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Fighting fraud can take some serious sleuthing

Having trusted employees is a good thing. Putting too much trust and financial authority in a single employee is just asking for trouble, according to accountant Jerry Batson.

And when trouble arrives, companies are asking for Batson, a certified fraud examiner. That’s a specialist in preventing, detecting and investigating fraud, and they are becoming increasingly important to businesses as electronic theft multiplies.

“I’ve performed fraud investigations on financial-statement fraud, asset misappropriation, embezzlement, bribery and kickbacks, conflicts of interest, bid rigging, and executive fraud,” said Batson, 57, who has 33 years of experience, mostly with the federal government. He works for the Chilton & Medley accounting firm in Louisville, Ky.

Chilton & Medley hired Batson in January to put more emphasis on investigations, partner Diane Medley said.

“The potential for fraud or misuse of funds has really escalated over the years with the advent of computer systems and just the sophistication of people who are perpetrating frauds,” Medley said.

“In the old days, people wrote checks to themselves” when stealing from their companies, she said. “Now it’s a whole new level. It’s a level where people move money around electronically. They hack into systems.”

U.S. organizations lose 5 percent of their annual revenues to fraud, or about $652 billion a year, according to the Association of Certified Fraud Examiners. The median loss is $159,000, but one-fourth of the cases result in losses of at least $1 million.

Fraud can be difficult to detect. The median length of schemes was 18 months from when they began until they were detected, an association study showed.

Small businesses suffer disproportionately from fraud, Batson said, citing figures that show the median loss suffered by an organization with fewer than 100 people was $190,000.

Small businesses suffer such high losses for various reasons, Batson said. They generally do a poor job of proactively detecting fraud. They don’t have enough employees to separate out financial duties, so, for example, may give one employee the responsibility for writing checks, making deposits and reconciling bank statements. They also may not do a good job of checking backgrounds on all new employees.

Companies that deal heavily in cash transactions are especially vulnerable to theft, Batson said. But the biggest fraud losses come, not surprisingly, from managers and owners – those with access to large sums.

“They can override controls,” he said. “And that’s why you saw a lot of large dollar figures on the Enron and WorldCom frauds, because upper-management executives were overriding controls.”

In fraud committed by owners or executives, the median loss is $1 million – five times more than the median loss caused by the managers and almost 13 times as large as the median loss caused by employees, Batson said.

Why do people commit fraud? It’s often simply “the greed factor,” Batson said. And they rationalize: “I’m just borrowing the money. I’ll give it back. Or really, I’m underpaid and I should be making this anyway.”

Employees also may be under financial pressure, or stealing to support a drug or gambling habit, he said.

Investigations can be long and laborious, unlike cases in television detective dramas, Batson said. Most of the real-life work involves carefully sifting through the company’s financial records and interviewing employees.

The majority of fraud cases are discovered because of a tip, not by audits, and the truth often surfaces during interviews.

Why don’t workers who suspect such activities come forward sooner?

“Most of the ones I’ve interviewed said, ‘Well, no one ever asked me,’ ” Batson said. If the company doesn’t have a “tone at the top” of openness and honesty, employees will hold back “because they think management at the top doesn’t care.”


Safeguarding your business from fraud

Certified fraud examiner Jerry Batson offers small businesses these fraud-prevention tips:

• Emphasize separation of duties and internal controls. Cross-train a number of workers in handling finances, and never have the same person write the checks, make the deposits and reconcile the bank account.

• The company owner always should receive statements directly from the bank, looking over the records and canceled checks for any signs of suspicious or unauthorized activity.

• Have a certified public accountant perform an annual audit and review internal controls.

• Set up a fraud hotline. A number of companies will provide a service for anonymous reporting of suspected fraud.

• Ensure that computer systems are secure and that access to financial areas is restricted.

• Create a company code of ethics to remind employees that theft and fraud are not acceptable.

• Buy employee-theft insurance.

• Hire a certified fraud examiner to perform a fraud-prevention checkup.

For more information, Batson recommends the Association of Certified Fraud Examiners Web site, www.acfe.com.

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