Fraudsters: Catch Them If You Can

A new kind of check fraud now links old-fashioned check cashing with fast mobile-payment technology.
Kathy HoffelderOctober 18, 2012

Frank Abagnale, the ex–con man made famous in the Hollywood movie Catch Me If You Can, is known more for how he committed fraud than how he prevents it. But small businesses can learn a thing or two about preventing check fraud from the now-respected consultant who frequently works with the FBI.

Although businesses are increasingly becoming more paperless, Abagnale said on an American Institute of Certified Public Accountants’s (AICPA) webcast last week, and despite the technological mobile-payment advancements available today, business check use has decreased only slightly during the past 10 years (though individual check use has decreased by a far greater amount). What’s more, he noted , most payments made by one company to another are still made by checks. He conceded, however, that younger adults use checks much less often for both business and individual reasons.

That’s a harsh reality for small businesses trying to prevent fraud, he said. Abagnale spent his youth scamming corporations with fake corporate checks. But a new kind of check fraud now links old-fashioned check cashing with fast mobile-payment technology. “We now have a crime wave going on,” he said. “What is happening is, I get a check from you . . . scan it onto my iPhone in my account, and go cash it somewhere else. I’ve cashed it twice.”

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This kind of fraud can particularly hurt small businesses today, he says, since many bookkeeping and accounting functions are outsourced, and busy company executives are not always even aware a check to a vendor has been cashed twice, for example.

Smaller companies are also not always up on the latest antifraud printers used to make and disseminate those checks to begin with, Abagnale said. “If you are not using the proper ribbon, the ink can come off. You want to make sure you are using security ribbon made of ink.” One can cut down on fraud simply by choosing the right printer, whether matrix or laser, for one’s particular kind of business. That’s because some logos and corporate graphics can be scanned more easily in some kinds of printers than others.

Having the right business equipment, he said, should help small and large businesses cut down on both external fraud and insider fraud — those actions perpetrated by a company’s own employees. He should know. He claims that before becoming an FBI consultant and fraud-prevention expert, he forged more than $2.5 million in bogus checks and infiltrated dozens of corporations.

Inside Job
Insider fraud indeed is a major concern for CFOs, CEOs, and other senior executives at both small and large companies, according to a recent AICPA forensic and valuation services survey. For the study, the AICPA interviewed 737 respondents at firms with 100 or fewer accounting professionals.

The highest number of survey participants (38%) expected financial fraud committed wholly by company personnel to increase the most in the next two to five years compared with outside fraud. The next-highest portion of respondents (34%) believed that company personnel along with the involvement of third parties (outside businesses the company does business with) would be responsible for an increase in fraud. Another 18% expected no change in fraud, while 10% saw an increase in fraud committed entirely by third parties.

Embezzlement or misappropriation of company funds, which is typically associated with insider fraud, was also flagged in the AICPA survey as an area to watch in the coming years. More than 50% of the respondents said increases in embezzlement would most likely involve company personnel on their own. In contrast, more than 30% believed it would involve company personnel working with third parties and 17% expected no change.

Similarly, 53% said they expected an increase in corrupt practices involving company personnel working with third parties during the next two to five years, while 27% expected an increase involving company personnel working alone. Only 20% believed there would be an increase in fraud involving third parties working alone.

What kinds of fraud are looming on the horizon? The highest percentage of respondents to the AICPA survey (23%) expected most fraud cases in the next two to five years would involve contract breaches, while 17% believed most cases would involve business torts.

For Rodney Hurd, CFO of Bridgeway Capital Advisors, a financial advisory specializing in lease and debt financings, it is precisely the contracts or undisclosed agreements performed by corporate insiders that can cause the thorniest problems for both small and large-company CFOs. For example, side letters, those promotional sales letters put out by corporate marketing/sales departments or other internal units that often offer a special sales incentive apart from what the company typically offers, can have significant repercussions, he says.

Too often, employees structure such transactions favorably to a customer just to get a deal. That may be the first time accounting or even the CFO hears about the financial arrangement. Such employees “are just working out the deals themselves without running [them] through accounting. I’ve been around people being terminated as a result of that. This is a very delicate position: to promote a ‘can do’ culture while not tolerating ‘can’t dos,’” he says.

Keeping one step ahead of corporate fraud, though, starts in all levels within a firm, not just senior management, notes Hurd. Good fraud monitoring should begin with training employees just starting out in a company. But he offers one word of advice: “If you observe a pronounced change in your employer’s risk taking and transparency, then you generally should get out of there.”

The same advice can be applied to CFOs. “The other side of the coin is you have to be aware of what’s going on as a financial officer,” says Hurd. “You have to be seen as a person who is there to try and make things happen.”

Richard Sibery, partner in fraud investigation and dispute services at Ernst & Young, agrees. He says there is an increased focus today by finance chiefs on monitoring fraud within a corporation. “There was some focus on fraud prevention and protection years ago, but there was little appetite from corporate to look into it too much . . . we’ve seen significant change since then.”

CFOs and senior executives today are “trying to get out there and do specific procedures to monitor for fraud,” he notes. While companies differ on where to place that fraud-monitoring function, he says companies are looking at internal checks and balances.

The numbers are telling the same story. The AICPA study found that 24% of the respondents increased the number of internal forensic professionals in their practice.

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