FRAUD EXPOSED What You Don’t Know Could Cost Your Company MillionsJoseph doc

FRAUD EXPOSED

FRAUD EXPOSED

What You Don’t Know

Could Cost Your Company Millions

Joseph W. Koletar

John Wiley & Sons, Inc.

This book is printed on acid-free paper.

Copyright © 2003 by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted

in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or

otherwise, except as permitted under Section 107 or 108 of the 1976 United States

Copyright Act, without either the prior written permission of the Publisher, or authorization

through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc.,

222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the

web at www.copyright.com. Requests to the Publisher for permission should be addressed to

the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030,

201-748-6011, fax 201-748-6008, e-mail: [email protected].

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their

best efforts in preparing this book, they make no representations or warranties with respect

to the accuracy or completeness of the contents of this book and specifically disclaim any

implied warranties of merchantability or fitness for a particular purpose. No warranty may

be created or extended by sales representatives or written sales materials. The advice and

strategies contained herein may not be suitable for your situation. You should consult with a

professional where appropriate. Neither the publisher nor author shall be liable for any loss

of profit or any other commercial damages, including but not limited to special, incidental,

consequential, or other damages.

For general information on our other products and services, or technical support, please con￾tact our Customer Care Department within the United States at 800-762-2974, outside the

United States at 317-572-3993, or fax 317-572-4002.

Wiley also publishes its books in a variety of electronic formats. Some content that appears in

print may not be available in electronic books.

For more information about Wiley products, visit our Web site at www.wiley.com.

ISBN: 0-471-27475-5

Printed in the United States of America.

10 9 8 7 6 5 4 3 2 1

∞

This book is dedicated to the memory of my parents,

John Edward Koletar, of Shamokin, Pennsylvania, and

Margaret Ruth McAbee Koletar, of Spartanburg, South Carolina.

CONTENTS

Preface ix

Acknowledgments xi

Introduction xiii

1 Crime and the Law Enforcement Response 1

2 Rethinking the Assumptions 17

3 The State of Occupational Fraud 33

4 Theories of Occupational Fraud 52

5 Lies, Damned Lies, Statistics (and Occupational Fraud) 75

6 Thoughts on Occupational Fraud 86

7 What Can We Learn? 95

8 Internal Controls 103

9 Compliance Programs 123

10 Community, Corporate Citizenship, and Quality of Life 134

11 What’s New?

Theories of Social Deviance 151

Profiling 155

Neuroscience 167

Game Theory 171

Forensic Professionals as Organizational Pathologists 175

12 Partnerships for the Future 182

13 Environmental and Organizational Intelligence 190

14 Reconceptualization 199

viii CONTENTS

15 Leadership 212

16 The Next Five Years

Funding 221

Visibility 228

Where We Go from Here 232

Endnotes 241

Index 267

PREFACE

This book was begun in October 2001, as an attempt to gather and articulate

thoughts that had been with me for some time. After 35 years in security,

law enforcement, and forensic investigations, I began to wonder if some of the

techniques that were apparently having success in the broad field of law enforce￾ment might also be useful in addressing fraud in the workplace. Thus began this

journey. During it, the initial focus grew beyond the confines of law enforcement,

as my research took me into areas as disparate as neuroscience, linguistics, and

game theory. I also encountered issues of defining fraud and trying to get a handle

on how big it is and what causes or impedes it. Even such apparently elemental

tasks proved formidable.

Then, Enron. While at this writing the full implications of Enron are still being

revealed and discussed, the name alone has become a catch phrase in public dis￾course, much like Watergate. Its very utterance conveys substantial volumes of

meaning and emotion and has become a sort of shorthand metaphor for things

that may be wrong in corporate America.

While I have mentioned Enron several times in this work, and speculated on its

meaning for the forensic profession, the thrust of this book remains unchanged—

thoughts as to how we can become more effective in dealing with occupational

fraud (that is, fraud committed by employees against their own organizations).

Enron may prove, as time passes, to be a tidal wave—massive and destructive,

but by definition rare. If tidal waves occurred every day they would not be tidal

waves, but merely exceptionally high tides. While the tidal wave and its hugely

destructive effects rightfully capture our attention, it is the rivers that concern

me. The rivers—slow, steady, and unrelenting—carve out huge canyons and for￾ever alter the landscape. Enron is, perhaps, a tidal wave. Occupational fraud is

the river that is slowly carving its way through most of the organizational land￾scapes we call home.

Joseph W. Koletar

ACKNOWLEDGMENTS

I

t is impossible to attempt a work such as this without substantial support from

others, near and far. To this group I am eternally grateful for their wisdom,

generosity, assistance, and encouragement. To these same friends and colleagues

I offer an apology for any weaknesses or errors in this book; should such occur,

they are solely my responsibility. I also apologize to any whose contributions I

may have overlooked—such oversight was not a reflection of the worth of your

thoughts and observations, but merely a function of my carelessness.

First, to my friend and mentor, Joe Wells: The founder of the Association of

Certified Fraud Examiners, Joe saw the possibility of answers before others even

knew there were questions. To Marie Simonetti Rosen, the gifted and dedicated

editor of the Law Enforcement News, who has forgotten more about policing in

the United States than I will ever know. To Dr. Edwin J. Delattre, a dear friend and

valued resource, whose voice, wisdom, and resolve have immeasurably

advanced the state of higher education and law enforcement in the United

States and abroad.

Although this work is solely mine and does not reflect the views or opinions of

the partners or employees of Ernst & Young LLP, to Mike Emmert and my colleagues

at that firm, for welcoming me into their midst and always encouraging the pur￾suit of excellence.

