Fraud

by

You Can Fight Fraud. And Win.

We all know Smokey the Bear’s slogan. “Remember – only you can prevent forest fires.” You can use the same slogan for fraud: only you can prevent fraud in your company.

I couldn’t let National Fraud Awareness Month slip by without mentioning a major contributor to revenue loss for a company. In its 2016 Global Fraud Study, the Association of Certified Fraud Examiners (ACFE) reported that a typical organization loses 5% of its revenue in a given year as a result of fraud.

Let that sink in a minute – 5% of your total revenue. Billing schemes and check tampering pose the greatest risk. And here’s another thing to think about, the perpetrator’s level of authority is strongly correlated with the size of the fraud. The higher up the thief, the bigger the theft.

I have written extensively about fraud as it can severely damage a company, and can even cause it to fail. While you can’t prevent fraud 100 percent, you can lessen its effect on your business. Does your company have strong enough fraud prevention measures in place? Here are a few articles to get you started.

Best friends, grandmothers, partners, even church ladies – I’ve seen them all commit fraud. When it comes to protecting your assets, trust no one. Don’t ever think that you know someone well enough to say, “He would never do that.” Maybe not. But don’t find out the hard way.

Sadly, the same goes for family members. Just read about the sad case of Gladys Knight and her son and what he did to her poor chicken and waffles restaurants.

I once worked with a company where the younger brother was running the business and took a salary beyond the limits allowed by the corporate minutes. Unfortunately, the fraud was only discovered after Daddy died and the statute of limitations had run out.

Fraud can occur when you have three elements: pressure, opportunity and rationalization. Knowledge of the fraud triangle is the basis of any successful fraud-deterrence program.

To catch fraud early, you need to know what the red flags are. One of these is when an employee exhibits behavioral changes, undergoes a sudden change in lifestyle or has financial difficulties. Read the article for four other red flags you need to be on the alert for.

According to the ACFE, the most common way internal fraud is detected is by receiving a tip from someone. One of the things your company can do is set up an anonymous hotline for anyone to report suspected theft. Their numbers show that organizations that had one were much more likely to detect fraud than those that didn’t – 45.3% to 28.2%.

My book “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes,” is now available as an ebook.

by

Funny, But True: Two Cases of Too Many Zeroes

Fraud isn’t funny. But some of the failed attempts at fraud can be. Here are my nominations for two people who deserve at least an honorable mention for the Darwin Awards. Neither of their genes should be in the pool.

Like trying to cash a check for $360 billion. In 2008, a 21-year-old man in Texas went to a bank in Fort Worth with a check, claiming he needed the money to start a record company and his girlfriend’s mother had given him the check. That would have been enough money to buy just about any record company he wanted, along with all the rights to every Beatles, Michael Jackson and Elvis song ever recorded.

See anything suspicious about this check? (AP Photo/KXAS-TV)

But the tellers at the Fort Worth bank were just a bit suspicious of a check with 10 zeroes in the number. A call to the girlfriend’s mother confirmed that suspicion. She did not give him the check. My guess is she also did not have $360 billion sitting in an account. He was arrested on a forgery charge.

A woman in Georgia had a few less zeroes in mind when she filed a fake tax return, claiming an income of $99 million. She claimed she was due a refund of $94 million. Revenue agents wrote a fake check of their own, issued to Brigitte Jackson for $94,323,148 and told her to appear at a bank inside a supermarket to cash it.

Brigitte showed up, visions of riches in her head. But instead of leaving with the cash, she left in handcuffs, charged with attempted theft by taking and conspiracy to defraud the state.

While these instances are comical and easily spotted, most fraud is not and can go on for years, costing your business millions of dollars. The Association of Certified Fraud Examiners estimates the money lost by businesses at over $3.5 trillion a year.

In my years in the turnaround industry, I have seen dozens of cases of fraud, many of which caused owners to lose their businesses. It’s rarely this blatant, which means as a CEO or business owner, you have to be ever-vigilant.

