By: Les Heitger
On December 11, 2008, The Federal Bureau of Investigation arrested Bernie Madoff for committing the largest investment fraud in the history of the world. With alleged victim losses well in excess of $50 billion, many were shocked by the magnitude and length of the fraud.
Although this fraud was significant, it was just one of many frauds that were discovered in 2008, as is true for any year we choose to analyze. Fraud has been a significant cost of doing business in the United States and other countries for as long as anyone can remember. Although the risk of fraud has always been a challenge for businesses, the public’s concerns about possible fraud often seems minimal until another big fraud is reported in the news.
For example, the 2001 discovery of the Enron fraud sparked major interest and was the impetus for the Sarbanes/Oxley bill which had significant ramifications for corporations and auditors. But absent the occasional news report about some newly discovered fraud, most of us, including most owners and managers of both profit-seeking and not-for-profit organizations, operate their business thinking “glad that is not my organization.”
While teaching fraud risk and fraud investigation topics in executive education programs, I have found that most executives believe that “fraud is an issue for many, but not in my part of the organization/world.” When asked specifically about this feeling, most managers offer that “we only hire honest people” or “we keep a pretty good eye on things that seem most at risk” or some other answer that gives them some comfort that fraud is not something about which they should be concerned.
What those managers fail to realize is that frauds, by their very nature, often remain hidden for quite some time before they are discovered and well after the damage has been done. Just because no fraud scheme is currently obvious in my managerial domain, does not mean that there is no fraud occurring in my business.
The major fraud-fighting organization in the world is the Association of Certified Fraud Examiners. Based in Austin, Texas, it provides many valuable resources for those interested in detecting, investigating, litigating and preventing fraud. Over the last twenty years, the ACFE has published its “Report to the Nations,” a two-year study that addresses the nature, significance, types, victims and perpetrators of fraud.
It is a sobering view of the challenges facing owners and managers of all types of economic entities. Sometimes, first readers of the ACFE’s Report to the Nation feel like giving thanks that their business or other type of economic entity is not part of the study. For knowledgeable readers, however, the next thought, often, is to realize that most entities, including mine, face significant fraud risks.
There may be fraud going on in my business right now and we have not yet discovered it. The ACFE’s study and other reliable fraud studies and reports paint a picture that suggests many/most/all economic entities are at risk from fraud schemes.
In the ACFE’s 2016 Report to the Nations study of 2,410 fraud cases from 114 countries, it reported a wealth of information about virtually all aspects of fraud. Among the major finding were that on average fraud losses for the participating companies was five percent of revenue, the average loss per fraud case was $2.7 million, and virtually all types of economic entities were susceptible to frauds.
The report states that virtually all forms of economic entities are susceptible to fraud, including all types of businesses, all levels of government, not-for-profit organizations, charities, religious groups and any other type of entity which has assets intended for use in achieving organizational goals.
One challenge is that many employees/managers think that people who commit fraud look and behave differently than honest employees. Many studies of the characteristics of fraudsters have found that they look and behave, and in most ways are just like honest employees. Employee characteristics such as education, church attendance, family life and most other characteristics are very similar for all employees both honest and fraudsters.
Of course there are steps organizations can take to reduce the risk of fraud.
Perhaps the first step is to be aware that fraud risk is real in all organizations and, if unchecked, can cause serious, even fatal, problems for an organization.
Secondly, top management must create a “tone at the top” that seriously addresses the challenges fraud creates and sends a message that all fraudulent activity will be addressed swiftly and firmly.
Businesses can provide educational programs that identify the serious nature of fraud and describe some of the red flags that might suggest fraudulent activities are occurring.
Professor. Les Heitger, Ph.D., CPA, is the BKD Distinguished Professor of Forensic Accounting in the School of Accountancy at Missouri State University, He is the National President of the Forensic Accounting Section of the American Accounting Association (AAA), he is co-author of Forensic and Investigative Accounting, and he teaches primarily graduate Forensic Accounting courses. He can be reached email@example.com.
This article appeared in the May 1, 2016 edition of the News-Leader and can be accessed online here.