Preventing Fraud: Parley with a Perp
By: Deborah S. Adkins
Don't think occupational fraud and abuse are pervasive problems? Think again. Have you ever had the occasion to speak with a fraudster?
I recently met Barry Webne, a noted author, lecturer, trainer and consultant on the detection and prevention of occupational fraud. In 1987, Webne graduated from the University of Toledo with a master's degree in business administration, majoring in accounting.
But, in 1995, Webne was convicted of bank fraud for embezzling more than $1 million during a four-year period while working as controller for a manufacturing company in Cleveland. He then completed a six-month federal prison sentence at the Intensive Confinement Center in Lewisburg, Pa.
Webne's fraud started as a payroll scheme. He wrote himself an extra check one month and decided that, should he be caught, he'd just tell management that he didn't know how his was the only payroll check to be duplicated.
He wasn't caught, though. His boss didn't catch it; the internal auditors didn't catch it nor did the payroll processing company. So, as time passed, the amount Webne embezzled by duplicating his payroll checks increased until it reached tens of thousands of dollars per month.
At first, he was just trying to reduce his financial pressure. (Today, Webne relates to middle-class Americans, whom he feels work hard but come home to a stack of bills.) However, once his bills were paid, he says, his crime became an addiction. He readily admits that he was out of control and just could not stop. His employer was a $12 million manufacturer, with an average inventory of approximately 500,000 and average accounts receivable of approximately $300,000. And he got very creative with places to hide his extra pay.
To keep the extra payroll expense secret, he capitalized the expense in assets, particularly in inventory, prepaids and accounts receivable. When the auditors would question, for example, why the increase in inventory, although sales remained relatively flat from year to year, Webne would respond that it was a "product-mix issue."
Why do employees embezzle from their employers?
Dr. Donald Cressey, a criminologist, developed the "fraud triangle" while studying embezzlers. Cressey refers to embezzlers as "trust violators" because the majority consider themselves as law-abiding citizens with no previous criminal history.
Opportunity is one of the three legs of the fraud triangle, according to Cressey, with the other two being motivation and rationalization. Motivation is usually a financial pressure that may stem from the fraudster's living beyond his or her means, or it may be an addiction. Rationalization is the fraudster's justification, that is, "I was only borrowing the money."
Opportunity is the only leg that a company can control. Opportunity is the fraudster's perception of how he or she will commit the crime without being caught. It occurs when there are weak internal controls, lack of segregation of duties and/or no fraud-detection policies in place.
Webne was able to hide the crime from his employer because his company role was a trusted one with plenty of opportunity. He was able to create payroll checks, reconcile the bank statement and handle the general ledger.
With the intense stress of keeping a business profitable, owners and execs must often get "trusted" employees to assist with key tasks. Often, the owners give away responsibility, along with opportunity. And, when all three legs are present, fraud is the most likely to occur.
Take a look at these statistics from the Association of Certified Fraud Examiners' 2006 Report to the Nation on Occupational Fraud and Abuse:
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It is estimated that U.S. organizations lose 5 percent of their annual revenues to fraud.
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The No. 1 method of fraud detection is receipt of anonymous tips.
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The median loss is approximately $159,000, with smaller organizations suffering a higher loss of $190,000.
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The average time for detection of a scheme is 18 months.
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The size of the loss is strongly linked to the perpetrator's position within the organization.
Although Webne and I spent well over an hour discussing his fraud scheme, he gave this very concise advice for business owners: "Trust, but verify." Webne believes that "No organization, from the smallest of churches to the largest of corporations, is safe from the risk of occupational and financial fraud." So, don't let your company become a victim of fraud! Contact us for more information or to find out how your company can prevent fraud. Contact Janet Watson(813) 317-3460 or Jwatson@npcfo.com Deborah S. Adkins is a forensic accountant, providing litigation support services and anti-fraud training. She is a Certified Public Accountant.
Author's note: Barry Webne was scheduled to speak in Orlando in May 27-28. Just before press time, however, Webne again was arrested for embezzlement, this time from two subsidiaries of Block Communications Inc., publisher of the Toledo Blade newspaper. Prosecutors say the thefts occurred from 2001 to 2006, when Webne held several positions at the companies.
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