Don't Be a Victim of Fraud

We've all seen the national headlines about Bernie Madoff and Rita Crundwell, the comptroller of Dixon, Illinois, who stole $53 million.  But we've also seen the headlines in Springfield – Adam Lopez who is currently in jail facing charges of stealing over $1,000,000, a woman who stole $2.5 million from a consulting firm, a woman who stole $600,000 from a hospital, a woman who stole $500,000 from an auto body shop, a bank employee who stole more than $100,000 and another bank employee who stole $47,500, to name a few.  Fraud can happen anywhere.  What should you look for to keep it from happening to you?

Spotting fraud can be very difficult.  Diana B. Henriques, the author of The Wizard of Lies: Bernie Madoff and The Death of Trust, sums it up well: "We think we’ll see these guys coming.  We think we’ll recognize them before they get close enough to hurt us. It's wrong.  These guys don’t look like the Joker.  They look like Robert De Niro. They look like [somebody] you’d want to sit next to at dinner."

These thieves will steal from their family, their friends and their employers, so knowing someone well (or thinking you know them well) will not prevent fraud.  Neither will a referral from a trusted source.  Bernie Madoff only accepted new clients who were referred to him.  He further violated his clients by using them to spread his fraud among their own friends and family.

According to Inc. Magazine, the most likely person to embezzle funds is "a female employee above age 40 without a prior criminal history working in finance or accounting – and living in Vermont. . . Nearly two-thirds of 2011's incidents involved female perpetrators, although men embezzle, on average, 25 percent more.  Nearly three quarters of crimes were committed by employees who held finance and accounting positions, with an average age of 47.9 years old.  Just five percent had any criminal history."  All of the examples I cited above, except Bernie Madoff and Adam Lopez, are women.  I will leave it to the psychologists and sociologists to determine why that is.

Some of the signs of fraud are the same whether it is regarding personal investments or company assets.  Documentation is key.  Almost all fraud requires fake documentation.  Bernie Madoff sent out fake account statements for years.  Since his funds were private, it would have been difficult to realize the statements were fake.  He chose the format, the letterhead, etc.  He controlled everything.

Most of us, however, invest with advisors who are employed by other companies.  This gives us the opportunity to verify any statements that we receive.  If the format of your statements changes or looks unprofessional, you should investigate.  Look for a phone number online to verify account information.  Do not use a number provided on the statement.  You could also verify your accounts online, making sure you go to the legitimate company website and not a look alike site.

Bernie Madoff's fraud was fairly straightforward.  He took people's money and kept it for himself instead of investing it.  Rita Crundwell's fraud was more complicated and a more typical example of corporate fraud.

According to an article in the Journal of Forensic & Investigative Accounting, the City of Dixon had six authentic bank accounts plus a seventh fraudulent account created by Rita Crundwell.  "The fraud was genius in its simplicity. Rita Crundwell picked up the daily mail, made all the deposits, updated the journals and ledgers, prepared and signed checks, moved investment monies, and reconciled the bank accounts."  She opened a new checking account as "City of Dixon and RSCDA" (Reserve Sewer Capital Development Account.)  "She routinely transferred funds from the first five accounts into the legitimate capital development fund account. The next step was that she created fictitious capital projects and fabricated a total of 179 invoices for those projects.  Transfers from the legitimate account to the fraudulent account were documented as payments of the fictitious invoices."

In hindsight the fake invoices should have been obvious.  They had no Illinois Department of Transportation logo or letterhead.  Many of the transactions should also should have raised red flags at the bank.  Because of their mistakes, the auditors and bank settled with the City of Dixon for approximately $40 million.  But that might not be the case for all of us.

So what can you do to protect yourself?  Be vigilant.  Open your statements promptly (sounds obvious, but some people don't).  If there is fraud, the earlier you catch it, the better.  Review your statement for unusual changes or inconsistencies.  Finally, verify your statement at least annually online or by phone.

What can you do to protect your business?  First and foremost, adopt strong internal controls.  Your accountant can help you develop controls, which will likely include the following:

    ●    Ensure no one person has control over all parts of a financial transaction.   For example, separate deposits from record keeping.
    ●    Require employees to take vacations.
    ●    Reconcile bank accounts and  petty cash promptly every month.
    ●    Examine cancelled checks to make sure the vendor, amount and signature are authorized.
    ●    Restrict use of credit cards and verify all charges made to credit cards.
    ●    Set account limits with credit card companies and vendors.
    ●    Require employees to submit itemized, original receipts for all purchases.
    ●    Examine credit card statements and receipts each month, independently.
    ●    Require an explanation of any significant differences in expenses from budgeted amounts.
    ●    Keep petty cash and blank checks in a locked box or drawer.
    ●    Prohibit writing checks payable to cash.
    ●    Issue receipts for cash, using a pre-numbered receipt book.
    ●    Reconcile cash receipts daily.

You may also consider purchasing insurance.  Chris Leming, Senior Vice President of Troxell, says that commercial crime coverage is available.  He says that good internal controls will help reduce the cost of the coverage, and the application will require you to list your internal controls.

Work with your team – your insurance agent, your accountant, your lawyer, and other advisors – have strong controls, and keep your eyes open.  Remember, it can happen to you.