To Catch Fraud, Just Do the Math

Numbers play a large role in my career as a turnaround authority. When I am trying to save a company from financial ruin, I spend a lot of time looking at the books. All those hours I spent in math class have paid off.

My favorite use of math is uncovering fraud, which costs this country an estimated $300 billion a year. So a recent article about fraud in WSJ caught my eye — “Accountants Increasingly Use Data Analysis to Catch Fraud.”

Seems that auditors at KPMG discovered that the numbers at a national call center weren’t adding up. The operators there each issued more than 10,000 refunds a year and were authorized to issue checks for up to $50.

The firm decided to analyze some data and applied something called Benford’s Law. When they did so, they determined there were too many fours in the refund checks. So what is Benford’s Law and what’s wrong with the number 4?

Also called the First-Digit Law, it refers to the frequency of digits appearing first in a list of numbers. It seems that the number one occurs first 30 percent of the time, with each successive number occurring less and less. The number 9 appears first less than 5% of the time.

This holds true whether you’re talking about street addresses or stock prices. That’s probably why we are advised not to start a passcode with the number 1.

The phenomenon was first mentioned by the American astronomer Simon Newcomb in 1881. Then physicist Frank Benford ran all sorts of data that included things like the surface area of 335 rivers, sizes of U.S. populations and numbers listed in an issue of Reader’s Digest. He found the phenomenon to hold true in a variety of situations. The law was then named after him.

So the accountants applied Benford’s Law, and took a look at the first number of the refunds issued by the operators. When they hit the number four they saw a huge spike in the number of refunds. Can you guess what was happening?

Turns out some of these operators, less than a dozen, were issuing fraudulent refunds at the $40 level, knowing they wouldn’t be checked.

These refunds totaled several hundred thousand dollars. And the only way they were caught was by applying Benford’s Law.

Whenever there is a set limit like this, I always encourage people to ask their auditors to look below it.

I tell the story in my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEO’s Mistakes” of a CFO at a manufacturing company in Wilmington, DE. He knew the level at which auditors would review expense reports was $5,000. So what did he do? He wrote himself lots of checks in the mid-$4,000 range.

Part of my review process at a company that is losing money is to look at expense reports at the senior level. I became really suspicious when this CFO dragged his feet in getting me the information I requested. I learned why when I found $180,000 of recent fraud.

Here’s a tip I offer anyone looking for fraud in a business. If you have any type levels set up like this, make sure you or your auditors are sampling below the limit of that transaction to make sure you are not getting defrauded. That seems to be a sweet spot for those committing fraud. And you may want to add Benford’s Law to your fraud detection toolbox.

Stories of Unbelievable Fraud for Fraud Awareness Week

I’ve written a lot about fraud, as I’ve dealt with millions and millions of dollars and merchandise being stolen from companies I’ve worked with. This week, November 16-22, is Fraud Awareness Week, a good time to review your fraud policies as they can cost your company a lot in lost money and time.

To celebrate the occasion, here are a few get-rich schemes that didn’t work out exactly the way they were planned.

This first story starts in 1993, when a con man convinced investors that he had found gold in Borneo. Michael de Guzman, a Filipino geologist, fooled investors and his employer, Bre-X Minerals, by filing down his wedding ring to “salt” the gold samples sent to a lab. At the discovery of “gold” the value of Bre-X, a penny stock, soared on the Alberta Stock Exchange. He and his partners eventually sold off a portion of their options for $100 million.

Enter the Indonesian government, which wanted a piece of the action. Concerned about his fraud being uncovered, de Guzman did the logical thing: he set fire to his office to destroy the files.

But it wasn’t over yet. The Indonesian government took over 55% of the mine to be run by Freeport McMoran, and Bre-X’s market cap went down a billion dollars. Ever resilient, de Guzman just added more gold flake to the samples, which he bought from local miners. The stock soared again.

Gregor MacGregor, winner of the Creative Fraud Award. He invented an entire country.

Gregor MacGregor, winner of the Creative Fraud Award. He invented an entire country.

Not surprisingly, the miners from the other company couldn’t find any gold and asked de Guzman for an explanation. So he hopped on a helicopter to travel to the site to talk with them. He never made it. According to the pilot, he turned around at one point and de Guzman was gone. It was assumed he had jumped and days later the Indonesian army found a body, eaten by animals, which they identified as his.

The stock plunged to zero. Many people think de Guzman is still alive somewhere, having paid a small sum for a body to be identified as his.

