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Stop, Thief!
Preventing and Uncovering Fraud in Your Cemetery or Funeral Home, Part 2
(Editor's note: This presentation was part of the ICFA's Annual Convention & Exposition in Nashville, Tennessee, March 10-13, 2004.)
by Robert A. Garvey Jr., CPA, CrFa,
The Fraud Triangle
There are certain things that will drive a person to commit fraud. That's the subject of the fraud triangle-we know there are certain things that are always present when there is employee fraud.
• One side is pressure. Over 90 percent of all known employee frauds involved some form of pressure-vice- or financial-related pressure. These cases also may have involved job dissatisfaction, status, ego or just good, old-fashioned anger, but there is almost always pressure. Investigators discovered that the guy who was doing the insurance contract fraud had two ex-wives and was going to lose his house.
Sometimes the pressure comes from the extended family, but often we see alcohol, drugs or other types of vices, and today we are seeing an incredible amount of pressure on individuals from credit problems. I investigated a CPA three years ago who had $85,000 on his credit card and was stealing from his firm. He'd worked with those guys for 25 years.
In a corporate, setting the pressure can be even more intense. Unrealistic financial targets-has anybody ever had to deal with that?-will drive you crazy. Earnings. Stock prices. That's what Worldcom was all about-they needed to increase the earnings, to keep that stock price up to make Wall Street happy. That was also what was going on with Enron, though Enron was vastly more complex.
Complying with covenants is another possible pressure. When there's a loan with the bank with a net worth requirement, a debt-to-equity ratio requirement, an assets-to-liability ratio, these kinds of pressures can built up and cause people to cook the books, to put out fraudulent financial statements.
Incentive compensation plans are another potential source of financial pressure. We see this all the time; if this type of plan is not structured properly, it can cause people incredible irritation. If they feel they're being cheated or somehow conned, they're going to start rationalizing about making things better for themselves through fraud. It is something we don't often think about, but we really should. Those types of plans should be structured as fairly as possible.
Another thing found in "cooking the books" cases is that they were trying to minimize taxes by reducing income.
Personal lifestyle/financial pressures cause an enormous amount of fraud. I live on the Chesapeake Bay in Maryland and we investigate a lot of fraud where we end up searching marinas to find the executive's $375,000 boat that he can't afford. I actually found one quite coincidentally in my own marina. We couldn't find where the guy spent the money, and one day I was at the marina, saw a beautiful boat and asked who owned it, and it turned out to be our guy.
People immerse themselves in these lifestyles when they're making lots of money and then all of a sudden the business turns sour for a time. The next thing you know, they can't keep that lifestyle going and there's incredible pressure to do so, because their ego is tied up in it.
• The next side of our fraud triangle is opportunity, which is the area we can actually do something about. We as accountants, we as investigators and you as business owners can do something about opportunity.
If all three elements of the fraud triangle aren't there, there's probably not going to be an employee fraud. It's very difficult for you to control a lot on the pressure side, so you need to turn your attention to opportunity. If the employee under pressure has the opportunity-or even the perception of opportunity-to steal from your organization, he or she is probably going to try. It doesn't really matter if employees can get away with it; if they think they can get away with it they'll give it a try.
• The last leg of this triangle is rationalization. I've investigated hundreds of employee frauds and embezzlements over the years, and I probably can count on one hand the number of those where the perpetrator didn't rationalize doing it. It's never their fault.
One of the most common ones you hear: "It's a loan. I'm not stealing anything; I'm going to pay it back." How's he going to pay back $250,000 when he makes $30,000 a year? I don't think so.
You also hear: "I deserve it." We hear that more often than you would believe. "I deserve it. I work my butt off. I'm here six days a week. The boss doesn't do anything. He plays golf." They feel they're entitled to it, so they're going to take it.
"They expect people to take this stuff." Who are "they"?
My personal favorite is, "Everybody else does it." I've had some great conversations on who these "everybodies" are.
The only thing we can really attack, as business owners, is opportunity. We need to remove the opportunity, or the perception of opportunity, from the employee who wants to be dishonest.
