‘Dear Mr. President’

CFEs Offer Advice to Nation on Ways to Control Fraud During Recession


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Fraud in the News 

On Jan. 20, as President Barack Obama took his oath of office, he addressed a nation already neck-deep in a recession.

“Those of us who manage the public’s dollars,” he said in his inaugural address, “will be held to account to spend wisely, reform bad habits, and do our business in the light of day. … This crisis has reminded us that without a watchful eye, the market can spin out of control.”

Bernard Madoff’s Ponzi scheme and subsequent “mini-Madoffs” were making the headlines. Trust in financial institutions, the stock market, and government oversight dissipated.

Most who lost their jobs since then have accepted their fates, but others are rationalizing that desperate times call for desperate measures.

Fraud examiners know they have to be “watchful eyes” because fraud typically increases during a recession.


Jim Ratley, CFE, president of the ACFE, said businesses should be especially vigilant about taking necessary fraud-prevention measures.

“Companies must be aware that all signs indicate that occupational frauds will increase,” Ratley said. “If they are not prepared, they will incur losses, many of which could be severe.”

In a Feb. 19 article from The Wall Street Journal, “Small Businesses Face More Fraud in Downturn,” staff writer Simona Covel reported that “small companies are especially vulnerable” during tough economic times “because they often lack the internal controls to prevent fraud.”

According to Fraud Resource Group CEO Jon McDowall, CFE, PCI, CIFI, CII, lax internal controls are often all that’s needed to push desperate employees to commit frauds of convenience.

“In favorable economic conditions, [employees] may resist the temptation to take advantage of security loopholes,” McDowall said. “However, in difficult economic times, the temptation and perceived pressure for even tenured and trusted employees to take advantage of these opportunities may be increased, leading to insider schemes that can be costly and difficult to detect.”

McDowall said fraud examiners will find higher incidence of these occupational fraud schemes:

  • Embezzlement
  • Payroll schemes
  • Ghost billing and vendor schemes
  • Expense account fraud
  • Financial statement fraud

He said identity and cyber-fraud schemes within the workplace are also becoming more prevalent as technology improves but security measures don’t. McDowall suggests businesses be on the lookout for:

  • Computer-borne malware and fraud schemes
  • “Work-at-home” and Nigerian 419 scheme variations
  • Insider threats including the intentional compromise of sensitive data and trade secrets for profit or vengeance


The ACFE’s “2008 Report to the Nation on Occupational Fraud & Abuse” states that “the implementation of anti-fraud controls appears to have a measurable impact on an organization’s exposure to fraud.” It also states that a “lack of adequate internal controls was most commonly cited as the factor that allowed fraud to occur.” With these findings in mind, McDowall said all businesses should make “fraud-risk assessment and meaningful fraud-awareness training” a top priority – especially during the recession.

“Fraud-awareness training is essential in any economic climate,” he said. “It’s critical in an economic downturn.”

Ratley said preventing fraud, or detecting frauds that are already occurring, is the best way to improve the bottom line, despite what some business execs might think.

“In this economy, companies need to take all measures they can to save money,” he said. “No company in this economy can afford to be the victim of fraud.”

McDowall said training key staff and hiring Certified Fraud Examiners are good ways to protect company coffers and investments. He said if companies don’t have an abundance of training dollars right now, they should consider online or on-site training.

“Webinars, such as those the ACFE has been providing for years, are very cost-effective,” he said.

Ratley suggests businesses also employ these safeguards:

1. Companies should make sure that they’ve reevaluated their internal controls because some positions might have been eliminated, and some employees might have been given additional job functions.

“The ACFE has a new Fraud Risk Assessment Tool that is available in the Members Only section of the ACFE Web site [www.ACFE.com],” Ratley said. “These checklists will help you better identify where your client’s or organization’s control structure might be weak.”

2. Companies should let their employees know that one of the best ways to save money (and jobs) is to prevent fraud.

“Hotlines are inexpensive and they are actually the most effective means of detecting frauds,” Ratley said. “In our ‘2008 Report to the Nation,’ members reported that more frauds were detected by tips than by any other means. Make sure your employees know what actions constitute fraud and how to report it.”

3. Management should ensure that employees know that the company is serious about detecting fraud and that preventing fraud is a priority to restore profitability.

4. Companies can help prevent fraud by minimizing the pressures on employees. In this economy, even the best salesperson isn’t going to be able to double his performance from last year.

