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.


“Nice People” Commit Fraud

“Bernie would never do that. He’s my friend,” said one potential investor who lost everything.

“He seemed like a nice person and not concerned about answering my questions at all,” said the reporter.

These were a few comments made about Bernie Madoff in the movie “Chasing Madoff” that I saw recently. It’s a documentary about whistle blower Harry Markopolos, who spent 10 years trying to get action taken on what he had quickly recognized was a massive fraud when his company asked him to come up with a competitive product and he ran the numbers.

Those comments struck me because that is often the case when I’ve uncovered fraud at my clients’ companies. Management and co-workers say, “Why, he is the nicest person in the office.”

He was such a nice guy, some people commented about Bernie Madoff. He would never steal money.

He was such a nice guy, some people commented about Bernie Madoff. He would never steal money.

I’ve seen everyone from owners’ best friends to grandmothers to the kindly old lady in the church office commit fraud. It’s been my experience that most of these people have no prior offenses, which was backed up by a report generated by the Association of Certified Fraud Examiners (ACFE) a few years ago. Here were a few other key findings from that report.

• More than half of the offenders were between 31-45 and slightly more likely to be male. The older the offender is, the bigger the loss.

• More than 80 percent of offenders work in one of six departments: accounting, sales, operations, sales, executive/upper management, customer service or purchasing. No big surprise there — these are the people that have access to money, can write off on purchases or have expense accounts.

• Only seven percent had been previously convicted of a fraud offense. I believe that low percentage is partly because most fraud offenders are let go from previous companies and never prosecuted. This is just one of the reasons I always advise my clients to prosecute those who commit fraud.

In the ACFE’s 2012 Report to The Nations on Occupational Fraud and Abuse, it was reported that the median loss suffered from fraud cases was $140,000. But more than 20 percent of the cases involved losses of more than $1 million.

Small business owners especially need to be concerned as they are more likely to be hit, primarily because they have fewer internal controls.

Want to take a guess how long the fraud goes on before it was detected? A median of 18 months.

Most people don’t go to work for a company with the idea of stealing from it. Most of them see an opportunity and then seize it. And that person is often the nicest person in the office.

I write a lot about fraud and how to prevent it in this blog and also in my new book, “How Not to Hire a Guy Like Me.” I tell the story of sweet Aunt Tess, a payroll clerk that everyone at the office loved. And she was so dedicated she had never missed a payroll in 25 years, even dragging herself to the office hours after an appendectomy. Bless her heart!

Well, old Aunt Tess was there, fresh surgical bandages and all, because she had a whole army of fictitious employees that allowed her to steal up to $100,000 a years.

Fraud does, and can happen to anyone. If you don’t have fraud controls in place in your office, make it a number one priority to do so. Maybe the nicest person in the office can stay that way.