I was reading The Inner Auditor and came across a couple of articles that got me thinking about fraud and how people get away with it. Successful fraudsters are successful because they are good at hiding. They go to great lengths to keep their fraudulent behaviors under the radar of those who check on the books. As mentioned in the Inner Auditor post, often evidence of fraud is ignored because what is found is a small amount. Ignore at your peril. Ignoring something like this could mean ignoring a large fraud made of many small amounts. Armed with the knowledge that small amounts will fall under the radar of anyone policing the books, a person perpetrating fraud could go undetected by only stealing small amounts at a time. Recently, I was reviewing financial statements and I came across a line item for repairs that was several times higher than it had been in previous years. Curious, I looked into the details of the transactions that made up the account balance. Each invoice in that account, and all invoices were from the same vendor, was for less than $300, below the threshold for more rigorous checking. However, in aggregate, these small invoices came up to almost $10,000 in one month. Yes, that’s more than 33 of these small invoices coming in and, pretty much automatically being paid without anyone batting an eyelid. That’s because no one was checking on the small stuff and because no one was checking, a smart vendor, working under the radar, was benefiting quite richly.
Alternatively, a discovered fraud may be small because the fraudster has only just begun their fraud scheme and is testing the waters. Most frauds start out small and, if they are not discovered, they will grow as the thief grows bolder, greedier or more reckless. If a fraud is ignored because it is small, by the time someone decides to take action the fraudster will have stolen a lot of money. Isn’t it better to nip things in the bud and avoid large losses?
People who defraud an entity and go on doing this, undetected, for a while do so because they have understood the system and its weaknesses. They use this understanding to exploit the system and take what they can. If they know that only invoices of over $500 get looked at closely, they will be sure to keep their fraudulent invoices lower than $500. If they know that separation of duties is not implemented diligently, they will offer to take on the duties that could lead to their detection. So, for example, the person making payments should not be the person reconciling the bank account. If they are the same person, who is going to question suspicious payments that pop up on the bank statement? If they know of a balance sheet account that is not reviewed regularly, they will hide evidence of their fraud in that account. When Barings Bank was bankrupted, Nick Leeson hid over a billion dollars in trading losses in an error account that he knew was barely being monitored. One person, Nick Leeson, bankrupted Britain’s oldest merchant bank because he exploited its weakness. And Leeson started small; the first year that he hid trading losses, the amount stashed away in error account 88888 was $2 million dollars. Once he saw that no one cared to check this account, this amount grew and grew, in just a few years, to the over $1 billion it was when the bank collapsed.
When you spot the small fraud in your company is when it is time to call in a forensic accountant to look into things. If the forensic accountant finds that the fraud is small and has only just begun, then you can breathe a sigh of relief, knowing that you have stopped things before they got worse. I have never heard of a fraudster who has stolen just once. On the other hand a deep dive by a credentialed expert may reveal that there is a lot more wrong than you imagined when you first spotted the small fraud.