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Corporations can defeat deceit.

COMPANIES ARE DEFRAUDED IN many ways and for many reasons by employees at every level. No industry is immune, but a security manager skilled in identifying and investigating fraud can keep employees honest and a company lucrative.

In most cases corporate fraud--financial gain through criminal deception--is committed by an employee of the victim company, in collusion with other employees, or with another company. Fraud is also committed by employees of contract companies or the contract company itself against the contracting firm.

Corporate fraud is often discovered by accident, coincidence, or when the amount of money involved reaches proportions that are impossible to ignore. Of the incidents that are discovered, only a small portion are reported to the authorities.

Reasons for concealing fraudulent actions that occur within a company are similar worldwide. Companies worry about damage to their image, reputation, and staff morale; they want to avoid union problems and problems with contractors; and in many countries, companies simply lack confidence in their judicial system.

Fraud is a problem, but managers cannot assume that corporations are plagued with dishonest people. This is an unfair and ridiculous assumption. The majority of executives and workers around the world are honest. A difference exists between majority and totality, however, and the world is made up of all types of people, some of whom easily succumb to temptation.

Rationalizations. Technological developments in today's business world allow for more automated operations, which means less personnel are needed. In such an environment, the effectiveness of supervision decreases, controls are less frequent, and massive dismissals contribute to employee rationalizations for dishonesty.

The employee who succumbs to temptation and decides to commit theft or fraud knows the operation, controls, patterns of supervision, contractors, suppliers, and customers. An employee has a good chance of carrying out the crime undetected because he or she has all the time required to think of a plan and to wait for the most convenient time to execute it.

To make theft or fraud even easier for the dishonest employee, the taboo against whistle-blowing is worldwide. After an internal theft or fraud is uncovered, it is common to hear that several employees knew or suspected what was taking place. It is exceptional, however, that a coworker would denounce the crime before it becomes publicly known.

Though no department is invulnerable to fraud, cases are most frequent in departments responsible for cash handling, payments, collections, money transfers, purchases, contracting, exchange, investments, and product movements.

Prevention and detection. Accounting, financial, and operational controls, frequently checked and effectively supervised, play an important role in preventing corporate fraud. One of the most basic rules of internal control is the segregation of three important responsibilities--approval of transactions (purchase, sale, contract), payment or collection, and record keeping.

Clear policies on honesty and integrity and the certainty that the company will seek criminal prosecution and civil recovery--regardless of the level of employees involved--creates a climate with little room for corporate fraud.

Companies that use contractors should include an audit clause in the contract. The clause obliges the contractor to permit representatives of the contracting firm to inspect the accounting records and documents related to the contract. Contractor audits often reveal mistakes in the billing of the contracting firm. This becomes suspicious when many errors are discovered.

Even if this is the case, however, it is exceptional that the victim would start an investigation. If the contractor cannot hide the evidence or convince the auditor that the charges were correct, the contracting company simply asks for reimbursement of the overcharge. Then the contractor reimburses the overcharge, usually in installments.

In other words, the contracted firm has obtained an interest-free loan, and it is ready to defraud again, safe in its assumption that it will not be audited for some time.

Other basic preventive checks, carried out regularly, are highly advisable. It is not uncommon to discover that a company is paying exorbitant prices for merchandise known to cost considerably less. For example, some years ago, ballpoint pens that were sold practically everywhere for $1.20 had been purchased by a large company for $3 each. The company's buyer was prosecuted for fraud.

Investigation. In most countries, it would be unrealistic to expect much cooperation from law enforcement in preventing corporate fraud. Their personnel and budgets are funnelled into preventing and investigating street crime, which has a wider impact on the population.

The first investigative steps should be taken within the company being victimized. The company should use its own or contracted resources before approaching the police. The investigator, whether a permanent employee or a contractor, should be a well-known professional whose honesty and capabilities are beyond question. Unintentional damage done by a nonprofessional during the first steps of a criminal investigation is almost always irreparable--and detrimental to morale.

A joint effort between an investigator and the audit department is ideal. Other departments, such as legal and human resources, should be ready to cooperate as required.

The investigative team should report to an executive above the level of the employee suspected of involvement. This executive should not be under suspicion of wrong-doing or have any personal interest in the result of the investigation. Final decisions in an important investigation should be made by the board of directors.

Court decisions. In 1983, an international contract company was tried for fraud in London. When passing sentence, the judge praised the victim company for having stood up and made the complaint. The judge said that such an attitude should serve as an example to the community. He encouraged the denouncement of corrupt commercial practices that spread due to the silence of the victims.

In the last few years, judges have criticized victim companies for not having taken reasonable precautions to prevent crimes, thus submitting their personnel to constant temptation. In suits for unfair dismissal brought by the employees of these companies, courts have usually found in favor of the employees for the same reasons.

To avoid litigation, many large international companies have adopted strict ethics policies that clearly state what is expected of their personnel. Several have also passed security policies establishing the principle of criminal prosecution and civil recovery in cases of crimes against the company.

While such policies are important, they do not produce changes by themselves. A company must establish and maintain a climate of honesty, eliminating the open doors that exist in every industry. Periodically, vulnerabilities must be identified, analyzed, and eliminated. Senior management should be sure to show its support for these security measures.

Fraud will continue to spread if people do not take the problem seriously. A permanent effort to rid a corporation of fraud is required to ensure its survival into the future.

Raul J. Biancardi, CPP, is an international security consultant based in Morristown, NJ. He is a member of ASIS.
COPYRIGHT 1992 American Society for Industrial Security
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:measures to prevent corporate fraud
Author:Biancardi, Raul J.
Publication:Security Management
Date:Nov 1, 1992
Previous Article:Trust but verify.
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