To all in law enforcement and the forensic profession, who labor mightily

under trying conditions to ensure that the bad guys do not always win.

Others, whose generous contributions were gratefully accepted, include Don

Barnes, George Campbell, Chief Steve Cherry, Carson Dunbar, Tracey Foley,

Dr. Gil Geis, John Kane, Tom Pickard, Frank Purdy, Jim Roth, Brian Sanvidge,

David Sawyer, Steve Seliskar, Gary Stoops, Representative John Sweeney, Alan

Trosclair, Fred Verinder, Miriam Weinstein, and David Zornow.

To my beautiful and talented daughter, Lauren, who makes me prouder each

day to be her Dad.

And, finally, to my lovely wife, Martha, without whose patience, support,

prodding, counsel, humor, and occasional questions as to exactly when I was

going to get this mess off the dining room table, this book could never have been

completed.

INTRODUCTION

This book will be long on questions and short on answers. It will, however,

offer a few suggestions. It is about occupational fraud (that is, fraud com￾mitted against organizations by persons who are members of those organiza￾tions). It is written in an effort to stir debate, foster dialog, and encourage

research. It is meant to provoke comment, both positive and negative, but all

helpful to the process of discovery. It is written in a spirit of friendly ignorance,

admitting that even after 35 years in the related fields of intelligence, security,

investigations, and forensics, I do not pretend to know it all or, probably, even

much of it. It is also written in the sure knowledge that collectively we know

more than we individually realize. In short, it is an attempt to begin a process.

I sincerely hope, when this work sees the light of day, to receive any number of

irate communications saying, in so many words, “Koletar, you idiot, weren’t you

aware of Professor “X’s” theory of “Y” fraud causation? Have you no idea that

the “Z” corporation has reduced occupational fraud to less than 1 percent by

using cranial obfuscation analysis?” The more of those communications I receive,

the happier I will be, for part of my mission will have been achieved. I have tried,

to the best of my ability, to learn what I could about occupational fraud and its

dimensions and causation. I have spent 35 years in the business, conducted

research, and talked to some of the leading practitioners in the field, but I am

sure I could double that amount of effort and still fall short. It is simply too large

an undertaking for one person in any reasonable amount of time.

The mathematician Henri Poincare once likened facts to stones. Facts, in and

of themselves, prove little. Only when they are compiled into a theory do they

have potential utility. As he put it: “Science is built up with facts, as a house is

with stones. But a collection of facts is no more a science than a heap of stones

is a house.”1 Welcome to my house; let us see if it withstands the winds of

debate, analysis, and dissent.

There are, I am sure, innovative and forward-looking control and compliance

programs that have been highly effective in reducing occupational fraud. I pre￾sume they exist, but I also presume most of us in the forensic profession are

unaware of them. Otherwise, why are we awash in fraud? Why do we continue

to do more of the same, then bemoan our collective lack of success?

Former New York City Police Commissioner Benjamin Ward once referred to

the fact that most crime committed in our country against minority citizens is

committed by minority citizens as “our dirty little secret.”2 We in the forensic

profession have our own dirty little secret: We are remarkably ineffective in dealing

with fraud. There may be an excellent reason for this failure. Perhaps it cannot

be done. Fraud, like murder and sin, has been with us throughout recorded his￾tory. It is part of the human condition. Eons ago, it is highly probable that one

prehistoric man traded a club to another prehistoric man for some berries,

knowing the club had a crack in it, but failing to tell his partner. A fraud was

committed—perhaps two, for the berries may have been spoiled.

We can argue, successfully, that we are not ethicists, educators, lawmakers,

human resource executives, or persons of the cloth. We are not in the morals

business; we are in the investigations and prevention business. As far as that

goes, it is true; however, I suggest that as a profession we need to do more, lest

we cede the field to the others named or be relegated to the role of the people

who follow the elephants in the parade with brooms and shovels. We need to

become researchers, thinkers, experimenters, writers, rabble-rousers, and seek￾ers of truth wherever we find it. We need to think deeply about what we do and

why it happens in the first place.

In short, we need to devote more time to the improbable goal of putting our￾selves out of business. It will never happen, but it is a worthy goal for any pro￾fession, ours included. To be free of disease, hunger, crime, and strife is the ideal

of every civilized society. We will not see it in our lifetime, but that is not the

point. If we have such ideals as goals, it is more likely that we will get closer to

them than if we do not.

Speaking to this point, and cautioning that such activities cannot occur in an

organizational vacuum, Erroll J. Yates, former chairperson and managing director

of Kodak Limited, U.K., offered the following observation in Internal Auditor

magazine in 1977:

The Institute of Internal Auditors has published aims for the development of

internal auditing. Its plans for education and research clearly demonstrate a

growth in status. . . . All professions need such a foundation of technical excel￾lence if they are to grow. But technical excellence is in itself not sufficient to

guarantee growth. Those whom the profession serves must also support it.

And that support should come from the highest level.3

I am primarily directing this work to those who are auditors, investigators,

and compliance professionals in organizations, and others interested in work￾place fraud, for three reasons: (1) you are the majority of the professionals in the

field; (2) organizations are where most of us live and spend our professional

lives; and (3) the ills of society, and the acts of fraudsters preying on other indi￾viduals, are beyond my mental radar range. Would that we begin to deal with

the issues that occur in our organizational homes before we extend our efforts to

the society at large. We have more than enough to do at home, right now, to keep

us busy for a very long time.

xiv INTRODUCTION