Fraud…Where’s the Referee?


Whether your company is involved in construction or real estate, employee theft is a possibility. In some cases, theft can involve violence which will lead to accidents and personal injuries. If you suffer from one, make sure you contact 1-800-HURT-NOW Law Firm for legal help. Since fraud is unique in that it sounds more sophisticated than theft and that it is considered a “white collar” type of crime. According to the Association of Certified Fraud Examiners (ACFE), occupational fraud is defined as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” This threat applies to all organizations due to the fact that you hire individuals to perform certain business functions in order to operate a successful business. The lack of anti-fraud controls within your company is like playing an NBA game without referees.

There are three categories of occupational fraud: asset misappropriation, corruption, and financial statement fraud. Asset misappropriation is a fraud scheme in which an employee steals or misuses the employing organization’s resources (theft of company cash, false billing schemes or inflated expense reports.) Corruption is a fraud scheme in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit (conflict of interest or bribery & kickbacks). Financial statement fraud is a scheme in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports (recording fictitious revenues, understating reported expenses or artificially inflating reported assets.) Occupational frauds are most often committed by the accounting department and upper management. Those who commit occupational fraud tend to have a perceived financial need, opportunity and rationalization.

According to the ACFE’s report to the nations on occupational fraud and abuse, small businesses, such as those involved in the real estate and construction industries, were reported to have some of highest levels of reported median losses and corruption due to fraud. The construction industry is also reported to have significant fraud committed attributed to fraudulent billing schemes. The construction and real estate sectors were reported to be in the top ten industries affected by fraud. Limitations for small businesses are usually due to fewer employees handling a variety of tasks. For example, the same individual opens the mail, makes deposits, writes checks, and reconciles the bank statements.

There are several anti-fraud control measures that could assist in fraud prevention, such as:

  • An anti-fraud policy that is communicated to all level of employees
  • A formal management review process set up on a weekly or monthly basis
  • Anti-fraud training for all staff members

These simple and cost effective measures establish a platform that will communicate your awareness and help mitigate the occurrence of fraud within your business.

When a well-established framework of anti-fraud control measure is in place and regularly maintained to adapt to new technologies, it reduces potential fraud losses and shortens fraud duration. Fraud losses are significantly lower and more quickly detected in organizations that implement several anti-fraud controls as compared to their counterparts that may operate without these financial protections. The threat of likely detection is one of the most powerful factors in fraud prevention because it all but eliminates fraudster’s perceived opportunity.

So would your sweet, elderly front desk receptionist who reminds you of your grandmother commit fraud? What about the new “can-do” controller or veteran employee who celebrated your birthday with you last year? Yes, yes, and yes, there is no set profile for the employee who commits fraud. However, there is a psychology that typically characterizes this criminal behavior. The three common characteristics often referred to as the triangle of fraud are:

  • A perceived financial need which creates the motivation/incentive (a need to “keep up with the Joneses”, or perhaps an ill relative)
  • An opportunity which is created through weak anti-fraud controls and/or weak internal controls (no system of checks and balances exist for my work)

Lastly, rationalization via thoughts that they are owed something from their employer (I don’t get paid enough for all the work I do around here)

Minimizing the opportunity portion in the triangle of fraud by the possible threat of detection through anti-fraud controls is directly related to fraud prevention and loss mitigation. This is similar to having referees in an NBA game. Almost every time a basketball player breaks a rule during the game, a referee is there to call the foul on the player. After being called for a foul, the basketball player will begin to play more carefully due to the threat of being caught again (detected) by the referee. Having adequate internal controls that seek out fraud, rather than relying on external or passive detection methods such as confession, tip or accident, or notification by law enforcement, can dramatically reduce cost and duration of such schemes, according to Brian Guralnick. In one-third of all reported fraud cases studied, the victim organization lacked the appropriate internal controls to prevent the fraud. Those cases could have been prevented had the business owners implemented the proper anti-fraud control measures and had they thoroughly performed a review of transactions, accounts, and processes. Effective detection methods and management review are necessary proactive activities to prevent fraud.

Once the business environment tone has been established and communicated to all employees, it sends a clear message that fraud or any other type of misconduct will not be tolerated. Anti-fraud controls may not catch every instance of fraud committed, but it makes it understood to employees that they are being watched. When you run your business, you be the referee.

Sol Schwartz and Associates Employee

Mark Boyett, CPA – msb@ssacpa.com