“Make sure that goals and expectations are reasonable under the current conditions,” Ratley said. “Encourage employees to come to you if they are having a financial problem. You might be able to put them in contact with an organization or agency to help them with their problems, whether economic or emotional. Helping employees deal with those issues can only benefit the company.”


In the March/April Fraud in the News column, Alton Sizemore Jr., CFE, CPA, director of investigations at Forensic/Strategic Solutions, said “There are not enough investigators, prosecutors, judges, and jails to handle the volume of wrongful activity. People are not being held accountable for their actions and too many crimes are falling through the cracks due to a lack of resources.”

A March 5 Reuters article, “U.S. Senate Panel Approves Finance Fraud Bill,” showed that Sizemore wasn’t alone with his concern when it reported that the government was planning to remedy the situation in 2009.

Reuters writer Randall Mikkelsen reported in the article that a U.S. Senate Committee voted that day to “tighten laws against financial fraud.” Committee members packaged their bi-partisan bill as the Fraud Enforcement and Recovery Act (FERA), hoping the two-year, $490 million allowance would give the Department of Justice (DOJ), FBI, and other law enforcement agencies the funds they needed “to hire more fraud prosecutors and investigators, and [that the] FBI mortgage-fraud task forces would receive more assistance from federal prosecutors.”

According to a March 12 article in The New York Times, “Financial Fraud Is Focus of Attack by Prosecutors,” staff writer David Segal reports that U.S. attorneys general “have already begun indicting dozens of loan processors, mortgage brokers and bank officers.”

In addition to the potential passing of FERA, Obama’s proposed 2010 budget, at press time, includes a $26.5 billion increase for the DOJ.

“This funding,” according to the president’s proposed budget report, “[will] provide resources for additional FBI agents to investigate mortgage fraud and white-collar crime, and for added federal prosecutors, civil litigators, and bankruptcy attorneys.”

“Prior to 9/11, white-collar crime was the No. 1 program for the FBI, utilizing 20 percent of its resources,” said Sizemore, a former FBI agent. “After 9/11 everything changed – as it should have – to ensure the protection of our country.”

But just as it was necessary to redistribute FBI resources back then, it’s equally important to re-evaluate our security needs now, Sizemore said.

“Without sufficient resources, fraud slowly eats away our investments, jobs, retirements, and confidence in our economy,” he said. “It’s not for me to say which program should have more resources, but I believe that it is important that they both have sufficient resources. Given the state of the economy, I believe that an increase in the number of agents working white-collar crime could easily be justified.”

While Congress considers anti-fraud laws and funding, and the DOJ struggles to keep up with the increasing number of frauds, Sizemore suggests the government consider “contracting the work to CFEs and other qualified individuals and firms to ensure those responsible for fraud are held accountable.”

McDowall said businesses should consider doing the same.

“The methods and sophistication associated with many of today’s fraud schemes require related expertise to identify, properly deal with, and prevent these frauds,” he said. “You wouldn’t ask a skilled electrician to perform open-heart surgery. Similarly, you should seriously consider seeking the assistance of a CFE with the expertise and experience to effectively detect and prevent fraud within your business.”


While the FERA and various other funding methods show promise for future fraud prevention measures, McDowall said he hopes President Obama carefully examines a “myriad of information-security issues” before he moves forward with some of his other initiatives. McDowall is particularly interested in parts of Obama’s health-care initiative.

“It appears that one of the president’s priorities is to migrate health-care records to electronic form,” McDowall said. “While numerous benefits will likely result … President Obama must not allow a situation to be created in which fraudsters have conducted more research into electronic health-care record-keeping than those intending to implement them.”

McDowall said he believes that in some ways, the U.S. government has fallen behind the private sector in its information-security endeavors. As the new president continues his quest to reform the economy and help the country pull out of this recession, McDowall said he should consider fraud risks, especially in cyber security.

“The White House is in a position to set the tone for information security for the nation and beyond,” McDowall said. “On some levels, the private sector is significantly advanced in comparison with government. Increased public-private partnerships would allow lagging parties to benefit from the lessons learned by the other participants and should be considered.”

Ratley said “We are currently in a situation where we have almost a ‘perfect storm’ for fraud to occur.” With that in mind, fraud examiners should be ready to help the nation weather this storm; it could be your “watchful eyes” that help restore confidence in America’s economy and help put an end to the recession.

Amy Logan is assistant editor of Fraud Magazine. 

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