March is National Fraud Prevention Month, a good time to access your businesses fraud prevention practices. Here are a few articles with tips on preventing fraud in your business:

 

 

by

Funny, But True: Give a Second Thought to That Second Chance

You have an employee who makes a big mistake, but comes to you to admit it and offers a solution. So, you forgive him and move on. We all mess up sometimes, and this employee handled it correctly. You give him a second chance.

As Warren Buffett said, “I make plenty of mistakes and I’ll make plenty more mistakes, too. You’ve just got to make sure that the right things overcome the wrong ones.”

But some mistakes aren’t forgivable and employees who make them don’t deserve a second chance.

publishing-scamI once worked with a company whose sales manager was running a scheme. He would sell their widgets to a customer who was a partner in his crime. After the sale, the sales manager would issue a credit, reducing the price of each widget by $1 to that customer. The sales manager and the customer split the extra $1.

The scheme went undetected and over time amassed both the sales manager and the accounts receivable manager a lot of money.

The fraud was only detected because the sales manager accidentally sent a credit to the wrong company, which reported the error. The fraud was uncovered and both managers were fired. But they were not prosecuted for their crimes. (I always advise business owners to prosecute thieves. Read more about that in “Why You Should Always Prosecute Fraud”)

And it turns out the sales manager was actually really good at sales, and once he left, sales declined 25 percent. The CEO couldn’t find a suitable replacement in the following year, so what did he do? He hired back the thieving sales manager.

The CEO’s explanation? While the sales manager never paid any of the money back, he said he was sorry. During that past year, he had found God, repented his sins and begged for forgiveness as a friend and long-term employee.

He lasted six months, until he moved. To jail. Where he was sent for stealing again.

Beyond the obvious lessons of prosecuting fraud and not rehiring people who steal, the other lesson is that some people deserve a second chance and some don’t. As a business owner/CEO you need to know the difference.

 

 

 

by

Funny, But True: When Employees are Naughty, Not Nice

The popular song may claim this as the most wonderful time of the year and the hap-happiest season of all. December is also the least productive, as many workers take time off for the holidays and when they are in the office, they are distracted. And possibly doing their gift shopping online.

Having employees take adequate vacation is important and critical to the well-being of your business. I encourage every company I work with to encourage employees to take time off, and in fact to mandate the CFO take two consecutive weeks off every year. No, I’m not playing Santa Claus here. It’s about uncovering fraud.

In addition to the benefits of having an employee come back refreshed and rested, vacation is the time companies uncover naughty things some employees may have been up to.

Take the example of dear Aunt Tess. She was a payroll clerk at a company I was working with. She was a loyal and dedicated employee of 25 years, who had never missed one single payroll. Not even less than 24 hours after she had her appendix out. See any red flags yet?

I did, and after a bit of investigation, found dear Aunt Tess had been paying fake employees for 25 years, diverting their income to herself, to the tune of $75,000 to $100,000 a year. She had stolen millions of dollars.

So, I may sound a bit Grinch-like, but when your employees take time off during the holidays, make a list of who has access to your books and do a little checking it twice.

Next week, why did Americans leave 658 million vacation days unused last year, and what impact does not taking those vacation days have on your employees?

by

Why You Should Always Prosecute Fraud

Sometimes people think I’m harsh when I tell them to always prosecute fraud in their companies. My fraud policy is quite simple, “If you steal, you will be prosecuted to the fullest extent of the law.”

Instituting a fraud policy is one of the easiest things a company can do. But I am continually dismayed to find out how many companies don’t have one. It seems to be an issue they’d rather avoid. Until it happens to them.

When fraud occurs in a company, many CEOs are reluctant to prosecute it. The main reason I’ve found is that it can be embarrassing to admit it happened in your company. They’d rather other people didn’t find out about it. And they don’t want to get involved with lawyers and filling out paperwork. It can also be hard to prosecute someone you know. They worry about hurting the employees’ families. So they find it easier just to let the thief go and keep the entire incident quiet.

