Fraud--It's Easier to Spot if You Know What to Look For
Business-related fraud losses in this country are reported to total more than a trillion dollars a year with four out of five companies being victimized in the past year. In a recent global survey, risk consultant Kroll, Inc., found that one in ten large business enterprises lose more than $100 million annually due to fraud with larger companies losing six times more money than smaller ones.
Federal agencies are also at a high level of risk for fraud with the United States Department of Justice reporting that in 2006 alone it recovered $43.1 billion in connection with fraud and false claims against the government. In a 2003 survey involving only U.S. companies, KPMG found that three out of four of the companies surveyed reported they had experienced an instance of fraud. Some 72 percent of U.S. organizations reported that in 2006 they experienced attempted or actual payment fraud involving corporate purchasing cards. Past convictions for purchasing card misuse demonstrates TVA’s vulnerability to this particular type of crime.
With billions of dollars a year in procurement and voluminous activity in the high risk area of construction, TVA has significant exposure to the potential of fraud and waste.
“Fraud is defined as any intentional or deliberate act to deprive another of property or money by deception or other unfair means,” said Nancy Holloway, OIG Senior Special Agent. “Waste has more to do with an exorbitant overuse of TVA resources, such as unnecessary or excessive spending on supplies, equipment, or other business necessities. Waste does not always involve intentional deception that personally benefits someone the way fraud does.”
“Fraud costs companies a tremendous amount, but with some notable exceptions, the companies can often survive the loss,” Holloway added. “It’s the people who commit the fraud that usually end up losing everything financially, reputation-wise and often relationally too. It’s not uncommon for spouses to leave their husband or wife after they have been charged with or convicted of fraud.”
But despite the risks, people still gamble they won’t be caught. “They live double lives,” Holloway said. “It’s often hard to tell, much less believe, your friend or family member is involved in any kind of crime whatsoever, but about 88 percent of people who commit fraud have no criminal background.”
“Sometimes the problem in spotting fraud involves our own beliefs especially around authority, Holloway explained. “Many of us have been taught to respect and trust people in authoritative roles. What we need to realize is that the people in those roles are susceptible to temptation just as any of us would be and they too need to be held accountable for their actions.”
Because fraud is often something employees don’t know how to look for, Holloway teaches the possible signs of fraud including:
Billing rates or prices in excess of contract terms
Estimates presented in an unclear way
Costs billed that were not incurred or allowed on the contract such as freight, taxes, or fees
An unusual number of credits or adjustments
A lack of documentation for services rendered or products delivered
Duplicate billings for the same service
Altered documents
Frequent complaints by users of suppliers or services
Complaints by other vendors
Vendors offering gratuities, gifts, or bribes
Verbal agreements outside of contract terms
Holloway detailed some of the fraud cases at TVA that included people in authoritative roles. One involved a Browns Ferry Nuclear Plant custodial supervisor who was sentenced for fraud because he was receiving kickbacks from a telemarketer for purchasing supplies at five to ten times the normal cost.
Another involved a TVA line foreman sentenced to six months in federal prison for using a TVA gas card to purchase about $45,000 in gas for others. The foreman would provide gas to others at TVA’s expense in exchange for cash. For example, if someone wanted $10 in gas, the foreman would offer to provide $20 in TVA-purchased gas in exchange for the $10 in cash.
Holloway cautions that almost anybody, whether in a role of authority or not, can succumb to fraud if the right circumstances exist. Some circumstances that make companies vulnerable to fraud include: geographical distribution, a large number of employees, recent downsizing, a transient work force, extensive use of contract employees, complex IT arrangements, complicated processes, and time pressure.
“Two fraud schemes we see repeatedly at TVA,” Holloway explained, “involve incorrect cost charging and product substitution." One example involved a vendor charging for emptying industrial-sized garbage containers at a TVA facility. Suspicions were raised when TVA employees realized the vendor was charging for emptying every container every time they were on site. Based on employee tips, the OIG opened an investigation, and TVA recovered more than $500,000.
“Another scheme involved purchasing coal from a company that mixed substitute product called ‘petcoke’ with actual coal,” Holloway added. TVA employees were the first to discover the substitute product, and several companies have been convicted as a result of this scheme.
“Without the help of TVA employees in that and other cases,” Holloway said, “we would never have known about the fraud and TVA would not have recovered millions.”
What YOU Need to Know and Do
Fraud can be very subtle--often looks like a mistake.
YOU are the eyes for detection (Frontline).
Be skeptical (Trust but Verify).
Know the contract terms and conditions.
Review supporting documentation.
Don’t “rubber stamp” approvals.
Look for fraud Red Flags, trends, and outliers.
Report any POTENTIAL fraud.
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