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Employer Be Aware: White Collar Crime is Increasing

Fraud and misappropriation of assets costs U.S. companies more than $400 Billion annually or $9 per day, per employee on average*. However, losses from fraud caused by management-level employees and executives are sixteen times greater than those caused by non-managerial employees. This is "white collar crime" usually falling into two broad categories, financial statement misrepresentations and misappropriation of assets.

Financial statement misrepresentations are usually perpetrated by top management with the intent to a make company's financial position look better than it actually is and often to meet the expectation of outside lenders and/or investors. Misappropriation of assets can involve the theft of cash, inventory, supplies, intellectual property, product line diversion, bribes, kickbacks, etc. The average white-collar crime costs a business of $500,000, which is astounding when compared to the average armed robbery of $250.

What is the general profile of a white-collar criminal? White-collar criminals are usually in a position of trust and have a strong knowledge of the accounting systems and their weaknesses. In addition, they are often career criminals who have committed similar crimes elsewhere or are disenfranchised employees who realize that they can exploit an opportunity to steal. Generally, these individuals are over 30 years of age who have an above-average education, stable family situation and in good psychological health. The ability to rationalize their behavior is usually shocking to an outsider!

Know the signs
Certain behavioral "red flags" should be recognized by the employer, which may be indicative of a problem:

  • Lavish lifestyle unjustified by salary level

  • Excessive gambling or substance abuse

  • High personal debts

  • Disregard for company internal controls and reporting lines

  • Unusual working hours and little or no vacation time

  • Job frustration; resentment of superiors

  • Management by intimidation and/or secrecy/poor communication

  • Territoriality and protectionism

  • Extra marital involvement

There are many different types of simple and sophisticated schemes involving phony vender fraud, ghost employees, over-billing schemes, bid rigging, short shipments, product diversion, bogus accounts receivable, bust-out schemes (planned bankruptcies), embezzlement and loan fraud.

How accountants can help
As accountants, we are often engaged to perform fraud audits separate from financial statement audits. Financial statement audits typically are not designed procedurally to detect misappropriation of assets or fraud, however, there are accounting "red-flags" that generally expand the scope and degree of procedures in a financial statement audit. They are:

  • The company's overall management is decentralized without appropriate internal control and reporting mechanisms in place

  • Management's compensation is excessively tied to performance results without review by the board of directors or similar non-employee oversight committee

  • Frequent change of outside auditors and a historically aggressive approach to financial reporting

  • Missing files and documentation

  • Excessive expenses and purchases and unusual changes in expenses from year to year

  • Unusual or non-recurring adjusting journal entries, particularly in the fourth quarter of a fiscal year

  • Transactions without a business purpose

White-collar crime is increasing and more publicized. Many local cases are well known worldwide: Cendant Corporation; Livent, Inc.; Oxford Health Plans, Incorporated; Fire Host Corporation; and Donn Kenny, Inc.. These are excellent examples of how owners of small and medium-sized companies must continually be alert to fraud, not to trust the most trusted and most importantly, to implement preventive measures to minimize the risk to white-collar crime.

James T. Ashe is a partner at Marcum & Kliegman LLP. He specialized in Litigation Support Services, Business Valuations and Taxation. He has worked served as an expert witness in numerous cases involving fraud. He can be reached at 516-390-1000.

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