Trust, but verify: Keeping an eye out for fraud

Whether it’s duplicate billing, false invoices or payroll theft, occupational fraud is costing businesses dearly in the United States, according to the Association of Certified Fraud Examiners.

Fraud examiners think businesses are losing the war on financial crimes, said David Kirtland, vice president of the ACFE’s Houston chapter. The association trains auditors, business owners and law enforcement on how to spot cons and prevent companies from losing large amount.

In a study conducted by ACFE that looked at 1,000 fraud cases reperted in the U.S. since 2016, small businesses lost an average of $104,000 and larger companies lost an average of $200,000 in fraud cases — and rarely do they ever see it back.

Kirtland sat down with the Chronicle to discuss trends businesses are seeing in fraud cases.

Q: What does the Houston chapter of ACFE do?

A: We try to provide a broad array of training that is applicable to law enforcement, prosecutors, defenders, corporate attorneys, internal auditors, legal counsel, compliance functions and management in general on what sort of fraud trends are out there. What to be aware of, how to identify it, how to fight it, how to prosecute it, what the documentation requirements are, when you should get certain entities involved to help with that. We prefer to target prevention.

Q: How does fraud impact large and small businesses differently?

A: It’s less pervasive in highly regulated entities, but a lot of those entities have higher scrutiny over things. You’ve got not only internal groups looking at things, but you have external auditors, state regulators who see that sort of thing.

Take financial institutions, for example. They’ve got more people coming in and they require processes in a certain way so consumers are protected. Whereas if you take a local coffee shop, they don’t

have any of that. It’s easier to take advantage of the smaller entities.

Q: How are fraudsters able to commit these crimes?

A: The only way a person can take advantage of you is if they’re in a position of trust. They have to have a rationalization for it; they have to think there’s some reason that tells them that it’s OK to steal from their organization. They have to have perceived need. Little Jimmy breaks his arm and medical bills have just popped up? That’s a need.

Whatever it is, if a person has a reason and they can rationalize it, you can’t control either of those two factors.

What you can control is the third leg of the triangle: the opportunity. Managers don’t think they’re hiring untrustworthy employees. If I didn’t trust you, I’d have more scrutiny over what you do. I don’t allow you the ability to create fraud.

Q: On the consumer side, what scams are we seeing in Houston?

A: Construction fraud is something that we deal with a lot. Natural disaster fraud, hurricanes every few years or so, people come in and they take advantage of that.

Anything you can think of where someone who would come to your door and knock on your door 30 years ago and say, “Hey, I’m here to sell you a new roof since a hurricane just came in,” or insurance.

One of the things that’s really pervasive worldwide, but especially here in Houston, is taking advantage of the elderly. They’re not as technically savvy as their children, grandchildren. So we laugh at the email from a prince in South Africa, and they really respond to these things and give information.

Q: What are the chances someone recovers the funds?

A: One thing that’s pretty universal is even if you catch someone committing fraud, especially at a corporate level, fraudsters don’t take money that they steal and put it into a 401(k). They spend it. The odds of you getting that money back is pretty much none. You may get some back through reparations, but if you’re successful in your fraud prosecution, that person’s going to jail. They don’t make much money in jail. When they get out of jail, it’s pretty hard for them to find a job.

Q: How has emphasizing prevention helped companies drive down rates of fraud?

A: It hasn’t. One, preventing fraud costs money.

Fraud prevention is like safety. You don’t know how many accidents you’ve prevented, you only know the ones that you didn’t prevent. You don’t know how much fraud you’ve prevented, you only know the fraud you didn’t prevent because you find it later. It’s hard to justify spending like that to companies, especially smaller businesses where the budgets are tighter.

Two, technology. The more you rely on technology, the more that gets exploited. The fact of the matter is we’re not the only ones with the knowledge we’re putting out there. The bad guys know what we’re looking for and they find ways around it. You’re never going to have a mousetrap that catches all the mice. They’re constantly ahead, there’s constantly advances on the fraudster side and we’re trying to keep up.

On top of all that, especially in Houston — we’re part of the southern United States, we’re raised with respect and trust in our DNA. And so typically our initial impulse is to trust people when we meet them until they prove that they’re not trustworthy. That’s exactly what they prey upon. And so until someone gets burned or taken advantage of, you have no reason to not (trust them). It can happen to anybody.