What to watch out for
There are some symptoms or clues you can train yourself and your employees to look for. This doesn't mean that anyone who falls in one of these categories is committing a fraud, but it's something you should think about.
• Lifestyle changes. Fraud is incredibly stressful. Think about it. You're sitting in the office with people you maybe have known for years-your employees, your friends-and you're stealing from them. The boss walks through, asks about the wife, the family, maybe you play golf with him. Nice people become belligerant and vice versa-you see that all the time.
• Unusual behavior. You've been working with somebody for the last 10 years. They've been a very conservative sort of person, they seem to do sort of the same thing all the time. All of a sudden they show up at work with a brand new car, a Lexus.
This has actually happened. I had an investigation at an electrical company where the guy couldn't figure out what the problem was, and I'm looking in the parking lot thinking, "Wow, that's a nice car he's bought out there, I couldn't afford that"-it was back when they cost $80,000. It belonged to the bookkeeper, Aunt Martha. Where the hell did Aunt Martha get the money to buy that? Unusual behavior.
• Refusal to take vacations, and its companion, reluctance to delegate tasks, even when obviously overworked. Who doesn't take vacations? I can assure you I have been involved with 50 employee fraud cases where I was interviewing the owner about his employees, and he said, "Oh, Aunt Margaret, I trust her with her life. She never takes a vacation, she seems to live in this office, she's always here. And she's got so much work, but I try to hire people and she doesn't want them." Think about it. People who are doing that aren't normal. Who wants to do more work than they have to?
An example from the industry: We had client that was a cemetery and funeral home combination. The controller was a highly trusted employee; he never took any time off. His sister worked in the accounting department. The owner was an absentee and, in his words, trusted the controller like a son.
The controller ruled the office; there really was no internal control. He had a receptionist who went through the motions of opening the mail and passing the receivables around, but at the end of the day, he controlled everything; he was responsible for everything that went on in that operation. The books were never closed on time; the books were a mess; a million adjusting entries a year.
I can tell you from 30 years' experience in the public accounting business, that what goes on in an audit is we sent the young people out to do the work, while us old fat guys sit in the office and think intelligent thoughts. That's been going on since the beginning of accounting, and what smart embezzlers-a CFO probably, or a controller-do is throw a big smokescreen at our young, impressionable auditor. They run a million journal entries through, they run stuff back and forth, back and forth. It's just not going to make any sense. The kid's getting calls from managers saying, "Why aren't you done with this job?" and the next thing you know, the guy has gotten away with it. That was what was going on in this case.
This guy ran what's called a lapping scheme with the accounts receivable for over seven years and got away with close to $2 million. He was stealing the accounts receivable, the payments. When customer No. 1's payment came in, he would steal it. He had to cover it somehow or late notices were going to start flying out. So he would take money from customer No. 2 and he would apply that to customer No. 1. Now he's got a problem with customer No. 2, so he's going to get customer No. 3's money.
He's juggling this, he's working 24 hours a day, he's belligerent, he's got a weird lifestyle. And he had the opportunity to do it because the owner wasn't there. It just went on forever. The only way this got uncovered is the owner got suspicious quite accidentally and then we got some tips.
They weren't really in vogue in those days, but hotlines work. In this case, when we interviewed the other employees, many knew this was going on, or had a strong suspicion that something wasn't right in this place, but they were afraid to talk to anyone, because they were afraid for their jobs. This guy controlled everything and they didn't know whom to complain to. They weren't going to complain to the 22-year-old auditor, and they were scared to death to talk to the partner, because he was scary and never showed up anyway. If they had had somebody to call, anonymously if they wanted to, this fraud wouldn't have gone on anywhere near as long as it did. As it was, the company lost $2 million and never got it back.
Part 3: Preventing and Exposing Fraud
Putting the right practices and systems in place.
Back to Part 1: Stop, Thief!
Examples; what it costs; who is ripping us off
Robert Garvey can be reached at bobg@mksh.com or at 1-800-296-6992 or (410) 296-6200. ; (323) 340-4701.
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Copyright ICFA 2004
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