FRAUD : To Catch a Thief – Nipping fraud in the bud

Cases of workplace fraud are on the rise in New Zealand, and detecting it requires strong anti-fraud ethos, good systems, skill and sometimes little bit of luck, according to white-collar crime specialists.
About 50 New Zealand white-collar crime and fraud experts, together with specialists from Australia, met in Auckland recently to share their knowledge at the Inaugural New Zealand Fraud Summit.
It drew together police, legal experts, corporate security executives, bankers, senior bureaucrats, forensic accountants and computer experts.
PPB McCallum Petterson director, and summit presenter, Barry Jordan said the clear message was that successful anti-fraud measures required strong leadership support within an organisation.
“Fraud boils down to people presented with the motive and opportunity to steal,” said Jordan, who heads up PPB McCallum Petterson’s forensic services division.
A number of New Zealand corporations and government agencies now have specialist internal anti-fraud teams in place with the technical skill to prevent and detect white-collar crime, but success rates demonstrated that systematic prevention measures and decisive remedial action still also required “buy-in” from senior management.
Jordan said that, based on the latest American studies, the Association of Certified Fraud Examiners estimated the cost of fraud was five percent of company revenues. This was 20 percent down on previous estimates, probably largely due to stronger regulatory measures put in place since the spectacular collapse of US energy firm, Enron.
New Zealand, however, was in different economic cycle with different regulatory environment, and the current experience here was that fraud caseloads were rising.
“As the economy slows down, managers tend to focus more on cost control and analysis, which can trigger investigations when discrepancies are found,” he said.
“Typically, frauds detected now started 18 months ago when stronger economy provided greater opportunities, and when management was focused on revenue not cost.
“In New Zealand we deal with cases involving amounts ranging from $50,000 to $500,000, and if you don’t act quickly the chances of recovering more than quarter of it are very low.”
International studies showed small to medium-size business often bore the brunt of white-collar crime largely because they didn’t have the skills or resources to put prevention measures in place.
But while these same international studies showed perpetrators were more likely to be university-educated white males aged 30-40, this was not the case in New Zealand.
“Our experience is that more women are involved… often senior accounts clerks aged 25-35… probably highly intelligent, maybe frustrated at lack of career progress, and greedy for material wealth.”
Greed was the most common motivation, but sometimes employees were driven by financial pressure or addiction through substance abuse or gambling.
One recent case in the financial services industry involved female clerk in her late 20s who had boyfriend with drug habit. She had authority to make payments by electronic funds transfers and siphoned $100,000 from her employer simply by making some of the transactions payable to her own account. She concealed each overnight transaction the next day by altering the records.
Cheque forgery is now uncommon as businesses and banks have been quick to adopt the new paperless money technologies, but opening the way to electronic theft, said Jordan.
Intellectual property theft is also on the increase as company client files or proprietary designs have become increasingly computerised and therefore easily downloaded.
Forensic accountants now work hand-in-hand with computer experts as well as legal experts to chase and recover funds and files, and to quantify damages for recovery through civil or criminal action.
“We will freeze assets, obtain civil search warrants, use computer forensics to recover files and data mining techniques to discover secret bank accounts, and then analyse patterns in financial transactions to discover how the money was taken and where it has gone,” said Jordan.
Forensic accountants have to develop healthy level of scepticism and are trained in interviewing techniques to help unravel the truth, he said.
Skilled independent investigators are crucial as dishonesty can occur at any level of an organisation. Executives who artificially inflate company’s performance to boost their pay packets are no less fraudsters than workers who siphon money away from creditors, and their actions are often not uncovered by the annual audit.
Jordan said forensic accountants can help advise companies on measures to reduce or prevent fraud. The main protection is system of checks and balances when fund transfers are involved, but strong corporate governance and staff training and education are important elements.
“The effect of fraud on business is profound,” said Jordan. “It’s not just the financial loss, or the cost of the investigation. It’s the intangible costs, too – the damage to the organisation and its reputation.”
Preserving the company’s reputation is reason why many cases never come to court, but often the need for court action is just as important for restoring workplace relationships.
“Work still has to be based on trust,” said Jordan. “Fraud undermines that trust and destabilises the whole organisation.”