Companies in eastern Pennsylvania lose millions of dollars each year to occupational fraud. And the incidents are increasing.
From small, privately owned businesses to massive corporations to tiny nonprofits and state-funded government agencies, fraud can be found. Those in forensic accounting and certified fraud examiners say it’s a problem that can erode a company’s trust, sink it into bankruptcy and destroy the dreams of entrepreneurs. In some cases, it can shut down a business permanently or force a company to downsize with layoffs and other cutbacks.
While more reports are turning up in the media about company executives embezzling funds, these stories capture only a small fraction of the problem, as they are the only cases that get reported.
Often, companies avoid publicity by settling the dispute with fraudsters internally, rather than going after them criminally. There are many other incidents that occur but company executives do not discover them until much later, experts said.
“Fraud by its very nature is hidden,” said Allan Bachman, education manager for the Association of Certified Fraud Examiners, an organization based in Austin, Texas. “The ones we are seeing are the ones that have been exposed. A lot of cases go undiscovered.”
Over the past five years, companies in the Greater Lehigh Valley have reported about $30 million in theft, with a lot of those nonprofits, said Maureen Thomson, a Certified Public Accountant and senior manager of special services for Concannon, Miller & Co. PC in Bethlehem. Nonprofits are more susceptible because these organizations typically have fewer controls in place, she said.
Over the past five years, articles about company executives involved in fraud have been appearing more frequently in area newspapers, including The Express-Times and The Morning Call, according to Thomson, a master analyst in financial forensics.
“There has been a lot more reported, and that has only been a small fraction,” she said.
One of the red flags for fraudulent behavior is gambling, as is any type of addiction, Thomson said. Thomson sees a correlation between fraud and the opening of the Sands Casino Bethlehem Resort in 2009.
As an example, her clients have maintained that employees committing fraud all had significant gambling debt.
Often, three factors combine to encourage a person to commit fraud:
(1) Motivation, which often comes from debt or vice.
(2) Rationalization, or the thought that “I’m owed this.”
(3) Opportunity – where the person believes he or she can get away with it, Bachman said.
“I see it as a character flaw, someone who is taking advantage of the system and profiting from it and at the detriment of others,” Bachman said.
While there can be no exact profile, there are factors that fraudsters have in common.
In terms of personality, some can be very nice or extremely standoffish or defensive, particularly if they are questioned over finances, according to Bethany Novis, a certified fraud examiner and managing partner at RKL, an accounting firm in Lancaster.
Women are more likely to embezzle, but men steal more, Thomson said.
With small to medium-sized companies, it’s often a person in the accounts receivable/payable departments, a bookkeeper or anyone in the cash conversion cycle of a business, since this person has access to money and the ability to write checks, Thomson said.
“It’s really kind of a perfect storm that puts someone in a situation where they think they can get away with it,” Bachman said.
In her role as a forensic accountant, Thomson analyzes the case to figure out how the individual committed fraud.
Often, fraud can occur when a company does not have good internal controls or segregation of duties. Business owners may not be focused on the financial details if they’ve hired someone whom they trust to perform that role.
“A lot of small companies are focused on running their business,” Thomson said.
But this is where a lack of oversight can allow a fraudster to begin stealing.
CPA Novis agreed that employers are focused on their clients and their customers and it’s what they do best, not searching for employees who might be committing fraud.
“They don’t really enjoy the financial part,” Novis said. “They hire those people to handle the finances.”
When business leaders do not question finances, fraud can occur.
“I think it happens because of economic pressure,” said Tony Buczek, certified public accountant, certified fraud examiner and shareholder with Buckno Lisicky & Co. of Allentown.
Pressure, rationalization and opportunity are the three factors that come into play.
“I’ve done a number of cases where the person has a gambling problem,” Buczek said.
In most cases, fraud occurs over several years. The first year, the individual commits a small theft, but then gets bolder.
“Once they get over the guilt and know they’ve gotten away with it, they know they can get more,” Thomson said.
Many times, people try to rationalize why they are doing it, or they are in need of money as a result of the recent economic recession, Novis said.
On average, embezzlement schemes last 4 ½ years, Thomson said.
In Thomson’s experience, the amount of money stolen ranges $50,000 or less to more than $300,000.
RKL serves privately owned companies whose fraud generally occurs over three to four years before it is detected, said Novis, who has worked on more than 50 cases of fraud.
At the corporate level, however, people are much more aware that these things are happening, Bachman said.
“Small to mid-sized businesses can really be taken out by it,” Bachman said. “They have limited resources to begin with.”
If employees are educated about fraud, they most likely will report it if they discover it.
Tips for potential fraud incidents can arrive from many sources.
Often, it can be another employee, a vendor or a request for proposal, Thomson said.
Fraud can come in the form of people writing bad checks, abusing expense reports, abusing the company credit card information, and those who wire money to their own accounts, Novis said.
The methods and mechanisms that technology brings to bear makes fraud more global and almost borderless, Bachman said.
When forensic accountants examine a case, companies want to know when the fraud began.
“The main question people want to know is, how can we try to trace it back to clean records?” Novis said.
Then, Novis said, she studies how the person committed the theft. Most of RKL’s fraud investigations are for nonclients of the firm, she added.
Often, once company money is stolen, it can be difficult to get it all back.
“Nationally, there is a very low amount of restitution,” Novis said. “Money that’s been stolen has been spent. However, in central Pennsylvania, we see a fair amount of restitution. Often, when confronted, the fraudster or his/her family will step forward and pay.”