The Antar family committed fraud for almost 20 years, from 1969 to 1987 at the retail store chain ironically called Crazy Eddie. The company underreported taxable income by skimming cash sales, reported fake insurance claims and avoided payroll taxes by paying employees with cash.

This story involves another disappearing act. After the company went public in 1984, it initially scaled back the fraud to get a higher valuation. But motivated by a desire to increase stock prices, it devised other schemes to infuse cash like moving funds from secret bank accounts into the company.

After a hostile takeover, the fraud was discovered. Eddie Antar, the CEO, went into hiding for three years but was caught and convicted, along with two other family members.

But the Creative Fraud Award goes to Gregor MacGregor. He created an entire fictional country in Central America in the 1800s. While serving in the British army, he visited the areas now known as Honduras and Belize. After returning to London, he said he had received a land grant and announced the nation of the Republic of Poyais.

After getting the requisite flag, currency and yes, even a coat of arms for his new country, MacGregor began to sell land, issued debt and attracted settlers by regaling them with stories of the wonderful capital city and the quality of the soil.

Imagine the surprise of those first settlers when after a long ocean voyage, they found just jungle and old wooden shacks. MacGregor was arrested, but fled to France where he tried the scheme all over again. I guess that was easier in the pre-Internet days.

He then made his way to Venezuela, ending up with a pension and the title of general after he helped the country in its fight for independence.

While some stories of fraud like these are entertaining, fraud is a serious business. It’s a good idea to review your fraud policies. For tips on how to prevent fraud in your company, please see some of my previous posts

 

Tips to Embezzle-Proof Your Business

I like it when people make my job easy. During one of my stints as interim CEO I suspected the CFO was enriching himself at the expense of the company. Once when he was out of the office, I sat down and looked at his computer. He was so organized that he had a spreadsheet right in a folder on his desktop that listed all the money he had stolen. It was so nice to not have to track it all down.

The truth is it generally works the other way around. Companies make it far too easy for thieves to do their job and to steal from the company.

I’m never too surprised to read about another case of embezzlement, but here was one with a twist. After an auditor with the National Credit Union Association noticed discrepancies in the financials of a small credit union in Hawaii in 2012, it led to an internal investigation. That led to a FBI investigation. Turned out, three employees were embezzling money. But it was hardly a conspiracy — none of the three knew the others were embezzling as well.

They managed to steal half a million dollars, each operating independently of the others. Heck, if they’d known they could have had a friendly competition — you know, first one to steal $250,000 buys lunch for the others.

The fact is I know of many instances where businesses have made it too easy for embezzlers.

Here are a few of the tips on how to protect your company from theft that you’ll find in my book “How Not to Hire a Guy Like Me: Lessons Learned from CEOs Mistakes.”

1. Give Your CFO or Corporate Controller a Break

I tell all my clients to give their CFO or corporate controller two consecutive weeks off every year. During that time, nose around a bit. Review deposits, talk to his assistant, check his mail. Banks have been doing this for years for good reason. If anything fraudulent is going on, this is a good time to detect it.

Once I was sitting at a CFO’s desk and took a peek at his mail. And there were his account statements from the bank in the Cayman Islands where he was depositing the money he was embezzling. Guess he was trying to save himself the cost of a PO Box.

Yes, most CFOs are trustworthy people. But I’ve dealt with enough who are not, and have cost their companies dearly, to know that it’s good policy to always verify your finances.

2. Tighten Up your Checks and Balances

Here are two things to remember: First, any place money or goods exist or move is a place that fraud or theft could occur. Second, no one is above suspicion.

Make sure to review expense reports even at levels lower than are generally reviewed. Make sure every expense-related check has two signatures and that the second co-signor takes the job seriously. Make sure all your checks and balances are in place throughout your company and working as designed.

3. Always Poke Around Your Books

Do spot checks of your ledger or QuickBooks to see where your money is going. Ask questions about vendors. Get a list of them and call a few of them to make sure they really exist.

Remember the $1.48 million embezzlement from Woodruff Arts Center? That was done by an employee who set up a bogus vendor. Guess who was cashing those checks?

Whether it’s one employee or three, don’t let embezzlement happen in your company.

Discovering Fraud By Walking Around

Have a fraud story to share? Send me yours for a chance to win a copy of my book! See details below.

I’ve had a front row view of more instances of fraud than I could have imagined when I first began my career. In my work as the Turnaround Authority™, I’ve seen hundreds of millions of dollars stolen from the companies I’ve worked with. Almost half of my clients have encountered some type of fraudulent situation.