Let me remind you what one investor said about Bernie Madoff. “Bernie would never do that. He’s my friend.” That investor lost everything. As they say, with friends like that …. For more on that topic, read my blog, “Nice People Commit Fraud.”

There are several reasons you need to prosecute fraud when it occurs in your company.

One is that when people see you following through on the fraud policy, it deters others from committing fraud. And the opposite may be true if you don’t prosecute it and your employees know about it. They may figure, “Well, Susie got caught. She did get fired, but I heard she found another job right away.” So while in the short run it may be a hassle to prosecute the employee, it can pay off in the long run when you don’t have to deal with this issue again.

And another reason is that if you don’t prosecute them, odds are very high they will go and steal from someone else. Susie got another job because her new employer didn’t know she’d embezzled from the previous one.

I recently read an article in the Atlanta Journal-Constitution about Thomas Conrad, “Decades after ban from industry, Alpharetta man again accused of fraud.” Seems Thomas is a repeat embezzler. He was banned from the investment industry in a disciplinary action in 1971. He apparently behaved himself for four decades. But then he struck again.

He and his son, Stuart P. Conrad, have been accused by the U.S. Securities and Exchange Commission of defrauding investors of $10.7 million through a group of hedge funds they managed. While he cut off any payments to investors starting in 2008, the money was still flowing freely to him, his wife, his son, other relatives and a few of their favorite investors.

They also involved another money manager in one investment that turned out to be a Ponzi scheme.

And did he tell those investors that he had been banned from the investment industry decades ago? You can guess the answer to that one. That is also a violation of federal securities law.

In this case a fraud prevention policy wouldn’t have helped as he had been banned from his industry. But this story does illustrate that once a person commits fraud, he is much more likely to do so again.

Don’t pass along your problem to someone else by just letting a thief go. Prosecute the people who steal from you. They may strike again. Even if they wait four decades to do so.

 

by

Fraud and the Family Business

Collard spring rolls. Delicious fried chicken and crispy waffles. An internationally famous singer’s name. Sounds like you’ve got all the ingredients for a successful business.

And for a long time, Gladys Knight’s Chicken & Waffles, opened in 1997, was just that. The restaurant chain had high ratings on Yelp, long lines of hungry diners and celebrities holding court in its booths. Sadly, things behind the scenes are not always as rosy.

Gladys Knight’s involvement was limited to letting her son, Shanga Hankerson, use her name. He ran the restaurant chain, which generated $8 million in sales at three locations. But he wasn’t running it too well apparently – he made national news in June when he was arrested for theft, and state revenue agents filed civil racketeering charges against him. Shanga allegedly owed $1 million in unpaid taxes and had been siphoning money from the restaurants to pay for unsavory activities. He wasn’t paying the employees and the restaurant was failing health inspections.

Shanga is out on bail and while two of the three locations have reopened, the chain made headlines again this week as it was disclosed Gladys is suing her son to remove her name from the restaurants and to stop using her recipes and memorabilia.

In addition to the financial losses the restaurant chain suffered, the Empress of Soul took another more immeasurable hit. To her reputation. Gladys has her name on seven Grammy awards, a star on the Hollywood Walk of Fame and in the Rock and Roll Hall of Fame. One place she doesn’t want to see her name is on a business mired in scandal.

Fraud can happen in any type of business and the types of fraud are similar to those in non-family businesses. According to an article in Strategic Finance magazine, “Shattered Trust: Fraud in the Family,” common fraud schemes include stealing office supplies, providing business secrets to a competitor, diverting customers to a competing entity, paying ghost employees and as happened in this case, stealing business funds.

Fraud always involves a betrayal of trust. But in a family business, that betrayal cuts much deeper. Many business owners and CEOS are happy to employ family members because there is an assumption they can trust them beyond anyone else.

An article in Forbes listed myths of family fraud. The one that caught my eye is one I have seen over and over in my career. “Our people wouldn’t commit fraud.”

Everyone wants to hire trustworthy people and continue to trust them to do the right thing. That’s one of the reasons they like to hire family members. You should be able to trust them above anyone else, right?

