Category Archives: Fraud

Your Cash Costs You More Than You Think

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While a recent article from Stores on “the true cost of cash” didn’t actually tell you how much your cash costed you as a merchant relative to debit, credit, and other payment solutions, it did provide some good ideas on how to decrease the cost of handling, and securing, that cash.

Counting cash is costly. It takes time. It can be miscounted. Some of it can disappear in the counting process. However, automation technology in the form of “smart safes” can reduce this cost considerably.

Taking cash to the bank yourself is costly. It takes time, increases the risk of theft, and delays the credit to your account until it is received AND processed by the bank. However, cash logistics services such as armored transportation, deposit solutions, and cash processing can reduce those costs and get you your credits faster. For example, store receipts can be transmitted electronically.

It was a decent article, and if you handle a lot of cash as part of your business, you should consider checking it out.

The Wrong Kind of Military Sacrifice

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his new column in the archives.

When most people see the term “military sacrifice” they think of what our service men and women give up in terms of their personal lives, safety, and well-being for the honor of protecting the interests and citizens of the United States and our allies.

Yet some frauds sacrifice our military in ways that could have deadly consequences, and these fraudsters do so for nothing more than financial gain.

In the case of a Miami Beach (FL) man, this twenty-something year old entrepreneur somehow secured government contracts worth tens of millions of dollars to provide ammunition to US troops overseas. Not only was some of this ammunition decades old and effectively not operational, but some of it came from China (not okay with the US military) though it was labeled as coming from Albania (okay with the US military). Can you, readers, imagine the harm and death to US troops using dysfunctional ammunition? Imagine fighting for your life in a combat zone and having your own weapon malfunction — perhaps even causing serious or otherwise life-threatening injury — due to substandard ammunition while someone in the country you are sworn to protect is living the high-life from profiteering off this fraud? Imagine being pinned down and not being able to fight back due to ammunition failure.

In another case, a US military subcontractor manufacturing night-vision goggles was going to outsource production to China strictly for profit purposes. The technology behind the US military’s night-vision goggles is one of the most closely guarded secrets in our arsenal, and yet these folks were going to hand over to China — a well-known Communist country — the plans and details. So much for a key technological advantage our military troops have in nighttime combat. What would have prevented this technology from falling into the hands of the Chinese military, let alone being sold to the militaries of countries and groups truly at odds with the US? And again, US citizens would have profited by sacrificing the lives of our service men and women.

In both cases, the motivation was greed, pure and simple. I don’t know how these people can live with themselves and what examples they are setting for others to follow, but as I recall both of these instances I am seething with anger. Our military forces deserve nothing but the very best: the military cook deserves to use the finest pots and pans and utensils available, and the combat troops worldwide deserve every advantage — food, technology, armaments, defenses, support services, etc. — that can be provided to them.

Fortunately both frauds were caught in time before secrets were revealed and serious harm done. Yet frauds that can ultimately cost lives continue to occur: when military contractors overbill for goods and services, if monies must be diverted from other uses to pay those bills, then the fraud can be more than just about overcharges and billing — the consequences of such frauds can result in injury and death due to underfunding or delays in other critical areas.

Similarly, consumer product frauds risk the health and well-being of the product users. Avoiding quality assurance testing to save money and shipping knowingly bad product puts lives needlessly at risk. What is the cost of a human life? Well, it seems that some organizations have figured out the price, and it looks pretty cheap from my perspective.

Honest mistakes happen all the time, readers, but in this day and age we’ve got more technologies and business practices than ever to help ensure errors are caught and corrected before damage is done. Yet just like at some point in our lives we’ve each got to act our age, at some point an organization has to act its size and get itself together, simply as a matter of course and without being asked to do so. To the executives out there I say this: The life that is ultimately saved may be yours or that of someone close to you.

Norman Katz, Katzscan

Organizational Versus Occupational Fraud

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his new column in the archives.

When do you draw the line between a person (or persons) being guilty of fraud versus the entire organization? The latter seems pretty sweeping, implying that every employee was guilty of perpetrating fraud; this is not the case, however.

Operational fraud — such as frauds that happen in the internal/external supply chain operations — can be divided into two basic classifications of fraud: organizational versus occupational.