You may think that I uncover fraud by going over the books and discovering something wasn’t quite right. And in many cases that is what has happened. I have plenty of those stories, of accounting personnel setting up dummy companies and payroll accounts, and embezzling hundreds of thousands of dollars.

My favorite story of uncovering fraud this way was when I sat myself down at the CFO’s computer, one I suspected of stealing. He was so organized that he had created a folder on his desktop with an entire spreadsheet detailing all the money he had stolen from the company. It’s so handy when thieves do a lot of my work for me.

But I’ve also found out about many cases of fraud from other employees in a company by employing a form of MBWA, management by walking around. Popular in the 1980s, MWBA really just means walking around and talking to people, face to face, and getting a sense of what is really going on in the office. (For more on MWBA, read my previous column about it, “Get Out of the Corner Office and Hit the Front Line.”)

In one instance of a twist on MBWA, I hosted a midnight barbecue for people working the nightshift. You could call it MBGH, management by grilling hamburgers. As I was grilling and we were all standing around chatting, the employees opened up to me and we began swapping stories. And boy, did I hear a doozy. One of the guys mentioned that he had a concern about excess inventory purchasing. Of course I made a mental note of that. Turned out to be a case of multi-million dollar fraud, which I uncovered because the employee felt comfortable chatting with me in the informal atmosphere.

I uncovered another case of fraud when I learned that a payroll clerk had returned to work the day after an appendectomy. That raised a red flag for me, as it seemed to be an extreme example of devotion to a job. After casually chatting with some other employees about her dedication, I learned they were in awe of sweet “Aunt Tess” because she had not missed a single payroll day in 25 years. Isn’t that something? Why yes it is, and that something is criminal. Aunt Tess was there every payroll day so she could handle the paychecks for the fake employees she had created, allowing her to steal up to $100,000 a year.

One of the best ways to uncover fraud in your company is to create an open door policy, a feeling of camaraderie where communication is encouraged. Generally, if fraud is occurring, someone in the company knows about it or is suspicious that something not quite right is going on. You want to encourage them to share their concerns with you so you can follow up.

I have plenty more stories about fraud and ways to prevent it in my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes.” One of the most rewarding parts of writing this book has been hearing from readers who share their stories of fraudulent activity with me.

Do you have a story of fraud? Please share it with me at lnkatz@aol.com. I’ll print the stories here, and the best story will win a copy of my book.

Church Ladies Passing the Plate – to Themselves

Many ladies of the church devote countless hours of volunteer work to their congregations — arranging flowers, planning weddings, cooking food for gatherings and doing whatever it takes to service their congregations. But it seems that some of the ladies who work at the church are involved in another not so helpful activity. Stealing.

In my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes,” I tell the story of the church bookkeeper who stole money from one church and after being caught, moved to another state and stole millions from that church as well. Seems she is not alone.

Sharon Warunek won’t be going to her job at the Diocese of Scranton in Pennsylvania any longer, after working there for 27 years. As office manager of the church’s Society for the Propagation of Faith, she opened all the checks people donated to benefit the poor. Instead of passing the money along to those who need it most, she instead used at least $340,000 to cover her monthly Discover credit card bill.

Jerri S. Hunter of Virginia managed to embezzle half a million dollars from the Chester United Methodist Church over the course of six years and faces 14 counts of embezzlement. And she wasn’t even caught while she worked there. After she was fired for an unrelated charge, volunteers who were handled tasks she previously performed found discrepancies in the numbers.

Although the Hilltop Lutheran Church in South Bend, Indiana, only had 120 members, the secretary and treasurer Jane Loprest managed to steal $119,000 in the eight years, taking it upon herself to double and triple her pay. She was smart enough to manage the accounts so the church was never overdrawn. Using surveillance photos from the church’s bank, postal inspectors determined she was writing checks but never issuing them, instead cashing them for herself. She is serving a year and a day in prison. At least she said she was sorry.

Sadly, ladies stealing from the church could form their own church circle — and have quite a few members. One out of eight fraud schemes involves a religious organization or other non-profit. And most of the thefts are committed by women.

The gender gap is fairly easily explained when you consider that women handle most of the bookkeeping jobs in the United States. They are the ones with access to the money. The Bureau of Labor Statistics reported that in 2010, 90 percent of the bookkeepers in the United States were women.

