Successful Financial Crime Prevention

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Re-published with permission from White-Collar Crime Fighter,

While the ingenuity and complexity of today's huge corporate frauds make interesting reading, there are countless other varieties of financial wrongdoing plaguing companies that don't receive mass media attention.


Unfortunately, these "lesser" frauds usually have devastating results on a company's bottom line and reputation—just as the mega-frauds do on the Enrons, Worldcoms and Tycos that the mass media has taken such an intense interest in.

They include billing and payroll schemes, inventory theft, travel and entertainment fraud, kickbacks and a host of other crimes. Executives in companies of all sizes need to be familiar with the red flags associated with them in order to control them.


Occupational fraud is the most ubiquitous form of financial malfeasance plaguing American businesses today.

The Association of Certified Fraud Examiners ("ACFE") defines occupational fraud as "the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets."

It can be as simple as stealing inventory or as complex as a large-scale kickback conspiracy scheme.

According to ACFE research, however, occupational frauds fall into one of three main categories...

  • Asset misappropriation involves the theft or misuse of an employer's assets and includes skimming revenues, stealing inventory, check tampering and payroll fraud.
  • Corruption is the wrongful use of influence in a business transaction to procure an inappropriate benefit and includes kickbacks, illegal gratuities, conflicts of interest and extortion.
  • Creating fraudulent statements involves falsification of an organization's financial statements by overstating revenues and understating liabilities and expenses.


Failure to conduct due diligence is the single biggest reason why occupational frauds flourish. Whether you're acquiring a company, entering into a major deal or forming a strategic partnership, key questions need to be asked...and answered convincingly. They include, what do we really know about these people?...Have they furnished us with facts or fiction?...Is the company a good corporate citizen?

The answers to these and related questions can mitigate risk and the loss of untold millions to fraud by your own employees. A major part of good due diligence is conducting background investigations on new hires at all levels, as well as periodic updates on existing personnel.

Pre-employment screening should include checks of criminal records, credit history, litigation, resume details and references.

Note: Resume fraud is a much bigger problem than many companies realize. The payroll company, Advanced Data Processing (ADP), found that 44% of resumes they reviewed for their clients contained false statements about employment history and 41% misrepresented educational achievements.

Case history: I once conducted an internal investigation for a major private investment firm involving a vice president who embezzled company funds. While doing the investigation, I performed a background investigation and learned that the subject had a history of poor credit. The subject had over-extended himself on credit cards and loans and was listed as a credit risk. Had his employers performed a routine consumer credit check, they would have discovered his bad credit and possibly instituted additional oversight and/or corrective action.

Valuable lesson: When you're talking about occupational fraud, the best way to predict future behavior is to assess past behavior.


Many employee frauds involve the company's bank accounts and checkbooks. You've heard it before but it's truer today than ever: A trusted and longtime employee who writes all the checks is often the culprit. Self-defense...

  • Regularly review canceled checks. Do you recognize all of the payees? The presence of new vendors may indicate that funds are being improperly used.
  • Review monthly bank statements to determine if canceled checks are missing. This may indicate that fraudulently issued checks were removed to prevent further scrutiny.
  • Enforce a rule requiring that all checks for more than $100 be signed by at least two authorized employees. Print the dual signature requirement on the checks.


Sherron Watkins is the Enron employee who tried to alert upper management about the financial shenanigans she suspected within the company, but was rebuffed. She ultimately blew the whistle on this enormous fraud and today is admired for her courage.

To encourage whistleblowers to come forward, set up a 24/7 toll-free hot line that offers anonymity if desired by the callers. The existence of a hot line must be communicated to all employees.

Even more important: Employees must know that action will be taken when credible information is provided.


It would be nice if we could take it for granted that acts of fraud and abuse are clearly understood to be wrong. Unfortunately, some employees still seem to need written clarification of the seriousness and consequences of abusing their positions for personal gain.

Result: More and more companies are turning to written codes of conduct to explain the company's standards of ethics and warnings against compromising those ethics.

Important: These documents should also include areas such as expense account procedures...anti-trust policies (such as price-fixing and bid-rigging)...compliance with anti-trust laws...conflicts of interest...use of confidential business information...retaliation and whistleblower protections...document and record retention...the Foreign Corrupt Practices Act ("FCPA".) *

Each employee should be required to certify that he or she has read, understands and agrees to comply with the code. The original signed, dated and witnessed copies should be retained by your general counsel--in case of future administrative, civil or criminal actions.

A detailed code of conduct is great for improving integrity. But--we all know that integrity starts at the top. The CEO and other top managers are responsible for setting the corporate tone and leading by example. It's too late to establish a culture of honesty and integrity when your CEO is doing the "perp walk" with federal agents.

*FCPA makes it a federal offense to offer, pay, promise or authorize the payment of money or anything of value to any foreign government official, political party or candidate for political office for the purpose of obtaining or retaining business.

White-Collar Crime Fighter source: Martin T. Biegelman, CFE, Group Manager of the Financial Fraud Integrity Unit at Microsoft Corporation in Redmond, WA. Mr. Biegelman has more than 29 years of experience in the detection, investigation and prevention of fraud and corruption. Prior to joining Microsoft, he was Director of Litigation and Investigative Services in the Fraud Investigation and Recovery Services Practice at BDO Seidman, LLP in New York City.

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