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Whistleblowers discover most corporate fraud

By Rob Lamberti, AdvocateDaily.com Contributor

The top three categories of corporate fraud involve asset misappropriation, financial statement fraud and corruption, Toronto forensic accountant and investigator Dave Oswald tells AdvocateDaily.com.

A study by the Association of Certified Fraud Examiners (ACFE) found the average loss for financial statement fraud was US$975,000, while asset misappropriation and corruption were responsible for an average of US$125,000 and US$200,000 in damages respectively.

In the 2,690 cases analyzed worldwide, the 2018 report found companies were swindled out of about $7 billion, and those that didn't have internal anti-fraud controls lost about twice as much as those businesses that did.

"I don't find it very surprising — I find it scary," says Oswald, founder and owner of the white-collar crime investigation boutique Forensic Restitution.

He says what the report reveals about how fraud is discovered should be a wake-up call for all companies. The study found that external audits caught just four per cent of frauds while internal reviews uncovered 15 per cent and management reviews detected 13 per cent. By far the most frauds — 40 per cent — were discovered through tips.

"Most companies rely on external auditors as their first line of defence against fraud," Oswald says.

But these statistics show companies should value and protect whistleblowers and tipsters since audits typically review accounts to determine if they fairly represent the position of the company and that the accounts are not materially misstated, and not necessarily if the accounts balance, he says.

"That's problematic because what is material?" Oswald says. "It depends on the size of the company. Everybody relies on external and internal audits to find fraud, but that’s not the most effective method.”

In Canada, the report shows that 32 per cent of these crimes are detected through tipsters, while external auditors discovered it only in five per cent of the cases, just one percentage point above it being found by accident.

"Fraud is rotten by nature, it's hidden away, and contrary to the common understanding, external auditors don't really discover it," Oswald says.

About 40 per cent of these cases in Canada involved corruption and the bribing of company or government officials, the ACFE says.

Oswald says he has seen kickbacks, illegal gratuities and economic extortion manifest in the form of bribing a company official in an attempt to secure a business deal, or a company representative overpaying in a contract where the excess is divided among those involved.

Financial statement fraud involves misstating the value of a company's property, such as adding expenses or inflating a firm’s worth, Oswald says, adding that asset misappropriation involves theft of materials, money and ideas.

Recovering stolen assets can be difficult, he says.

"Once it's gone you don't get much back," Oswald says. "With many men, the money is for wine, women and song and the rest they waste. Women tend to steal for the family and home, a slightly different methodology and motivation behind it."

He says as more women gain positions of authority in the business world, "They're stealing at roughly the same rate as men.

"It's still male-dominated, but so are the boardrooms," Oswald says. "One of the big problems with fraud is that we trust and like the people we work with."

He says accusations are often brushed aside because of those feelings of trust and friendship.

"It becomes incredibly important to stop it early," Oswald says. "One of the things we do at Forensic Restitution is a fraud risk assessment, and it's based on the idea that if something is going on in an organization, someone knows about it."

He says people often lie by omission, and although they know something is happening, they don’t want to speak up for fear of being seen as a "rat."

"They don't want to be a whistleblower, so they won't volunteer information, but if they're asked a direct question, they won't lie either," Oswald says. "What you're trying to do is to elicit that tip at a much earlier stage.”

He advises companies to regularly perform fraud risk assessments.

"We have to realize the world is changing," he says. "Canadians used to be a really honest bunch of people, not so much anymore. We're moving into this instant-gratification world."

Extramarital affairs are often a starting point for fraud, Oswald says.

"You can't put a dinner on your personal credit card because your spouse will see it and ask questions, so you put it on the corporate credit card," Oswald says. "And you justify it to yourself by saying you work very hard.

"Once you get away with that, then life gets interesting," he says.

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