The bottom line is not always. Not even your own spouse/sibling/child. Here is another story to illustrate that fact.

A physician husband set up a practice with his wife in Connecticut. The business thrived and they enjoyed a nice lifestyle. One day the wife was running some errands and the husband saw an envelope on her desk from a bank he wasn’t aware of. It contained a bank statement for an account with $200,000 in his wife’s name. He learned she was planning on divorcing him, so had been stealing the money from the practice for the new life she was planning.

Other motivations for family members stealing may be addiction problems, feeling entitled or feeling underpaid and underappreciated. Whatever the motivation, the answer is the same as it is for every company. Institute strong fraud prevention policies and enforce them for everyone, family included.

For tips for setting up fraud prevention policies, please see “My Number One Tip for Fraud Prevention” and “13 Fraud Prevention Tips.”

As for Gladys Knight, it’s too late for her. She won’t be singing “You’re the Best Thing That Ever Happened to Me” to her son any time soon.

 

 

 

by

Excuses for Fraud: Now We’ve Heard It All

Call it the lighter side of fraud, if there is one. As a follow-up to my columns on fraud prevention, I thought I’d share some of the more entertaining excuses people have given for why they committed some type of fraud.

One guy from Glasgow tried to use the soap opera defense. He claimed the investigators were really seeking his “evil twin brother” who lived in Pakistan about the identity and benefit fraud he was accused of. Wait, it gets better. He had two Pakistani passports with the same children listed on them. Seems his evil twin had children born on the exact same days with the exact same names. Wow, what are the odds?

This one could be called the “50 Shades of Grey” excuse. One man was collecting housing benefit money in Great Britain while working but hadn’t informed authorities. He claimed he owed money to his landlady. Her efforts to collect included wearing high heels, brandishing a prop similar to those in the movie and chasing him down for “payment in kind.”

How about the “I never got that raise” excuse? A bookkeeper was once denied a monthly raise of $100. He was angry and decided to help himself to the company till, stealing exactly $100 a month. For 20 years, until he retired.

Then there’s the CFO of a bank in Tennessee who tried the “It’s the tractors fault” excuse. The case study was reported by the Journal of Accountancy of the CFO who invested a lot of money in a local tractor dealership. He borrowed from his own employer to increase his investment and when the investment soured, didn’t want to admit to his employer that he was no good with his own money. So he began stealing from the bank, and by the end of the year had helped himself to $150,000.

He became so enamored of stealing money that when a customer accidentally paid a note twice, this guy just signed his own name on it and put it into his checking account. That was his downfall. He was caught when the customer noticed the duplicate payment and they tracked it to his account. He spent three years in prison.

And finally, the “My ego was too big to admit failure” excuse. That’s what Russell Wasendorf Sr., who was the owner and CEO of Peregrine Financial Group, said when he admitted he had embezzled an estimated $215 million with forged bank statements over a period of close to 20 years.

Wasendorf received all bank statements from US Bank and was able to make counterfeit statements and deliver those to the accounting department. He also made forgeries of nearly every document that came from US Bank and established a PO box to intercept paperwork sent by regulators.

In a signed statement, he said he began stealing when his business was on the verge of failing if it didn’t receive additional capital. “I was forced into a difficult decision: Should I go out of business or cheat? I guess my ego was too big to admit failure. So I cheated.”

In 2013, Wasendorf was sentenced to 50 years in prison and was ordered to pay $215.5 million in restitution.

Don’t set yourself up to hear any of these excuses. Make sure you have adequate fraud prevention policies and measures in place. Check my previous columns on the topic and the chapter in my book, How Not to Hire a Guy Like Me: Lessons Learned From CEOs’ Mistakes. These excuses may be comical, but fraud is not.

by

7 Fraud Prevention Tips for Small Businesses

Last week’s post, More Red Flags of Fraud, discussed how management should be trained to always be on the lookout for behavioral changes in employees that may be red flags for fraud. As the column pointed out, 92 percent of the people who committed fraud exhibited certain behavioral traits. Recognizing those can be the key to detecting and preventing fraud.

