Fraud Comes In All Shapes and Sizes

A number of years ago, I remember reading about how a small cadre of science geeks used their way-above average IQs to “game” a significant number of arcades in the Northeast.

This legion of Intel Award winner hopefuls, no doubt clad in ill-fitting chinos, baggy cardigans and soiled pocket protectors, ventured into a local office supplies store, purchased a ream of paper as close to U.S. Treasury grade as legally allowed. They then walked over to the copy machine, plopped a $5 bill on the glass and proceeded to Xerox hundreds of actual sized Lincolns.

Now, obviously their counterfeit largesse would not be legal tender in any retail establishment, but at a gaming arcade where a change machine scanner reads only the top side of a bill, this enterprising, but illegal venture, netted them roughly $3,000 by the end of the afternoon.

My first thought was why at that age was I working as an usher in a movie theater for $1.85 an hour? Despite the dubious nature of their exploits, I can’t honestly admit to not being a bit jealous.

I harken back to this vignette of misspent youth because I recently received the annual Report to the Nations on Occupational Fraud & Abuse, published by the Association of Certified Fraud Examiners, which estimated that organizations worldwide lose an estimated 5 percent of their annual revenues to fraud.

In U.S. dollars, that translates to roughly $3.5 trillion (yes, with a “T”). To put that figure in perspective, the aggregate amount of money stolen in bank robberies in the U.S. hovers at about $70 million.

The ACFE report found that the median loss caused by the occupational fraud cases in the study was $140,000. In more than one-fifth of the nearly 1,400 cases it studied, fraud was responsible for losses of at least $1 million. The frauds in the study lasted a median of 18 months before the plots were uncovered.

One of the more shocking findings is that despite any and all prevention techniques occupational fraud is more likely to be detected by a tip than by effective fraud prevention strategies.

Not surprisingly, smaller businesses suffered the largest proportional median losses, as they usually do not have the resources to deploy sophisticated anti-fraud controls. That troubling demographic, I assume would encompass many small and midsized CPA firms as well.

True, there are strategies that can temper fraud, i.e. segregation of duties, continuous auditing software and any number of checks and balances.

But when it’s all said and done, you can pass all the rules and regulations you want. The truth is you can’t, and never will, be able to legislate ethics.

Inside every rogue teen looking to cheat an arcade, there could be a future mid-to-upper-level manager who has learned a thing or two about cheating the system along the way.