David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

We are taught to forgive others who make a mistake, and to usually offer them a second chance.  While this philosophy may apply to many of our life experiences, I strongly recommend against it in the case of someone who has committed fraud.

The 2018 Report to the Nations from the Association of Certified Fraud Examiners (ACFE) found approximately 40 percent of all fraudsters, when caught, are not terminated by their employers.  This 40 percent are:

• 12 percent reached a settlement agreement, usually confidential, and left the organization
• 10 percent were permitted to or required to resign without being terminated
• 8 percent were placed on probation or suspension
• 6 percent received no punishment at all
• 4 percent made restitution and stayed with the organization.

The above numbers are higher if the employee is an executive (53 percent):

• 18 percent reached a settlement agreement, usually confidential, and leave the organization
• 16 percent were permitted to or required to resign without being terminated
• 7 percent were placed on probation or suspension
• 12 percent received no punishment at all

The fact that such high numbers of fraudsters may leave without being terminated or remain with their organizations can have significant implications.  For example, the 22 percent of fraudsters who are permitted to leave without being terminated may be allowed to file for and collect unemployment payments.  This, in turn, raises the cost of unemployment insurance for the organization.

Also, because organizations fear being sued if they provide negative information to a new employer, the new employer of the fraudster may be unaware the employee previously committed fraud.  In fact, the 2018 Report to the Nations noted 6 percent of employees who committed fraud had been previously charged but not convicted and an additional 4 percent had a prior conviction for fraud (these numbers rise to 9 percent and 6 percent, respectively, for executives).  In most of these cases, the second employer found out about the previous fraud only after becoming a victim themselves.

Additionally, insurance companies may decline to pay claims of organizations who allowed a fraudster to remain with the organization and/or commit subsequent frauds.

Let’s also consider what happens when an employee who committed fraud remains with the organization.  In previous blogs, I discussed the Fraud Triangle – the three aspects (Pressure, Rationalization and Opportunity) necessary to enable a fraud.  What really changes when the employee remains?

• What Pressure did the employee face? Was it an addiction (to drugs, alcohol, gambling, shopping, etc.)?  Was it financial (debts, medical expenses, need to maintain an outward lifestyle)?  Despite verbal promises from the fraudster to not commit a future fraud, if the Pressure is not removed, it will continue to impact the employee.
• What Rationalization did the employee make to justify committing the fraud? Was it that the employee felt underpaid and/or unappreciated?  Did the employee feel that since management ignored the rules, it was okay for the employee to do so?  Did the employee feel the organization could “afford” to lose money through the fraud?  What changes will the organization make to remove the basis for the Rationalization?  If these changes are not made, the Rationalization will continue to impact the employee.
• What Opportunity allowed the employee to commit the fraud? Will the organization make the necessary changes in controls and oversight, and continue to rigorously enforce them in the future?  Or, will management begin to relax those controls if they start to feel comfortable with the employee?

Two cautionary examples which I have encountered show this problem:

In the first case, an auto dealership sales manager “created” a dealership rebate to help a customer purchase a car.  Instead of discounting the price of the car by $1,000, the sales manager had the dealership write a check to the customer for $1,000.  The customer used the check as down payment on the car in order to obtain a car loan (the bank required that the customer provide a $1,000 down payment in order to show “equity” in the car).

When this fraudulent scheme worked, the sales manager began to regularly offer similar dealership rebates to help customers obtain car loans (in one case, a rebate as high as $5,000).  This helped the sales manager meet his quotas and earn bonuses and higher sales commissions.  Unfortunately, many of these customers who used the dealership rebate as down payment defaulted on their loans.

The higher-than-normal default rate lead to investigations by the lenders who invoked “claw back” clauses in their agreements with the car dealership, and the dealership lost many thousands of dollars due to the claw backs.  Rather than terminating the sales manager, the auto dealer allowed the manager to remain with the promise that he would never again use the dealership rebate scheme.  The sales manager made good on his promise for almost a year.

However, one month, the sales manager was one car short of making his bonus quota for the month.  A customer was $500 short of the required down payment on a car.  The sales manager decided to give the customer a $500 dealership rebate.  He earned his bonus for that month but promised himself this was a one-time only indiscretion.  Because the auto dealer had relaxed his controls and oversight of the sales manager, he never noticed the rebate.

Of course, two months further along, the sales manager decided to offer another customer a dealership rebate, and before long, he was back to regularly using the dealership rebate.  The cycle of customer loan defaults, investigations and claw backs followed.  But this time, the dealership also lost several of its lender relationships, and the total weight of cost to the dealership lead the auto dealer to terminate the sales manager.

In another case, the Controller of a retailer embezzled funds by submitting false (and in most instances, duplicates of the same invoices) employee reimbursement requests.  When caught, the Controller apologized, agreed to make restitution through regular payroll deductions, and stated that she would never commit fraud again.  The business’s owner, who regularly had the business pay personal expenses he directed the Controller to charge as business operating expenses, agreed to let the Controller remain.

After about six months, he relaxed his increased oversight of the Controller.  The Controller then began a series of fraudulent schemes which included ceasing repayment of her restitution; additional submissions of false employee reimbursement requests; and accepting kickbacks from customers in return for processing phony credits against their purchases.  When these schemes were discovered, the Controller was terminated.

The additional frauds ended up costing the company several times the amount taken in the original fraud.  Our investigation also revealed a subordinate of the Controller was aware of the subsequent frauds but was afraid to report them because the Controller hadn’t been terminated after being caught in the initial fraud.

If you require the services of a Certified Fraud Examiner in Philadelphia or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert in Philadelphia who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Valuation Analyst and a Certified Fraud Examiner in Philadelphia.