Being aware of and dealing with fraud is crucial for any size business, but particularly for small businesses for three reasons:

  • They are disproportionately victimized by fraud
  • They are less likely to have fraud protection measures in place
  • There tends to be a greater level of trust in small offices

That’s according to the Association of Certified Fraud Examiners (AFCE). Small businesses, defined as those with fewer than 100 employees, suffered 28.8 percent of all fraud cases, with an average median loss of $154,000.

The average median loss was higher for the largest entities, defined as more than 10,000 employees, at $160,000. But obviously that is a much smaller fraction of overall revenue than for smaller companies.

So you’re a small business and can’t afford the most expensive fraud detection systems. But there are plenty of measures you can enact to cut down potential for fraud in your company. Here are a few suggestions.

  • Select the right employees. Always check references and criminal records. You may want to conduct credit checks to make sure your potential employee is not in dire financial straits, which can set the stage for him to consider committing fraud.
  • Separate accounting duties. Many small businesses delegate all the financial dealings to one person, who opens the mail, writes checks, reconciles the accounts and generates invoices. This makes a business vulnerable. If you don’t have the staff to completely separate duties, then have some of the responsibility rotate around the office if possible.
  • Always prosecute theft and fraud. Make it clear that you have a no-tolerance policy towards any type of theft or fraud and you will prosecute any and all people involved. This is easy to include in an employee manual. “If you steal, you will be prosecuted to the fullest extent of the law.” If the policy is equally applied to all employees, no one, even in a small office, should feel mistrusted.
  • Conduct surprise audits. Ask to see the books and review invoices and accounts payable. Call a few of the businesses to make sure they are legit and that your company is doing business with them. Or call your CPA in for an unannounced mini audit to uncover any problems.
  • Have your controller, bookkeeper or CFO take off two consecutive weeks each year. I recommend this measure to all my clients as a way to prevent and detect fraud. In their absence, do their jobs. Open the mail, review deposits, correspond with vendors.
  • Purchase the ACFE’s Small Business Fraud Prevention Manual. At $59, it’s money well spent. The manual goes into detail on how employees steal. It also gives prevention tips and how to deal with dishonest employees.

And as long as you are buying books, add my book to the list. How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes contains a chapter called “Stop Fraud Before It Starts” and includes ways to create an office fraud as well as tips on preventing fraud in all size companies.

You’ve worked hard to create revenue for your business. Don’t let anyone steal any of it from you.

by

More Red Flags of Fraud

In a previous post, Red Flags of Fraud, I wrote about 5 red flags you should be on the lookout for in your employees’ behavior to prevent fraud in your company.

These are:

  1. An employee refuses to take vacation and rarely takes personal or sick days
  2. An employee gets annoyed at reasonable questions or offers unreasonable explanations
  3. An employee wants to remain in his or her current position
  4. An employee exhibits behavioral changes, undergoes a sudden change in lifestyle or has financial difficulties
  5. An employee has unusually close relationships with vendors

The 2014 Global Fraud Study done by the Association of Certified Fraud Examiners found of all cases they analyzed, 92 percent of the people who committed fraud exhibited certain behavioral traits, all of which are listed above.

fraudchartThe top two traits the study found are Living Beyond Means (43.8 percent) and Financial Difficulties (33 percent), as listed in #4. I’d like to expand on these two behaviors, as they may be harder to detect than the others above and on the chart you see here.

If an employee begins to talk about financial difficulties, too much credit card debt or high medical bills, that’s the time to pay a bit more attention to him. Pressure from financial problems due to things such as overspending, a divorce or health problems can set the stage for an employee to consider fraud as a way out of his difficulties.

Another behavioral change to note is when an employee who may have previously complained about being overworked, underpaid or passed over for a promotion no longer talks about workplace issues and seems more content although nothing has changed.

If she is committing fraud, she may feel that she is evening the score and taking what she considers is due to her. She now feels happier in the workplace.

