CORPORATIONS It pays to put a stop to fraud

Twenty percent of businesses say they know their companies have fraud.
KNIGHT RIDDER NEWSPAPERS
Crime does pay. Well, it's more like an employee commits a crime and the employer pays.
That's why experts say it's important to nip fraud in the bud -- especially seemingly innocuous, but common forms like fudging employee expense accounts. Companies that choose not to are cultivating a culture of criminal activity.
"Employees that can justify one type of fraud can justify another," said George P. Farragher, an accountant and certified public fraud examiner at the Cleveland office of Ernst & amp; Young.
Long-term consequences aside, letting any type of theft go unchecked also can prove very costly.
Big losses
Companies nationwide lose $15 billion to $40 billion a year to fraud, according to estimates by the Bureau of National Affairs and U.S. Chamber of Commerce.
Or, according to a 2002 survey by Ernst & amp; Young LLP and Ipsos Reid, businesses can lose up to 20 percent of every dollar earned.
Twenty percent of the employees cited in that study said they were aware of fraud at their companies. Of that 20 percent, 37 percent said they knew about theft of office items; 16 percent knew employees who claimed extra hours worked; and 7 percent said they knew people who inflated their expense accounts.
"Expense report fraud is very, very easy to commit," said Raymond Dunkle, a certified fraud examiner at the Akron accounting firm Bober, Markey, Fedorovich and Co. "Most large companies probably fall victim to it."
Unfortunately, Dunkle said, there's is no way to completely eliminate expense-account fraud. The idea is to minimize it as much as possible with effective corporate policies.
Three ways
Employees who fudge their expense accounts do it in one of three ways: They overstate, mischaracterize or create fictitious expenses. Most false claims involve travel and meals, experts said.
"It's easy to get away with, and they know it," said Farragher, who is a principal consultant in the Global Investigations and Dispute Advisory Practice. "They're very creative."
Famous scenarios include the employee who goes out to dinner with his wife and turns in the receipt as a "business dinner." Or the employee who steals a stack of taxicab receipts and turns one in every few months for a fictitious reimbursement. Or even the employee who gets money for a credit-card purchase multiple times -- once with the receipt, once with the statement and once with the bill.
Catching such perpetrators starts with sound policies.
Farragher said it's crucial to know what every employee is doing. If a sales representative turns in a gas receipt for the trip she took to Columbus on Oct. 1, her supervisor should know all about the journey.
That means, as Dunkle recommends, everyone should have their expense reports reviewed by a supervisor. It's easier to spot lies that way.
Even high-ranking employees and top executives should be subjected to scrutiny, Farragher said. In addition to setting the proper tone for a company, such a policy will stave off the kind of embarrassing claims made about former Tyco Chief Executive Officer Dennis Kozlowski's spending habits.
According to the Ernst & amp; Young study, the type of person most likely to commit fraud has been with a company for more than three years, is a junior employee and is younger than 35. But in a more recent global survey, the professional services firm found that managers are the most likely culprits for the worst cases of fraud.
Another and perhaps more important way to sniff out thieves is to require receipts for everything, Dunkle said. It's the basis of accounting and proof that a transaction took place.
Although many companies have electronic expense tracking, that "still doesn't excuse not submitting receipts," Farragher said.