Banking & Finance and Law

Fraud cases leading to safeguards

Forensic accountant reminds business owners that ‘trust is not an internal control.’

October 2, 2015
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West Michigan is a nice place, a fairly economically successful place, but it’s not a place that’s immune to fraud.

A string of West Michigan embezzlement cases hit the news in recent months. The first was the case of Chad James Perleberg, who pled guilty to embezzling more than $100,000 (the total was reportedly about $327,145) from Wyoming-based Grand Rapids Foam Technologies, where he had served as chief financial officer.

In July, Kathryn Sue Simmerman, former manager of Muskegon-based Shoreline Federal Credit Union, admitted in a plea agreement to embezzling about $2 million from the credit union's cash vault.

Then there was the case of Peter Canepa, chief financial officer for Walker Tool and Die, who recently was charged with embezzling between $50,000 and $100,000 from the company.

And finally, Coloma’s Sandra White, a former travel agent, was recently sentenced to prison for wire fraud and aggravated identity theft after an eight-day trial in the U.S. District Court in Kalamazoo.

So, as Jerry Seinfeld might ask, what is the deal with all the fraud these days?

The good news, according to Plante Moran’s Forensic and Valuation Services partner Michelle McHale, is Grand Rapids is still a great place with a great working environment and, generally speaking, isn’t worse off than anywhere else when it comes to fraud.

Unfortunately, she said, the West Michigan business community may be a little too trusting when it comes to employees.

“I don’t think there’s a trend (of more fraud). I’ve been doing this work for about 20 years (and) I don’t think it’s happening more, but I do think people are becoming more aware of the symptoms and the signs, and more companies, more employees are reporting it,” she said.

“Many times we have smaller companies here in West Michigan, and certainly everywhere, and not every company can afford to put in a hotline or have an audit, the purpose of which is just to make sure your financial statements are OK.

“We recommend random and periodic checks. Someone has to oversee the CFO’s duties. You can’t just hand over a checkbook and say, ‘I trust you,’ she said.

“Trust is not an internal control. You have to have checks and balances everywhere.”

According to McHale, studies by the Association of Certified Fraud Examiners showa typical organization loses about 5 percent of its revenue to fraud each year. That loss translates to a potential projected global fraud loss of about $3.7 trillion, she said.

“ACFE does a study every other year to report the trends in fraud. It’s been about 5 percent from the last several studies. It’s pretty consistent,” she said.

“Fraud affects more than the company’s bottom line — it affects every single person in your organization. Giving your employees the education to detect, deter and report fraud is vital and necessary to protecting both your company’s financial and human assets.”

Lack of internal control is the No. 1 issue that allows fraud to occur, McHale said. To stop fraud, there first has to be a tone set by the owner and senior management emphasizing that if an employee suspects a CFO may be guilty of fraud, they should tell someone.

Fraud is usually caught through a tip, McHale said, adding a company must communicate that employees will not lose their jobs for reporting something inappropriate or unusual. And company policy must dictate a wide spectrum of disciplinary actions for the guilty party, depending on the severity of the fraud.

But fraud gets harder to deal with the higher up it goes.

“If it’s being done by the ownership, there’s not a whole lot you (as an employee) can do. If the owners are defrauding, it’s their company. If they’re stealing from their own company, it would be difficult for the police to investigate that,” she said.

“Depending on the role, there’s only so much (an employee) can do. If it’s a public company, there’s a hotline they call … or they could leave the organization. Whistle blowing is fine, but you need to report it first to your manager and beyond before running out to the police. Police will go to management automatically.”

So who commits fraud? Often it may be a 20-year employee who had a great 18 years, but for the last two years was motivated to steal because of something that happened in their life, McHale said. That might be gambling, poor finances, divorce or something else; financial desperation leads the employee to start small, and if they’re not caught, they continue, she said.

“This is why you need good hiring practices and periodic background checks. A lot can happen in 15 years. I would say most people are good, but circumstances change in someone’s life,” she said.

McHale advises all companies, big and small, to keep the following practices in mind in order to prevent fraud from ruining their finances:

  • Implement good hiring practices. It is important to perform background checks, contact references and verify educational degrees of potential job candidates.
  • Establish and adhere to a written code of ethical conduct. A concise, strong ethics policy defines improper and illegal behavior, including conflicts of interest, kickbacks, embezzlement, etc. The policy should be given to employees to read and sign at the time of hire, and it should be reviewed with employees annually. Ensure the rules of conduct apply equally to everyone within the firm.
  • Discipline fairly and consistently. Employees and members must understand there is zero tolerance for improper business conduct or fraudulent behavior, and that disciplinary action will be taken for infractions.
  • Implement and monitor internal controls. Sound internal controls require that transactions are properly authorized, recorded and reported and all assets are safeguarded. Safeguards include securing firm assets within controlled areas, vendor and client verification and random, periodic checks of accounting activities.
  • Offer ongoing training to employees. This is important to keep them apprised of what constitutes fraud and how it is prevented, detected and reported. Take time to educate employees about fraud and how it affects the company.
  • Give employees a variety of methods to report their concerns about fraud, illegal actions or unethical behavior, including telephone hotlines, emails, web-based portals, faxes or even face-to-face meetings. Anonymous reporting, either internally or through independent service providers, can help employees feel their information has been shared in a safe and confidential manner.
  • Empower and equip employees to utilize the services. There may be a negative stigma attached to whistle blowing, but encouragement from senior management as well as ongoing training and support from the organization may ensure a more robust fraud reduction program.

“Organizations will find their workforce to be their largest and most effective reporting source. Maintaining a robust culture of ethics and compliance along with an open door policy for senior management and effective communication channels for reporting employee-related concerns will help employees feel comfortable and engage in fraud prevention,” McHale said.

“When employees are given tools to report policy violations and inappropriate behaviors, they are given a clear signal that management is committed to the elimination of dishonesty in the workplace.”

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