FRAUD AND ABUSE ARE COSTLY
Fraud and abuse cost the U.S. economy $400 billion a year. That translates into 6% of revenue or $9 per day, per employee. And relatively speaking, small companies are at a higher risk of fraud than large companies. Why? Because small companies don’t have as sophisticated systems of internal controls as large companies.
And the situation is getting worse. A recent Association of Certified Fraud Examiners survey of executives found that:
- 67% said fraud is worse today than five years ago;
- 70% said fraud detection is getting better (that’s encouraging);
- 75% said fraud detection resources aren’t adequate; and
- Asset thefts made up 82% of the cases.
Example: The headline screams, "‘Trusted’ worker stole $1 million." Beverly Kunkel not only was a trusted secretary who handled bookkeeping for Kendrick Mollenauer Painting, she was the wife of a lifelong friend of the company president.
"When Ford married Beverly, his second wife, we took her in like one of the family." She worked at the painting company 13 years and embezzled for 11. Kunkel was sentenced to eight to 15 years. Hired in 1985, she told the owners she had been unfairly fired from a prior job when $50,000 was missing. She admitted that theft also. When Kunkel told the owners customers were slow pays, they withdrew savings to pay bills. They also noted that Kunkel had embezzled more money in a year than they both had earned, combined. The company has received about $135,000 in restitution.
MY EXECUTIVES WOULDN’T STEAL
And don’t think fraud and abuse are limited to lower-level employees. At a recent seminar, I asked the 200+ CFOs in attendance, “How many of you have executives that steal?” Three or four brave souls raised their hands. Then I asked, “How many of you do the company’s tax return?” Everyone held a hand up. Last question: “Now, again, how many of you have executives that steal?” Everyone roared and raised their hands.
When the executive pays for the mostly personal trip to Las Vegas with company funds, it’s called “tax fraud.” When the bookkeeper, who hasn’t had a raise in three years, writes the $5,000 check to the executive for the trip, it gives everyone in the company permission to steal. You can’t expect any better ethical behavior from employees than executives exhibit.
NOW YOU’RE BEING SUED
The risk of this culture isn’t just to the company. It can put you at risk personally. Let’s assume you prepare and/or sign the company’s tax return. And the return has those trips to Las Vegas for the past five years. Now the company gets into financial difficulty. It can’t pay the bank loan, or the stock price declines 30%. In addition to suing the company, the plaintiffs’ attorneys sue you personally. You. The following exchange takes place while you’re on the stand trying to defend yourself:
ATTORNEY: Mr. Wilson. You were the company’s chief financial officer. Is that right?
ATTORNEY: And you have the highest standards of integrity?
YOU: That’s right. (What else are you going to say?)
ATTORNEY: But yet, it’s okay with you if the company’s executives commit fraud and embezzle, isn’t it?
YOU: No. Of course not.
ATTORNEY: Isn’t this your signature on the company tax return?
ATTORNEY: Then how do you explain this $5,000 for the CEO’s personal trip to Las Vegas the past five years?
YOU: But it’s only a small amount. We’re a $250 million company.
ATTORNEY: So your company saved $2,500 each year in taxes. Now Mr. Wilson, who had to make up that shortfall? (Answer: the members of the jury.)
YOU: (Dumbstruck at this point and fidgeting for an answer. [No answer will get you out of trouble with the jury.])
ATTORNEY: Clearly, it’s okay with you if the CEO steals a little bit. So tell me, Mr. Wilson, how much does the theft have to be before it’s not okay with you?
What do you say at this point? Nothing. You’re done. You’re now protesting that the attorney backed you into a corner. No. You backed yourself into a corner by allowing deductions that are illegal. The fact that it’s only $5,000 does not make it legal. Plaintiffs’ attorneys are very good at asking questions that have no right answer, like, “Have you stopped kicking the dog yet?” Understand the risks you’re taking. It’s your decision.
Gary Zeune, CPA, is CEO of "The Pros & The Cons," the only speakers bureau in the U.S. for white-collar criminals. His books include The CEO’s Complete Guide to Committing Frauds, Outside the Box Performance: How to Beat Your Competitors’ Brains Out, and over 35 articles on fraud and performance measures in national publications. Gary teaches fraud classes for the FBI, the U.S. Attorney, over 30 state and national CPA societies, and numerous banks and accounting firms. You can reach him at firstname.lastname@example.org or 614-761-8911, or visit www.bigfoot.com/~gzfraud.