Changes in lifestyle can be a bit trickier to determine. An employee may start driving an expensive new car, talk about a new second home or take high-end vacations. She may chat about moving to a new home in an upscale neighborhood or bring in photos of a new boat.

It can be tricky to question someone about these purchases and where the money came from. And they could be explained by claiming to have gotten an unexpected inheritance, or a spouse with a new high-paying job.

Or, as often happens, the money is spent somewhere the employee would not be eager to share at his workplace. Michael Dennehy embezzled over $1.7 million from Bexar Waste in San Antonio by forging company checks for more than six years. He admitted that he spent it on escort services and gambling. As a married father of five, he probably wasn’t sharing those stories in the break room.

Make observing behavioral changes part of your fraud prevention program and share this information with your management team, so they can be vigilant about these behaviors.

Fraud prevention is vital for any business. The median loss caused by fraud in the ACFE study was $145,000, with 22 percent of the cases costing a company more than $1 million.

Come back next time when I’ll discuss why small businesses are disproportionately affected by fraud and what small business owners can do to protect themselves.

by

Why You Want Your Employees to Take Vacation

Many people refer to the third Monday of January as Blue Monday – the most depressing day of the year. The holidays are over, the weather is cold and drab and there is less sunlight.

If you’ve made some typical resolutions for the new year, you may have given up foods you love, or alcohol for the month. Rather than cheery holiday cards that arrived in your mailbox in December, now the mail just brings bills from purchases you made this past month.

Here’s my prescription for battling Blue Monday. Plan a vacation. Not only will it give you something to look forward to, taking time off is good for your health and your productivity. And encourage your employee to take time off as well.

While many Americans leave vacation days unused every year, according to a survey done by Glassdoor, a career website, 15 percent of U.S. employees did not use any in 2013.

And they even brag about it, believing they are more productive and proving themselves more dedicated and valuable than their co-workers. They may believe it helps ensure job security.

But studies have shown that not using all of your vacation is actually hazardous to your health. The Framington Heart Study found that taking vacation increases your longevity and decreases your changes of dying from a heart-related cause.

And taking a vacation can actually make your more productive. In an interview with ABC News, Francine Lederer, a clinical psychologist in Los Angeles said, “The impact that taking a vacation has on one’s mental health is profound. Most people have better life perspective and are more motivated to achieve their goals after a vacation, even if it is a 24-hour time-out.”

Recognizing the importance of time off, many companies have taken unique approaches to make sure their employees refresh themselves.

Rather than mandate a maximum number of vacation days, HubSpot instituted a minimum number. Every employee has to take two weeks off every year. The Motley Fool awards the Fool’s Errand prize to one lucky employee. The company draws a name of an employee who has been with the company at least a year. The lucky winner gets $1,000 and two weeks off, must leave immediately and have no contact with the office. And if you work for FullContact, you receive $7,500 to finance a vacation.

Evernote began offering unlimited paid vacation. But some employees were confused and thought that meant they shouldn’t take any vacation. So the company offered each employee $1,000 to get away, and “come back with a stretched-out mind,” said Phil Libin, chief executive, as quoted in an article in the Wall Street Journal.

There is another excellent reason to encourage a two-week vacation. As the Turnaround Authority, I always recommend that banks and financial institutions require the CFO to take two consecutive weeks off to detect and prevent fraud.

As I write in my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEO’s Mistakes,” during his absence, do his job. Sit at his desk. Open his mail. Review all of the deposits. Talk to his secretary or assistant. Just see what happens. This method has long been highly successful for CFOs, and banks have used this same technique for ages. If you don’t find anything unusual, that’s wonderful. Unfortunately, though, you might uncover a detail worth noticing.”Having another set of eyes review transactions can uncover fraud and some misdemeanors.

Taking time off is good for your health, your productivity and your outlook, and that of your employees. It’s also an opportunity for you to spot potential fraud.

So rather than dwell on the dreary days of January, plan a getaway. Even if it’s just a weekend away, you’ll feel refreshed. And Blue Monday will be just another day.