This summer I am working in the area of fraud. If all goes well, perhaps someday there will be three or four baby articles cooing to be picked up and read. Why fraud? It’s more recognizable as accounting than either learning effectiveness or social media.
So I set out to learn as much about fraud as I could. There are dozens and dozens of articles, both practitioner and academic. Finally, I came across Tracy Coenen’s most wonderful book, Essentials of Corporate Fraud.
Before settling on a researchable issue, I like to get a handle on the big picture. So, I put together some ideas from Tracy’s book, my prior knowledge base, and some of the articles, and came up with “The Big Picture of Fraud.”
The big picture of fraud. Each arrow points from who is perpetrating the fraud to who is being defrauded. (c) Albrecht
Although some think insiders are able to wreak the most damage on a corporate business, I disagree. In one of the largest frauds in history, Bernie Madoff stole $50 billion USD from investors in a classic ponzi scheme. In the decade from 2001 to 2010, investors typically reacted by lopping an average of 25% from the capitalized value of companies announcing financial restatements. Many organizations spend much more on IT security to protect the company from outsiders than they spend on fraud prevention activities.
You might ask, do companies intentionally steal from outsiders such as insurance companies, suppliers, customers, and investors? The answer is that some do. Jonathan Marks of Crowe Horwath writes,
Sam E. Antar was welcomed into a life of crime at age 14 when he became a stock boy in the family business, Crazy Eddie, Inc. From the beginning, he was involved in cash skimming and overstating insurance loss claims. Antar says he never questioned the business methods of the famous consumer electronics retailer. As the CFO and a crafty CPA, Antar cooked the books of Crazy Eddie for many years – skimming profits, evading taxes, laundering cash, and committing securities fraud – until the company collapsed in 1987.
Antar’s illicit activities were abetted by the Crazy Eddie culture, which promoted fraud from within and made clear that no money should go to the government. Cash sales were routinely skimmed, and frontline employees were paid in cash to avoid taxes.
I’ll write more later this week.
Debit and credit – – David Albercht
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Last week I wrote (GRATA’s Non-Grata News) about Senator Chuck Grassley’s (R-Iowa) inquiry into the SEC destruction of evidence. Most journalists and bloggers have led with splashy headlines. However, there have been a few voices of sound reason, such as Broc Romanek of CorporateCounsel.net and Tracy Coenen of The Fraud Files Blog.
The Summa 