Fraud Doesn’t Have to Be a Cost of Doing Business

GUEST BLOGGER

Zach Capers, CFE
ACFE Research Specialist

As a fraud examiner, I often see occasions when it seems that others do not recognize the seriousness of the threat posed by fraud. While Certified Fraud Examiners (CFEs) are trained to be familiar with many of the underlying causes of fraud and associated prevention strategies, fraud is too often dismissed by others as an acceptable loss or casually labeled as a cost of doing business. Moreover, management at many organizations would simply prefer to ignore these problems and absorb losses from fraud rather than open the company up to scrutiny and risk reputational harm. This frustrating attitude not only breeds an environment of indifference, but can often exacerbate the very factors that lead to fraud in the first place.

Few other industries are reputed to treat the problem of fraud with more apathy than that of construction. According to the ACFE’s 2014 Report to the Nations, 3.1 percent of all reported fraud cases occurred within the construction industry, resulting in a median loss of $245,000. Additionally, a recent Grant Thornton report found that approximately 10 percent of the global construction industry’s profits are lost to fraud — a staggering amount totaling an estimated $860 billion.

While the ACFE’s new online self-study course, Construction Fraud, might seem suited only for those people either directly or indirectly involved in the construction industry, it has been designed to be of use to CFEs of all backgrounds. One of the most interesting aspects of fraud in the construction industry specifically is the fact that, from the inception of a project to its completion, virtually every type of scheme imaginable can take place, including corruption, bid rigging and fraudulent disbursements. Furthermore, the intricacy of most construction projects requires the inclusion of numerous parties, including government officials, corporate executives, contractors, suppliers and procurement specialists to name only a few. These factors combine to form a veritable microcosm of fraud from which everyone can learn.

Perhaps it is this overwhelming complexity that causes people to view fraud as an inevitable consequence of business in not only the construction industry, but countless others as well. However, all CFEs know that the only people benefiting from fraud in any industry are the fraudsters themselves.

Fraud affects the bottom line of all companies, which in turn affects every employee, whether in the form of a decrease in benefits, a salary increase put on hold, or any number of other negative consequences. For this reason, we should never accept fraud merely as a cost of doing business and should instead endeavor to change the permissive attitudes that enable fraud at the expense of everyone else.

CFE's First Job in High School Leads to Lifelong Career

MEMBER PROFILE

Wendy Hans 
Director of Fraud Loss/Control 
AMC Entertainment, Inc.  
Leawood, Kansas 

Few people can say that their current place of employment was their first; especially after a 25-year career. But, for Wendy Hans, CFE, Director of Fraud Loss/Control at AMC Entertainment, Inc. (AMC), that is exactly the case. Her first job in high school as a concessionist at a movie theatre sparked her later interest in investigating fraud. "Years ago, in an accounting class, we watched videos of convicted felons recounting their scams from the prison yard. It stuck with me that the fraudsters claimed their coworkers should have noticed their suspicious activity," Hans said. "Shortly after, a close coworker was acting strangely when some gift certificates went missing. We dug in and realized that she was stealing gift certificates and redeeming them on her own drawer to cover cash theft. It was my first bust — I was a box office cashier." Many roles later, Hans now oversees a team that conducts audits and closely monitors the transactions of nearly 18,000 AMC associates across the country.

Where were you born and raised?

I was born and raised in Kansas City, Missouri. I earned my undergraduate degree and MBA from a local Jesuit college – Rockhurst University.

What steps led you to your current position? 

I started with AMC 25 years ago as a concessionist – my first job. The evening and weekend shifts were a good fit during my high school and college years. I learned the business as I rose through the ranks. After working in the theatres nearly 10 years, I accepted a role in the accounting department and transferred to the corporate office. A fraud created my initial role in the fraud field. I was uniquely qualified with operations experience and an accounting degree. Over time, my responsibilities continued to increase and direct reports began to accumulate. The ACFE has been a wonderful resource to learn about all the new scams, sharpen my skills, interact with peers and understand where we should focus for the future. The ACFE's annual fraud conferences are the highlight of my year!

What is your current role and what does it entail?  

I oversee the theatre audit program and loss prevention functions. My team conducts onsite theatre audits, and identifies and investigates any possible fraud. I also advise on potential risks and mitigating controls for company initiatives and sit on our Information Security Committee. Nearly all of our 18,000 associates have access to cash — so the need for thorough transaction monitoring keeps us on our toes.

What is a memorable case or project that you have worked on? Feel free to alter details to protect confidential information. 