But why churches, religious organizations and non-profits? These are the more vulnerable organizations. They have “have very weak control systems. They’re not operating on big budgets that allow them to spend money on accountants,” according to Chris Marquet, CEO of Marquet International, a security firm based in Boston that tracked worker embezzlement schemes over the past five years.

The lesson here is not to be suspicious of the kindly lady at the reception desk or the office manager at your church office. It’s a lesson for anyone that owns or runs a business, particularly a smaller one that doesn’t have an accounting department. Always take a look at your books and institute controls on financial transactions. Don’t make anyone even attempt to violate the seventh commandment with your business’s money.

Look for me November 10 at 4:30 at the Book Festival of the Marcus Jewish Community Center of Atlanta. I’ll be discussing my book,  ”How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes.” The event is free and open to the public. Click here for more information.

How They Got Caught

Continuing our series on corporate fraud, today’s topic is how people who steal from their companies get caught. In addition to all helping themselves to money that doesn’t belong to them, they have something in common. They never thought they’d get caught. Here are some stories on how they did.

As a fraud deterrent I’ll always advise people to tell your CFO to take two consecutive weeks of vacation a year. Take that opportunity to sit at his desk, open his mail and talk to his secretary. You may be surprised at what you learn.

I did just that for a company where I was Interim CEO. I found that the CFO was having his Cayman Island bank account statements sent to his office, clearly detailing the money he was stealing from the company. Another time I suspected a CFO of fraud so I poked around on his computer. I found a spreadsheet detailing all the money he had stolen, dated and tracked. I love organized thieves. They make my job so much easier.

2010.07.28m3You never know how you’ll find fraud. I once had a potential client that found the controller had siphoned $3 million from the payroll account over the period of four years by creating dummy employees. The company hired a new CEO who determined that the headcount didn’t match. I never got them as a client. Once the bank found out, it decided it couldn’t trust the balance sheets and called the loan. The company had to shut its doors.

And here’s a story that literally takes the cake. Tom Murphy started the hugely popular Murphy’s restaurant more than 30 years in Atlanta. He wrote a lot of checks and had huge statements so he hired a Georgia State grad to help out as a bookkeeper. He knew Murphy’s was taking in a lot of money but he never seemed to have enough to cover his expenses.

So he looked over the bank statements himself one day. In just one month he found the bookkeeper had written checks for $3000 to himself. Going back through older statements, Tom found the guy had stolen $35,000 over the past year.

He called the guy who said he had “borrowed it” because he was getting married, planned to pay it back etc. Back in his more naïve days, Tom believed him. As he writes in his book, Murphy’s: 30 Years of Recipes and Memories, “Lesson learned: After you find someone stealing from you, chances are good he is lying when he says he will pay you back.”

The guy didn’t show up for work the next day so Tom called the police. Turns out he hightailed it to Mexico and eventually landed in Texas.

Here’s the fun part. Two weeks later the guy’s sister called Tom and said her brother was in town and she was having a going-away party for him. “Would you make the cake?” she asked.

“Of course,” he said and got the address. Then he called the chief of police to arrange a special delivery. Now that’s a surprise party where everyone was surprised.

So there’s a lesson for would-be thieves. While you may be justifying your crime to yourself, as we discussed in a previous column when I wrote about rationalization as part of the fraud triangle, you’ll have a lot harder time justifying it when you get caught. And you most likely will.

Lessons from the Fraud Triangle

Fraud can occur when three elements are present: pressure, opportunity and rationalization. That’s the premise of the Fraud Triangle that I wrote about in last week’s column, “Why Fraud Occurs: The Fraud Triangle.”

So what lessons can we learn from these three elements of the Fraud Triangle? With a better understanding of why fraud occurs, what can we do in our businesses to prevent it?

The Fraud Triangle needs to be the basis of any effective fraud-deterrence program and should address its three elements.

1. Pressure

While some employees steal due to financial pressure, they may also be stressed due to difficult circumstances at home or addiction issues. Remember the example of Amy that I wrote about last week, the office manager who embezzled $345,000 from her company over a four-year period. She began stealing because her son had been arrested and she used the money to hire a lawyer to defend him.

Other than paying employees fairly, there is not a lot a company can due to relieve many sources of pressure, financial or otherwise. But it can train managers to recognize employees that seem to be under unusual stress. In some cases the HR department can point them to resources to get help.

fraudhandcuffs2. Opportunity

This is the area where a business can be most effective and should focus its efforts. Every company needs to have an effective fraud prevention program with strong internal controls and management oversight.

