Banking & Finance, Law, and Technology

Technology creates greater opportunities for fraud

October 9, 2015
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Eric Larson is a forensic accountant, which means he’s seen a fair share of fraud and embezzlement schemes during the course of his career investigating these crimes.

Larson, who is a partner with Beene Garter, said while some people get caught pretty quickly, many others don’t, and companies can experience large losses as a result.

“Some of these frauds can go on for quite some time,” he said.

One reason for that, Larson said, is a lot of businesses have the mentality of “it won’t happen to me” and, therefore, don’t take the precautions they should to mitigate the risk of fraud. But Larson said it could happen to any business, so every business owner needs to assume it can happen to them and take precautions.

Larson said technology is making fraud easier for people to undertake — and get away with.

“The ability to create fraudulent documents is very easy now,” he said. “I’ve seen bank statements and financial statements that look like the real thing, faked by someone who had limited technology abilities but was able to create them.”

Larson said there are three factors, known as the fraud triangle, that increase the chance of a person committing fraud.

“The fraud triangle — opportunity, rationalization and pressure — those are the three things that create the perfect storm,” he said.

Opportunity is the element over which a company has the greatest control.

Larson said there are many ways a business can mitigate the opportunity for fraud, including performing background and reference checks on new hires, implementing internal controls and audits, creating a corporate culture that encourages openness and establishes clear rules, and providing employees with routes to report fraud.

Larson said he hears a lot of resistance from smaller businesses about internal controls and audits because small business owners often think it’s too costly to implement those measures, but he said there are ways even a smaller business can create a safety net from fraud.

“If you have the bookkeeper paying some of the bills, maybe that person isn’t the person who balances the checkbook,” he said. “Or maybe the person who balances the checkbook isn’t the person who gets the bank statement.

“If you are stealing money out of the company’s checking account and you know somebody else is getting the actual statement and looking at it, it’s going to really limit your opportunity. If you can split up some duties in a way that isn’t very onerous, that can really limit that opportunity.”

He noted cash and cash-like assets are not the only targets of fraud.

“People can steal merchandise and inventory, and if there are strict controls over that inventory and the physical assets, that can limit the opportunity,” he said.

A company’s corporate culture can also go a long way in either deterring fraud or helping an employee rationalize their crime, Larson said.

“Some of the rationalization that you encounter when people commit fraud is, ‘I deserve this, they owe this to me.’ ‘Everybody else does it and gets away with it.’ ‘The rules don’t really apply.’ ‘I’m underpaid.’ ‘I don’t take any vacation.’”

Larson said to limit someone’s ability to rationalize what they are doing, companies need to have clear rules and make sure they are applied evenly.

“If there is animosity around the rules, that can create problems and lead to rationalization,” he said.

He also noted employees need to feel safe bringing information to the attention of management, and it’s good to have involvement at all levels when it comes to creating the company’s culture.

“You don’t want to have an organization where people have to worry about being snitches,” he said. “Folks need to feel like they can come in and talk to management about what they see going on in the organization, and where everything is out in the open. That creates a more conducive atmosphere to everyone, knowing everything is done above board and everyone is watching out for each other at the organization and there is involvement at all levels.”

Besides mitigating the opportunity for fraud within the company, Larson said there are also some signs to look for in employees that can create greater pressure on them to undertake fraud.

“Managers and senior managers: Know what is going on with your employees so you can sense or see when pressure or rationalization might occur,” Larson said. “Do you know if you have an individual going through a financial hardship or a health crisis, an addiction, or living beyond their means? Sometimes there are telltale signs.”

He also noted it can be the seemingly “best employee” who is committing the fraud — the one who never takes a vacation, comes in early and stays late.

“This person doesn’t take a vacation because then this person can’t do the day-to-day maintenance to maintain the fraud,” he said.

If a company thinks it has become the victim of fraud, Larson said it should not try to investigate on its own, but, instead, should get professionals in fraud detection and prevention involved.

The reason is because otherwise they could tip the person off or accidentally destroy evidence.

“A lot can be done electronically — people can cover their tracks,” he said. “It’s better to bring someone in to look into it.”

Larson also has seen a lot of companies that are hesitant to prosecute the employee who has been committing the fraud out of embarrassment and not wanting the public to learn about what has happened.

He said that is a mistake because it allows the person to move on and possibly commit the fraud somewhere else.

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