The Business/Legal Investigator

November 23, 2009

In This Issue:

The Perfect Storm
(Fraud in an Economic Downturn)
by Joseph T. Wells, CFE, CPA
Part 1 of 2 parts


In late October, Attorney Amy Garrard, partner in the Gray Robinson Law Firm of Naples, FL, and I presented "Strategies for Preventing Employee Theft" at the monthly meeting of HR Collier. Our primary task was to bring awareness of this sensitive issue to local business professionals and to offer insight with respect to investigative and legal remedies. We plan to go forward with similar presentations in the future. Then, upon return to my office, I was met with my bi-monthly issue of "FRAUD" magazine published by the Association of Certified Fraud Examiners (ACFE). In that November/ December 2009 issue an article by Joseph T. Wells, CFE, CPA made me sit right up straight! It fit perfectly with our presentation at HR Collier. So, this and next month, instead of authoring an article myself, I am providing my readership with this outstanding two-part assessment of the current business climate and fraud in the workplace. "The Perfect Storm" sums up what you need to know about fraud in today's difficult business environment. Mr. Wells is the founder and Chairman of the Association of Certified Fraud Examiners. He has published 14 books and nearly 200 articles on fraud. I hope you gain from this article. Please feel free to forward it to whomever you feel would benefit, as well.



David B. Watts, CLI, CFE

ALLIED BUSINESS SOLUTIONS, solely owned d/b/a of
Interprobe Affiliates, Inc. a Florida Corporation
(Our twentieth year serving our clients in Soutwest Florida!)
FL Lic. No. A89-00394

(Fraud in an Economic Downturn )
by Joseph T. Wells, CFE, CPA
Part 1 of 2 parts

If you didn't have enough money to feed your family or pay your bills, would you turn to fraud? Or if you were running a multibillion-dollar corporation and thousands of families depended on your company's stock price, would you turn to fraud?

The answer, of course, is that it depends. And much of it depends on personal integrity, which isn't usually measured in audits. Although internal controls are supposed to mitigate opportunities to commit occupational fraud, there are several flies in the internal control ointment. First, controls have a bigger role than just to prevent financial malfeasance. Second, there are few internal controls that can't be negated or circumvented by those with a strong enough motivation. Third, if you're high enough up the ladder, you can simply override them. As I've written previously, good internal controls are a vital element in fraud deterrence. But they aren't a panacea. It's necessary for us to take a broader view of fraud to recognize it as the social phenomenon it is. Here are three factors that make occupational fraud in an economic downturn the perfect storm:

.. Increased (and often severe) financial needs.
.. Decreased loyalty to the company because of real or potential layoffs.
.. Increased opportunity due to the elimination of "non-essential" positions such as auditors and fraud examiners.


Earlier this year, the ACFE conducted a random survey of more that 500 CFE's based in the United States. Here's what they thought:

..Forty-eight percent believed that the dollar amounts of occupational frauds had increased during the current economic crises; 29 percent thought they had remained the same.

..Nearly half felt the increase was due to increased economic pressure.

..Eighty-eight percent believed that the level of fraud will increase during the next 12 months.

..Nearly half of those surveyed thought the biggest risk was with employees. Many more expected a rise in fraud by executives and vendors.

None of these results should be surprising, but at least the survey quantified the opinions of experts that deal with fraud in the trenches. And even though most CFE's expect fraud to rise, they believe that expenditures to fight this problem will remain the same or decrease. That simply means that anti-fraud experts will need to do more with less. One way to do that is to conduct a fraud risk assessment specific to your enterprise. Note that this assessment has some similarities to evaluating internal controls. But it goes beyond that.


In our year-end issue next month, we will finish up with the second half of this highly informative article. Mr. Wells guides us through fraud risk assessment and what constitutes a realistic fraud risk assessment team.

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