Does Your Business Use The Most Effective Fraud  Controls?

Does Your Business Use The Most Effective Fraud Controls?


Fraud can have a tremendous negative impact on the value of a business. Not only does the immediate loss reduce the ability of a business to pay current obligations, but the diminished revenue can significantly lower the net income figure that is often used in a multiplier formula to estimate current market value of a business.

Strategies for Reducing Fraud
According to research by the Association of Certified Fraud Examiners, an anti-fraud hotline to gather tips and information is the single most effective measure, resulting in a 54.5 percent reduction in fraud losses. The next most effective were employee support programs, surprise audits, fraud training for managers and executives, job rotation/mandatory vacation, and fraud training for employees. Each of these strategies was associated with at least a 45 percent reduction in fraud losses according to the study performed by ACFE.

Utilize Existing Strategies
Interestingly, the strategies that were most effective were also the ones least likely to be implemented by the businesses that participated in the survey. Thus, it would seem that the most effective anti-fraud measures are underutilized. While any organization is potentially vulnerable to fraud, the risk can be mitigated to some extent by setting up appropriate anti-fraud measures before a loss occurs.

More Information
For a more detailed analysis of the AFCE findings, click here.

Who’s Committing Fraud?

Who’s Committing Fraud?


According to the Association of Certified Fraud Examiners (ACFE), U.S. organizations lose up to
seven percent of their annual revenues to fraud. And the most likely profile of a financial fraud
perpetrator is a male aged 41-50 who works in an accounting department, according to a report
prepared by AFCE. In most cases, offenders are a trusted part of a team who take advantage of
their situation to get their hands on company assets. For a fuller account, click here. Or see the
short version below.

Men v. women
According to the report, males are more than twice as likely to commit fraud as their female
colleagues. Significantly, the median loss of fraud by men is more than twice as great as frauds
perpetrated by women, according to the study.

Middle age v. millenials
The highest percentage of fraudsters in the study were between the ages of 41-50 (in more than
half of all cases, the perpetrator was over 40). Generally speaking, older professionals often
occupy positions with authority and more access to company resources. Median losses from
fraud rose as the age of the fraudster increased.

Solo v. team effort
In nearly two-thirds of the fraud schemes covered by the study, the perpetrator acted alone.
Yet when the scheme did involve collusion of two or more parties, the results were much more
costly. Cases of collusion resulted in a median loss over four times higher than the amount lost
to fraudsters acting alone.

Education and position
Most perpetrators have attended or graduated from college. About 11 percent have obtained
a post-graduate degree. In general, the higher the education level, the more costly the fraud.
Furthermore, the highest percentage of fraudsters worked in the accounting department when
they executed their scheme. Executives and upper management made up the second-most
common category of fraudsters. The least common perpetrators? Internal auditors.

Living the fraud life
Several behaviors are red flags for fraud. The two most common traits are a tendency to live
beyond one’s means, and a struggle with financial difficulties. Other red flags might include
irritability or defensiveness, addiction problems, past legal problems, and complaining about inadequate pay.

Fraud Investigations: Final Signs to Look For

Fraud Investigations: Final Signs to Look For


Wrapping up our discussion of fraud investigations (which were prompted by this article in Fraud Magazine), here are some additional signs of deception to watch for when investigating potential fraud.

Lack of Detail
Truthful statements usually contain specific details, some of which may not even be relevant to the question asked. This is because truthful subjects are recalling events from long-term memory, and our memories store dozens of facts about each experience. At least some of these details will show up in a truthful subject’s statement.

Those who fabricate a story tend to keep their statements simple and brief. Few liars are able to invent detailed descriptions of fictitious events. Furthermore, a deceptive person wants to minimize the risk that an investigator will discover evidence contradicting any aspect of his or her statement. That means the fewer facts that might be proved false, the better.

Narrative balance
A narrative consists of three parts: prologue (history leading up to the critical event), critical event (the main story) and aftermath (what happened after the critical event). In a complete and truthful narrative, the balance will be approximately 20 percent to 25 percent prologue, 40 percent to 60 percent critical event and 25 percent to 35 percent aftermath. If one part of the narrative is significantly shorter than expected, important information may have been omitted. If one part of the narrative is significantly longer than expected, it may be padded with false information.

For example, consider this account from a hit and run insurance claim investigation:
“I was driving east on Elm Street at about 4:00 on Tuesday. I was on my way home from the A&P supermarket. The traffic light at the intersection of Elm and Patterson was red, so I came to a complete stop. After the light turned green, I moved slowly into the intersection. All of a sudden, a car ran into me. The other driver didn’t stop, so I drove home and called my insurance agent.”

The subject’s statement contains four sentences of prologue, only one sentence describing the critical event, and only one sentence of aftermath. The prologue contains a credible amount of detail: the day and time of the accident, the driver’s destination, and the location of the accident. But the description of the critical event (i.e., the alleged accident) and the aftermath are suspiciously brief. A claims adjuster receiving such a statement would be wise to investigate whether the claimant made up a story to collect for damages caused by the driver’s own negligence.

