From a Seed to a Deep Rooted Problem: How Fraud Starts in a Company

Occupational fraud, crimes committed by employees against their employers, is often perpetrated by some of the most trusted people within the company.  Company owners say they feel betrayed and are even personally hurt when they learn of the employee’s theft because they trusted the worker implicitly, giving them access to sensitive information and financial documents. All too often, it is these employees who are the most susceptible to the lure of fraud because they have the access that other employees would never get.

But what turns a person from an employee collecting a paycheck to one who feels justified in stealing from the company to pad their bank accounts? It starts as a small thought, a seed in their mind about how they need extra money for a pressing matter, and it grows into a deeply rooted lifestyle that cannot be stopped until they are caught.

Though you may be loath to consider the possibility, here is an example of how this may happen with one of your own trusted employees:

  1. A Seed is Planted – Your bookkeeper is upside down in her home with an adjustable loan that just recently increased. She is having a hard time making the mortgage payment each month and the recession has handed her an additional blow – her husband was recently laid off from his engineering job. She just needs $500 a month to cover the new mortgage amount and she has access to the bank accounts through her job. She thinks “what if” and imagines moving funds to cover her bills until her husband can find work.
  1. The Idea Sprouts – Since she is in charge of keeping all of the accounting records – payroll, reconciling the bank statements, making deposits and paying the bills – there is no one who will notice if she “borrows” a little money. Besides, business is good and she has worked for the company for more than five years. She has earned a bonus. The seed in her mind becomes a plan.
  1. The Plan Grows – To test her plan, she “borrows” $50 from petty cash to make a minimum payment on her credit card. When no one notices for several weeks, she makes another payment, this time with a company check. She again waits a week or more for discovery and when no one says anything, she becomes more confident in her ability to continue to siphon off funds for her personal use.
  1. The Schemer Puts Down Roots – Since no one seems to have noticed her activities, she decides to give herself a permanent “raise” on her paycheck. She reports payroll and reconciles the bank statements. This lack of internal checks and balances allows her to operate freely and she now has a regular bi-monthly increase to help pay for her bills. She becomes accustomed to this extra money, and it eventually turns into a permanent “raise,” even after her husband lands a new job.

In a matter of months, a simple idea planted by dire need has grown into a fully developed occupational fraud scheme. Improved internal controls, a financial audit, fraud examination or a tip from another employee could help uncover the fraud. Contact a Certified Fraud Examiner (CFE) for a fraud check-up that you can apply to your business today.

Tricia J. Cook is a senior forensic analyst with the forensic accounting and litigation services department at Piercy Bowler Taylor & Kern CPAs. She sifts through financial transactions to resolve allegations or evaluate suspicions, interpreting that transactional data and then organizing that information into easy to understand reports for use by counsel, or for presentation in a court-of-law.  She can be reached at tcook@pbtk.com or 702-384-1120. 

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