produced sketches from their description. The resulting sketches bore little resemblance to what the women really looked like, and were actually much less attractive. (The video has been watched 55 million times on YouTube!)

Yes, that’s on a different topic about women and their self-images. But it’s a good illustration that we don’t always see ourselves realistically. And we don’t always see our businesses for what they are either.  Dealing with daily crises and all the things that go wrong, we may sometimes overlook all the positive aspects of our business. Or on the opposite spectrum, we may be in denial about the underlying problems that will affect its value.

Jim Collins, author of “Good to Great” said, “The challenge is not just to build a company that can endure; but to build one that is worthy of enduring.”

Make sure your business endures long after you’ve moved on.

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The First 15 Seconds

In the movie “The Big Chill” one of the characters has been dating for 20 years and laments how hard it is.

“I know in the first 15 seconds if there’s a chance in the world,” she says.

“At least you’re giving them a fair shot,” her friend replies.

That may sound a bit harsh, but the truth is you can tell a lot about someone within the first 15 seconds of meeting him or her. This is crucial to remember if you are interviewing for a job or meeting with a potential client.

In my last column I wrote about ways to lose a job in an interview. I’ve interviewed hundreds of people for all levels of jobs in my decades as a Turnaround Authority, and yes it is possible that you can seriously decrease your odds of landing that job within the first 15 seconds.

We all make snap judgments when we meet someone. Will we like this person? Do we want to be around this person? Our brains made fairly rapid assumptions about the personal traits of others. This process is known as thin-slicing, which refers to our ability to gauge what is important and form opinions from limited information.

Malcolm Gladwell wrote about thin-slicing in his fascinating book “Blink: The Power of Thinking Without Thinking.” Speaking of the book in an interview he said, “When you meet someone for the first time, or walk into a house you are thinking of buying, or read the first few sentences of a book, your mind takes about two seconds to jump to a series of conclusions…. As human beings we are capable of making sense of situations based on the thinnest slice of experience.”

If you are interviewing for a job, you need to spend time focusing on what you are telling the interviewer about yourself in the first 15 seconds. Here are just a few things I can tell immediately upon meeting someone.

1. Whether they are respectful of others

Did he show up on time? Was she friendly to the receptionist or anyone else I introduced her to? Is he dressed appropriately for a job interview? Does she look polished and put together? Are his pants ironed? Did she wait for me to invite her to sit down?

2. Whether they have confidence

Did she look me in the eye when we met? Does he stand up straight? Did she smile when she met me? Does he seem excited to be here?

3. Whether they arrived prepared

Did he bring a copy of his résumé and references along? Does she know my name?

Frank Bernieri did a study at the University of Toledo in Ohio to find out if there are any particular mannerisms that will help you in a job interview. Two people were selected to be interviewers and were trained for six weeks on interviewing techniques. They then interviewed 100 people for 15-20 minutes and filled out a six-page questionnaire on each person. His conclusion was there were no particular tricks you can use in an interview.

But then one researcher asked to do a second study with the videos they had made of each interview, showing people just the first 15 seconds of the interview as the applicant arrived and met the interviewer. They were then asked to rate the candidates using the same criteria that the trained interviewers had.

In an article in The New Yorker written by Malcolm Gladwell, Bernieri talked about the results. “On nine out of the 11 traits that the applicants were being judged on, the observers significantly predicted the outcome of the interview. In fact, the strength of the correlation was extraordinary.”

Accept the importance of the first 15 seconds of any encounter towards making an impression on someone. And do what you can to make yours a positive one.

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Five Ways to Lose a Job in an Interview

You just have to chuckle when you read a story like the one I did recently about a young woman who showed up for a job interview as a buyer at American Eagle with her cat in a crate. She then proceeded to put the crate on top of the interviewer’s desk and play with it.

That may be the quickest way I’ve heard to sabotage a job interview. But there are plenty of other ways. Here are just a few I’ve seen.

1. Blaming others for your failures

I like to ask job candidates to tell me about a project they were working on at their last company that failed. It gives me a chance to learn about how they work with others. The big red flag: when they blame others for everything that went wrong. Yes, there are people who claim they have never made a mistake and probably really believe it. But I won’t hire those people.

2. Being overly negative about your current situation

No one likes to hang around negative people. And even though your current job is making you break out in hives from stress, there has to be something positive you can say. If that’s a stretch, focus on what you are looking for instead. You can say you are leaving for more growth opportunities or a chance to take on more responsibility. Don’t ever forget that no matter how big the city is where you are interviewing, it’s still a small world, especially within a certain industry. Your interviewer could be a golfing buddy or in a book club with your current boss. It can only hurt your career to be negative.

3. Focusing more on what the company can do for you rather than what you can do for the company

It’s good to ask questions. In fact, it’s a big red flag if an interviewee doesn’t ask questions. But if those questions are all focused on what you’ll be getting out of the company — salary, benefits, vacation, type of office — rather than what you are bringing to the company, well that’s a huge red flag. Companies want to hire team players with a motivation to contribute to the goals of the company.

4. Talking too much or not answering the question

I get it. You’re nervous and that may cause you to talk way too much and take five minutes to answer one question. Or not answer it at all. I get really frustrated when I ask what I think is a simple, straightforward question and I get a rambling, long-winded, irrelevant response. It’s like asking a politician a question at a press conference. And it tells me this person needs to work on his or her communications skills.

5. Not knowing your own strengths and weaknesses

An interviewer doesn’t expect anyone to be perfect. But he or she does want to know what strengths you are bringing to the team. You wouldn’t conduct a draft for a baseball team without knowing whether your shortstop has the strength to throw the ball to first base. You also need to know the batting stats of all the potential recruits, whether good or bad. It’s the only way to build a winning team.

Another candidate left his cat at home. But he also left his shirt. The HR manager couldn’t recall any policy against candidates being half clothed, so he interviewed him. After that he added a sign to his office that read “No shirt, no interview.”

So here is one last tip. Arriving fully clothed to any interview is always appropriate.

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On the Radio

I’ll be discussing my experiences as a Turnaround Authority and my new book “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes” tomorrow on the Michael Hart Show at 9:00 a.m.  You can listen online here: http://tunein.com/radio/The-Michael-Hart-Show-p49631/#

This is my third appearance on the show. Click below to listen to my first two appearances.

Michael Hart interview with Lee Katz

We had a rousing discussion about fraud and the most important things companies can do to prevent it.

Michael Hart interview with Lee Katz and Bernie Marcus

Bernie and I discussed the government and business as well as how to create more jobs in this country.

I hope you’ll tune in and listen!