Mean Length of Utterance
The average number of words per sentence is called the “mean length of utterance” (MLU). The MLU equals the total number of words in a statement divided by the number of sentences:
According to research by the Association of Certified Fraud Examiners, most people tend to speak in sentences of between 10 and 15 words. When people feel anxious about an issue, they tend to use significantly more or less words per sentence than the norm. Investigators should pay particular attention to sentences whose length differs significantly from the subject’s MLU.

More Tell-Tale Signs of Deception

More Tell-Tale Signs of Deception


Continuing from our last post which focused on this article in Fraud Magazine, here are some additional signs of deception to watch for when investigating potential fraud.

A deceptive subject may try to avoid an interviewer’s questions by qualifying statements with expressions of uncertainty, weak modifiers, and vague expressions. Investigators should watch for clues such as: “I think,” “I guess,” “sort of,” “maybe,” “might,” “perhaps,” “approximately,” “could have been,” etc. Vague statements and expressions of uncertainty provide some leeway to modify assertions at a later date without directly contradicting the original statement.

Deceptive subjects try to give interviewers as little useful information as possible, while also trying hard to convince interviewers that what they say is true. Deceptive subjects often use mild oaths to make their statements sound more convincing. Be on the lookout for common expressions such as: “I swear,” “on my honor,” “as God is my witness,” “cross my heart.” Truthful witnesses are more confident that the facts will back up their account and thus may feel less need to bolster their statements with oaths.

Statements made by guilty parties often include mild or vague words rather than their harsher, more explicit synonyms. Euphemisms tend to portray the subject’s behavior in a more favorable light and minimize any harm the subject’s actions might have caused. Investigators should look for euphemistic terms such as: “missing” instead of “stolen,” “borrowed” instead of “took,” “bumped” instead of “hit,” and “warned” instead of “threatened.”

Alluding to rather than admitting actions
People sometimes allude to actions without saying they actually performed them. The author gives an example of the following statement from an employee who was questioned about the loss of some valuable data: “I try to back up my computer and put away my papers every night before going home. Last Tuesday, I decided to copy my files onto the network drive and started putting my papers in my desk drawer. I also needed to lock the customer list in the office safe.” Did the employee back up her computer? Did she copy her files onto the network drive? Did she put her papers in the desk drawer? Did she lock the customer list in the office safe? The employee alluded to all these actions without saying definitively that she completed any of them. An attentive investigator should not assume that subjects perform every action they allude to.

Protect Yourself from Fraud: Watch for Signs of Deception

Protect Yourself from Fraud: Watch for Signs of Deception


Following up on our previous post from guest blogger Eric Williams about the devastating impact of financial fraud on small businesses, Eric sent me a link to this article in Fraud Magazine. According to the author, Paul M. Clikeman, who is a certified fraud examiner and a professor of accounting at the University of Richmond, fraud suspects and witnesses often reveal more than they intend through their choice of words. The article goes into some detail about ways to detect possible deception in written and oral statements. Here are three signs of deception:

Lack of self-reference
Truthful people often use the pronoun “I” when describing their own actions. For example, a truthful witness might say: “I arrived home at about 6:40 p.m. After I walked into the living room, I noticed that my flat screen TV was missing and I saw a lot of my business papers scattered on the floor.”

Deceptive people often use language to minimize reference to themselves. One way to reduce self-references is to describe events in the passive voice. For example:
• “The back door was left unlocked” rather than “I left the back door unlocked.”
• “The payment was authorized” rather than “I authorized the payment.”

Another way to reduce self-reference is to substitute the pronoun “you” for “I.” Consider the following response to the investigator’s question:
Question: “Can you tell me about reconciling the bank statement?”

Answer: “You know, you try to identify all the outstanding checks and deposits in transit, but sometimes when you’re really busy, you just post the differences to the suspense account.”

Verb tense
Truthful people usually describe historical events in the past tense. Deceptive people sometimes refer to past events as if the events were occurring in the present, which suggests that the speaker is rehearsing the events in his or her mind rather than recalling from memory. Pay close attention to the narrative if the speaker shifts to inappropriate present tense usage.

For example, consider this response from an employee being questioned about an alleged theft of a daily cash deposit:

“After closing the store, I put the cash pouch in my car and drove to the bank. It was raining hard. I drove around back to the night depository slot. When I stopped the car and rolled down my window, a guy jumps out of the bushes and yells at me. I can see he has a gun. He grabs the cash pouch and runs away. After he was gone, I called the police and reported the theft.”

The first two sentences describe an employee’s drive to the bank in the past tense. But the next three sentences with italics describe the alleged theft in the present tense. An alert investigator might suspect that the employee stole the day’s cash receipts, then drove to the bank and called the police from the bank parking lot to report a phony theft.

Answering questions with questions
Even liars prefer not to lie. Outright lies carry the risk of detection. Before answering a question with a lie, a deceptive person will usually try to avoid answering the question at all. One common method of dodging questions is to respond with a question of one’s own. Investigators should be alert to responses such as:
• “Why would I steal from my own brother?”
• “Do I seem like the kind of person who would do something like that?”
• “Don’t you think somebody would have to be pretty stupid to remove cash from their own register drawer?”