Alison Lee Satake SPECIALIZING IN BUSINESS & SCIENCE REPORTING

Alison Lee Satake
Cooking the books

Baton Rouge Business Report

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Bookkeeper Susan Fonte was responsible for maintaining the financial records, paying the bills, and opening the mail for a Mandeville real estate development firm for about five years. But between 2008 and 2010, she stole over $192,000 from the company by forging her boss’ signature on checks and depositing the funds into her own personal checking account, according to U.S. District Court documents. She also illegally obtained a debit card linked to her boss’ personal checking account and withdrew over $95,000 through several ATM transactions. In June 2012, she was sentenced to 15 months in prison and ordered to pay full restitution to her former employer, Thomas Bradshaw and Associates.

Although fraud happens within all types of companies, small businesses are particularly vulnerable. Many do not invest in the tools or maintain the level of oversight needed to prevent fraud.

“[Small business owners may] place a lot of trust in one individual and that individual may decide to exploit that trust. That is when fraud happens. The owner needs to be active in the accounting and keep a close eye on all banking transactions,” says Jeff Aucoin, the fraud, forensic, and litigation services partner at Horne LLP in Baton Rouge.

“You want to know who are the trusted employees. More than likely that’s the fraudster. Trust is what allows fraud to occur,” he says.

Signs of a fraudster

Knowing the red flags to look for can help business owners stay vigilant against defrauding. The four most common red flags are when an employee lives beyond their means, has financial difficulties, has an unusually close relationship with vendors or customers, and exhibits excessive control issues, according to the latest Association of Certified Fraud Examiners (ACFE) report issued in 2012.

Of the 1,388 cases studied for this biennial international report, most of the fraudsters had clean employment histories and were first-time offenders. About 87 percent of the perpetrators held no prior charges or convictions against them for fraudulent offenses.

Many fraudsters will test the waters by stealing a small dollar amount first.

“As they figure out no one is looking, they get braver. Usually, they will get caught because they get too greedy,” Aucoin says. “The longer a fraud goes undiscovered the higher the losses.”

Other red flags can be when an employee cannot provide simple reports and details when asked routine questions or they keep accounting records to themselves. Be alert if supporting documents and financial records go missing from a file cabinet or server, Aucoin says. A gambling addiction can also be a red flag. The convicted bookkeeper, Fonte, said her motive for embezzling was to feed her gambling habit, according to court documents.

In general, Crumbley believes about 20 percent of the population are honest, about 20 percent are dishonest, and 60 percent would commit fraud if they thought they could get away with it. Therefore, instituting internal controls that even give the perception that fraud or theft is impossible without being caught, can prevent it. For example, installing video surveillance cameras on a loading dock, whether they are monitored or not, can deter theft.

What to look for

Over the past four years, the majority of fraud has occurred in one of six departments: accounting, operations, sales, executive/upper management, customer service, and purchasing, according to the ACFE report. And the industries most commonly targeted are the banking and financial services, government and public administration, and manufacturing sectors.

Missing or late payments to vendors and if company bank accounts cannot be reconciled can also be signs of internal malfeasance, Aucoin says.

Tips from employees are the most common way occupational fraud is detected. Therefore, providing ways for internal and external sources to report fraud, such as an anonymous, confidential hotline, is crucial. Employees should be encouraged to report all suspicious activity and be protected from retaliation through company policies.

Also according to the ACFE study, “organizations that have anti-fraud training programs for employees, managers, and executives experience lower losses and shorter frauds than organizations without such programs in place.”

Training employees about fraud and a company’s policies can promote an anti-fraud culture within the workplace. A company should also monitor for fraud by implementing surprise audits, internal controls, and segregation of duties.

Instituting an anti-fraud program before fraud occurs is recommended.

“It is better to develop a plan for responding to fraud before fraud is found because if you don’t have a plan and you find fraud, emotions sometimes take the lead, which can make the situation worse,” Aucoin says.

Losses

A typical company loses about 5 percent of its revenue each year due to fraud, according to ACFE survey participants. About $140,000 is the median loss to a company while more than one-fifth of the companies studied lost at least $1 million.

About half of the organizations that fall victim to fraud do not recover any financial losses. This does not account for the additional costs of hiring attorneys and forensic accounting investigators.

“Sometimes there is a cost to make customers or vendors whole. Sometimes there is cost to reputation and there is almost always a significant emotional cost,” Aucoin says.

“The emotional toll is partly from the financial cost, but usually it is because the fraudster is a critical part of the business and may even be your most trusted employee.”

Consulting an attorney or accountant that specializes in fraud early, can save you and your company from this financial and emotional toll.

Red Flags of fraud

Many fraudulent schemes can last up to 18 months before being detected. By watching out for the following four most common behavioral red flags, you can protect your company from occupational fraud. Does your employee:

Live beyond his/her means (36% cases)

Have financial difficulties (27% cases)

Have an unusually close relationship with vendors or customers (19% cases)

Exhibit excessive control issues (18% cases)

Source: Association of Certified Fraud Examiners 2012 report

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