Mary Schaeffer

Fraud in the Corporate World

Itís a lot worse than you think.

December 6, 2007
by Mary Schaeffer

Preliminary results from a new survey conducted by Accounts Payable Now & Tomorrow newsletter last month found fraud to be more prevalent and commonplace in the corporate world than was previously believed. More than 86 percent of survey respondents indicated that at least one organization they had worked for in the past 10 years had been a victim of some sort of fraud. While most of the reported losses were not overwhelming, this indicates a pervasive pattern that most readers just cannot get away from (see related story). What follows is a look at a few examples reported by survey respondents along with recommendations on how to prevent fraud in your organization.

Case Stories

Here is a small sampling of the stories reported by the survey participants. They demonstrate the type of activity that goes on more than infrequently in the corporate world. They also reveal, at least in my opinion, a level of brazenness (“chutzpah” to you New Yorkers) and a certain amount of stupidity on the part of the fraudsters.

  1. On the sales side, a manager discovered several employees stealing from the company. In each case, the employees were fired immediately. One of the fired employees went to work for a competitor, with which the original company later merged. About three months after the merger the employee was caught stealing again and was again fired.
  1. The employee in question, at another company purchased an audio course meant to be completed anywhere and made it look like a conference the employee needed to attend. The purpose was to get the company to reimburse the employee for travel to Orlando (with family in tow). After uncovering this act, the organization went back three years and found the employee had done the same thing two years prior.
  1. At a third organization, a salesperson who traveled extensively would ask to see his expense reports claiming he couldn't remember what he had submitted. This was before the T&E process was automated and online. He would remove receipts submitted with the report he was looking at and then resubmit duplicate receipts. He was only caught because one receipt rang a bell with the processor who went back and discovered the missing receipt on the old report. He also purchased pre-numbered pads commonly used in small diners and stupidly submitted them in numerical order.

What Can You Do?

For starters, impress upon your approvers the very strong imperative to review every expense report before signing off on it. The majority of managers routinely approve travel and entertainment reimbursement requests with only a cursory review. It should not have been the processor who recognized the reused receipt, but the approver. Remember, most internal fraud is committed by long-term trusted employees.

Don’t overlook the need for strong internal controls and appropriate segregation of duties. These should extend to the master vendor file, a function that is often overlooked when putting fraud protections in place. These controls are crucial not only for preventing fraud in the first place but for uncovering it before it gets out of control.

Whenever employee fraud is suspected, review 14 months of T&E reports at the same time. Identify a random sample of employees each year and review 14 months of each of their T&E reimbursement requests.

Returning checks to requisitioners is a very bad idea. It demonstrates poor internal controls and is the vehicle used by a good number of scheming employees to scam money from their employers. Yet, the number of organizations that still allow this poor practice is mind-boggling.

While it is impossible to completely eliminate fraud, you can take steps to make employees think twice about considering it. The techniques discussed above will help you avoid the fate of the three organizations discussed in the case stories above and protect your own good reputation as a manager.

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Mary S. Schaeffer is the author of more than a dozen business books including Controller and CFO’s Guide to Accounts Payable. She is currently working on a book about fraud. She is the president of CRYSTALLUS, Inc. a publishing, training and consulting firm focused on payment issues. An admired speaker, she will discuss fraud prevention in detail in Accounts Payable Now & Tomorrow’s December Webinar on Fraud in the Real World.