Most employees steal only when they perceive no chance they will get caught. Remember, it’s only the people you trust that will steal from you. If you don’t trust them, you’ll make sure they don’t have the opportunity to steal. Trust no one implicitly.

For tips on preventing fraud, please see my previous columns, including “The High Cost of Fraud and How to Prevent It,” “My Number One Tip for Fraud Prevention” and “13 Fraud Prevention Tips.”

3. Rationalization

Like pressure, this element is harder for an employer to deal with as it is done internally and no one may know that the employee feels it’s okay to “borrow” the money from the company or is owed it because he is feeling overworked. Amy the office manager began working harder and longer hours to justify the money she was stealing from the company, telling herself that she was really earning it.

Rationalization lets a person continue to commit a crime while telling himself that he is really not a criminal; he is still an honest person. Make sure every employee knows that fraud will not be tolerated in your business and it will be prosecuted.

I also recommend you follow Lee’s Fraud Policy and post it in the employee manual and reinforce it verbally: If you steal, I’ll put your butt in jail!

Because it is more difficult for a company to deal with an employee feeling pressured and his ability to rationalize crime, the majority of efforts should be focused on the most effective way to prevent it in the first place — by not providing any opportunity for thieves to steal. That way, all your employees truly can remain honest.

Why Fraud Occurs: The Fraud Triangle

Pressure, opportunity and rationalization. Those are the three factors that must be present for a person to commit fraud in workplace.

I’ve written a lot about the effects of fraud, the cost of it to the US economy and how to prevent it. But why is there so much fraudulent activity going on every day?

Criminologist Dr. Donald Cressey asked the same question in 1950. Cressey, who is considered the founder of the modern study of organized crime, became fascinated with embezzlers and wrote his dissertation on them for his Ph.D. in criminology. He was puzzled because most people who commit fraud are not criminals. They are generally “good” people. So what happens?

He interviewed 250 criminals who must have accepted a position of trust in good faith and must have violated that trust. His research was published in Other People’s Money: A Study in Social Psychology of Embezzlement in 1953. His theory on why fraud occurs eventually became know as the Fraud Triangle and is still the classic model to explain why people commit fraud in the workplace.

Cressey wrote that all three factors of the fraud triangle must be in place for an employee to commit fraud.

fraud7Pressure/Incentive

The thief is initially motivated because he or she has some type of non-sharable financial pressure or incentive. They may be involved in gambling, have a drug addiction or possibly took on more debt than they can handle. Or they could have a desire for material goods beyond their means, such as designer clothes and handbags or a new car. Sometimes an employee feels unfairly treated by a company and this is their way to get back.

The non-sharable aspect is an important distinction because the person generally feels shame or embarrassment over the situation or is concerned about potential disgrace. These are generally crimes committed in secret.

Amy Wilson was a respected office manager when she was caught for embezzling $345,000 and sent to jail. Now out and reformed, she speaks about what she did to help businesses prevent fraud. The first time she embezzled, ironically, was to hire a lawyer for her 18-year-old son, who had been charged with a felony and put in jail. When she was caught, not even her husband knew of her crime.

Opportunity

The second factor is opportunity. The criminal has to see what he perceives to be an opportunity and one that he can keep secret. He has gained the knowledge and has the authority to circumvent internal controls and devises a scheme to exploit those.

Amy’s company had no internal controls and as the office manager, she had access to all the bank accounts and computers. “For me, stealing money was as easy as printing checks in the accounting software test module and forging the vice president’s signature,” she says. “I then paid my personal credit card account with a company check.”

Rationalization

Most people who commit fraud in the workplace have no criminal past. They are first-time offenders and despite stealing from their companies, believe themselves to still be honest and decent people. To continue along the path of denial, they come up with ways to justify their crimes to themselves. These include: I was stealing to provide for my family; I am underpaid at work and deserve to have this money; I was going to eventually pay it back; everyone else at work steals things like office supplies and no one seems to care.

Amy worked long harder and longer hours, one of the ways she was able to justify her theft to herself. “Somehow, this made me feel less guilty and less shameful about my behavior,” she says. “I vowed to find a way to pay back the money I’d ‘borrowed.’”

There are great lessons to learn about how to handle fraud by looking at the fraud triangle and the behavior of people like Amy. Read next week’s column to find out what the fraud triangle tells us about how to handle fraud in the workplace. What works, and what doesn’t?

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 Preventionfor 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.

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?