We regularly receive notifications of incidents that impact sales patterns. As soon as this case came in, it was clear that our knowledge of the available data and ability to discern patterns would be an asset, even though it was not a fraud case. Eager to help, we offered our assistance and got to work. Some speculated that an individual would not be foolish enough to leave an online trail, but that was ultimately what caught our suspect. I learned to never underestimate the power of data and the vast amount of information you can and will capture surrounding anything you are investigating.

What advice do you have for people looking to move up in their company and transition into a role with more responsibility? 

Look like a leader and play the role before you are cast. Become an expert (attend continuing education, become a CFE), network (learn what other companies are doing) and educate others (volunteer to host an International Fraud Awareness Week lunch and learn – there are great plug-and-play resources for this event.)

Last but not least, figure out how you can make a difference and add value to your company. Not sure how? Think about what you do better than anyone else. I have never been bored at work; there is always a problem out there to solve.

When you are not working, what types of things do you enjoy doing? 

Travel is my passion. It's a fascinating experience to go somewhere you have never been and explore. Plus, I love beautiful beaches and yummy, local food treats. I see a lot of movies too.

Read more profiles in the ACFE Career Center on ACFE.com.

Need Access to Historical Banking Information? Better read the fine print...

SPECIAL TO THE WEB

Stephen Pedneault, CFE, CPA, CFF

In the past 10 years, technology has ushered in tremendous changes to the banking industry. Paper bank statements that travel via snail mail are the exception to the rule — given online access and "going green" — and the return of your canceled checks is archaic.

Many merchants and vendors scan or convert written paper checks into electronic transactions to complete their deposits, and banks have enabled deposit by digital image so you can use your smartphone to transmit pictures of checks. Paper is old news — replaced by electronic access to digitally stored information.

Financial institutions might be saving money and becoming more efficient, but be prepared — if you now need a bank’s paper records for a case you could receive them: 1) quickly with a smile, 2) after a long wait with a large fee or 3) never.

NEED FOR RECORDS

Many account holders find reviewing their bank accounts and transactions online sufficient. Their access to many online activities and balances are closer to real time. Stop payments, transfers, vendor payments and other transactions already happen in real time.

Most financial institutions maintain online access for statements and activity for up to one year. Customers no longer have to print statements and only review canceled check images when particular transactions are in question.

This strategy saves considerable space in filing cabinets and attics. But sometimes we need bank records for these reasons:

  • The IRS requires taxpayers to maintain supporting records for their returns for a minimum of three years for most items. Some records carry a longer requirement, and in other cases we must archive those records permanently.
  • A business’ ability to support the amounts reported on filed tax returns. This requires past bank records, including deposit details and check images.
  • Notice of a federal or state tax agency's audit. This might come two to three years after the filing of tax returns. Online access to the supporting bank statements, deposit details and canceled checks might no longer exist, and the period available online might be limited to the most recent year's information. The account holder must now turn to the financial institution to produce records to satisfy the auditor.
  • Divorce or any litigation matter. The disputing party must provide the opposing party with financial details, including bank statements, credit card statements and other account details through the litigation discovery process. The period requiring record documentation could go back many years, and banks typically only retain records for seven years (as little as two years for certain items).
  • Any fiduciary matter, i.e., situations in which someone was entrusted with the custody and care of funds for someone else. The fiduciary would be required to produce records to substantiate the maintenance and use of the funds, and bank statements, deposit details and canceled check images must support any accounting the fiduciary provides. 

EMBEZZLEMENT LEADS TO BANKING FRUSTRATION

A recent case illustrates a worst-case scenario involving a request for bank information. A small, 30-unit condominium association maintained two bank accounts at a local branch of a financial institution. The association's board of directors — comprised of unit owners — maintained a contractual relationship with a property manager to oversee the association, including the accounting books and records, bank accounts and unit owner information. The property manager, who possessed proper licensing and insurance, provided services for two years.

The property manager usually attended the regular board of directors’ meeting over the course of two years. However, she surprised everyone when she abruptly resigned and told board members that she’d embezzled all of the association's funds. She said she’d retained an attorney, and that the board should contact counsel to start the process of finding a new property manager. Obviously, the board was shell-shocked. It wasn’t prepared to deal with the theft, and it couldn’t operate the association with no funds.

The attorney representing the former property manager assured the board’s counsel his client, as required by state law, would turn over all her records to the association. Unfortunately, after weeks of delay, when the former property manager’s attorney finally turned over the records, the storage boxes didn’t include even the minimal level of records, such as complete monthly bank statements, deposit details and supporting paid invoices.

With the bank account numbers and limited information in hand, the board president — who was a signatory on both bank accounts — visited the local branch of the association’s bank to request replacement bank statements for both bank accounts.

Read the rest of the article on Fraud-Magazine.com.