Guide to Preventing Workplace Fraud Taking …

1 Guide to Preventing Workplace FraudTaking Action to Reduce Business Crime ExposureIt s Chubb. Or it s Chance. 2006 KPMG LLP, the member firm of KPMG International, a Swisscooperative. All rights reserved. KPMG and the KPMG logo are registeredtrademarks of KPMG International, a Swiss TO Preventing Workplace FRAUDTAKING ACTION TO REDUCE BUSINESS CRIME EXPOSURE Honesty pays, but it doesn t seemto pay enough to suit some people. F. M. HubbardPREFACER egardless of size, all organizations are vulnerable to Workplace Fraud . Fraudcan take many forms including embezzlement, forgery, theft of inventoryand other assets, and computer crime and can continue unchecked foryears.

2 The financial impact on an organization of these so-called white-collar crimes can be a leading provider of crime insurance (sometimes known as fidelitybond), the Chubb Group of Insurance Companies believes the most cost-effective way to deal with Fraud is to prevent it. Although insurance can helprecoup some monetary losses resulting from Fraud , other losses can never berecovered, such as losses resulting from adverse publicity, the disruption ofoperations, and time spent with law enforcement officials and , the consistent application of sound risk management practices canminimize opportunities for white-collar crime, helping to spare anorganization the financial loss and humiliation that can result from adetermined employee s Fraud asked KPMG ForensicSM.

3 A firm that specializes in Fraud detection andprevention, to prepare the Guide to Preventing Workplace Fraudto help ourCrime Insurance customers develop loss prevention strategies designed toreduce their exposure to white-collar crime. This booklet discusses the threatposed by various types of Fraud , reviews common types of Fraud schemes,and suggests specific risk management we believe the Guide to Preventing Workplace Fraudis a goodstarting point for companies that want to develop or review their lossprevention strategies, it is not a substitute for expert advice.

4 We encouragethe reader to seek appropriate professional advice for any specific issues thatarise when designing and implementing loss prevention ..5 The Threat of Fraud ..7 Defining Fraud ..7 The Fraud Triangle ..8 The Types of Fraud ..11 Asset Misappropriation ..11 Fraudulent Financial Statements, Books, and Records ..13 Corrupt or Prohibited Practices ..13 Fraud Risk Management Loss Control Considerations ..14 Common Fraud Schemes ..25 Vendor Schemes ..25 Cash-Skimming Schemes ..28 Frauds Related to Company Checks ..29 Accounts Receivable/Incoming Payment Processing.

5 34 Misappropriation of Waste, Scrap, and Salvage Property ..36 Conflicts of Interest, Kickbacks, Bribes, and Employee Corruption ..37 Expense Account Reimbursement Fraud ..38 Payroll Fraud ..39 Use of Company Funds to Pay Personal Expenses ..42 Computer-Related Fraud ..43 Responding to the Threat of Fraud ..45 Fundamental Elements of Corporate Governance ..46 Final Thoughts on Fraud Risk and Response ..51 About This Booklet ..523 INTRODUCTIONU nderstanding the impact of Workplace Fraud , and the potential lossesassociated with Fraud and establishing effective loss control measures arecritical for companies from cost, cultural, and risk management perspectives.

6 Workplace Fraud is a common, everyday occurrence. Everybusiness large or small is vulnerable to these crimes. Workplace Fraud can have a substantial impact on a business s bottom line and even on its continued survival and impact of Workplace Fraud can be significant and can occurin the form of direct, indirect, and/or intangible costs. In addition todirect losses of tangible assets, such as cash, inventory, and securities,loss of competitive advantage, reduced ability to meet customer needs,reputation impairment, and disruption of business operations aresome of the potential indirect and/or intangible costs to a business.

7 The challenge of combating Fraud directed against a business isincreased by the diversity and deceptive nature of those is a key element of Workplace Fraud , and a company mayrealize too late that it has been victimized. An appropriate response to the threat of Workplace Fraud requiresunderstanding potential areas that are at risk, recognizing thefraud-related threats, and understanding the potential Fraud -origination points, both internal and external. Although it is not possible to completely eliminate Fraud risk, it is possibleto reduce the risk and to minimize Fraud -related losses and otherconsequences through effective loss control measures.

8 Reduction of fraudrisk requires a thoughtful, comprehensive, and proactive approach. Fraudrisk management includes establishing effective loss control measures that5focus on prevention, detection, and response. Given the potential costs of Workplace Fraud , proactive Fraud risk management makes goodbusiness sense. 6 THE THREAT OF FRAUDB ottom line:Businesses are targets for crime because they have somethingof economic value. Fraud perpetrators believe that they can successfully steal,compromise, or use some of that value. There is virtually no limitation to the means that may be employed toaccomplish a criminal objective.

9 The criminal mind is ever alert to seeminglynew and unique ways to separate a business from its assets. Crimes thatbusinesses face generally may be categorized as: Street crime, such as robbery and burglary. White-collar crime, such as Fraud , misconduct, and related financial threats. The focus of this booklet is on the white-collar Fraud threat. Defining FraudAnti- Fraud professionals agree that Fraud (and misconduct) encompassesactivities involving dishonesty and deception that can drain value from abusiness, either directly or indirectly, whether or not the perpetrator(s)benefit.

10 Fraud involves the intentto defraud; that is, the perpetrator relies onhis or her deception to accomplish or hide the fraudulent activity. Fraudis not accomplished via honest mistake or can manifest itself in a wide variety of ways and originate from anumber of different sources. Fraud that is perpetrated by employees,consumers, and vendors dominates most instances of Fraud experienced by businesses. Understanding the Fraud threats against your business, as well as why fraudtypically occurs, are first steps in analyzing Fraud risk and developing anappropriate plan for managing that risk.