When a person or persons commit occupational fraud, they have used their positions or roles to facilitate the perpetration of the fraud. A cashier who takes money from the till, an accounting person who falsifies deposits and pockets some cash, a buyer who accepts gifts, brides, or kickbacks for steering business to one supplier versus another, etc., are all examples of occupational fraud. Contractors and service providers can be guilty of occupational fraud, such as the attorney or technology consultant who submits bills for hours not worked. There is an implied trusted relationship that the person breaches in their less-than-trustworthy conduct.

When, at the highest levels of an organization, senior management (typically officers, but sometimes members of the board of directors) are guilty of perpetrating fraud via the use of the enterprise itself, in whole or in part, this is organizational fraud. What’s so unfortunate about organizational fraud is that many times honest employees in specific occupations are often left to suffer, such as when the organization folds. (Examples include Arthur Andersen, WorldCom, and Enron.)

Senior management and directors bear the burden of responsibility in their positions to set the right examples for the organization’s code of conduct. This is part of good governance for public companies as outlined in the COSO Sarbanes-Oxley compliance framework, but it is certainly applicable to private companies and government agencies alike.

The Sentencing Reform Act of 1984 provides guidelines for the penalties assigned to both individuals and organizations guilty of crimes. In brief, the penalties are assessed as follows:

(1) The greatest of the following:
(a) A base fine from an offense level table;
(b) The monetary gain to the organization;
(c) The loss suffered due to the intentional, knowingly reckless, behavior by the organization. (2) Application of a fine multiplier based on such factors as cooperation versus obstruction of justice, history of bad behavior, and whether the organization self-reported and accepted blame and responsibility.

In the tainted pet food scandal that hit the United States, melamine was added in China to the base ingredients to boost the tested protein levels and cover-up quality problems. A public official (an inspector) and an employee of the manufacturing company (a buyer, I believe) were both involved in the fraud: they used their occupations to perpetrate the fraud, which involved payoffs.

The pet food was then shipped from China to Canada where it was canned for distribution into the United States under various brand names. If, in the US or Canada, the corporate philosophy was to either not bother with quality assurance testing or not adequately fund quality assurance testingn (thus rendering it ineffective), in order to reduce cost-of-goods-sold and boost profits, this is, in my opinion, organizational fraud as perpetrated by the canning company in Canada and the US distributors.

Another good example is children’s toys in regards to the use of lead paint and design flaws which, even when manufactured to the specifications, represented a hazard.

The lesson here is very simple: You can outsource manufacturing, but you can’t outsource responsibility.

Norman Katz, Katzscan

The Troubled Triangle — How an Economic Recession Can Increase Fraud

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his new column in the archive.

In the 1950’s, Donald Cressey, a sociologist and criminologist, created the theory of the Fraud Triangle. In brief, Cressey stated that there are three components that must all come together for the commission of a fraud to occur. (This is akin to a “three-legged stool” theory.)

First, there must be pressure. A person can feel pressure from a variety of internal and external sources, such as a desire to excel, jealousy, family needs, drug or gambling addictions, etc.

Second, there must be opportunity. If a person senses that he/she can get away with something, or is otherwise enabled to do something, opportunity is present.

Third, there must be rationalization. A person will think through why an act of fraud should or should not be performed and “talk themselves into” the belief that the fraud should be perpetrated, often using skewed logic which seems justifiable to the person.

Now, let’s relate Cressey’s Fraud Triangle to the troubled economic times we are in. Organizations are slashing payrolls and laying off personnel by the hundreds and thousands. While this may satisfy financial analysts and Wall Street, are these moves being thought out strategically in terms of security and good governance integrity? Let’s explore this.

For the remaining employees, I’d imagine that these folks are under a lot of pressure, having to pick up extra work loads that their now laid-off compatriots once did. With work loads increased, bonuses cut, existing payrolls held or reduced, and the worry of whether they will be in the next round of cuts should their organization survive at all, there’s a lot of pressure on the shoulders of these individuals. Combine this with outside-the-job pressures such as family needs, an unemployed spouse, kids in college, medical care, etc. and you’ve got quite the boiling tea kettle ready to blow.

With their job responsibilities increased to cover for dismissed colleagues, an employee will likely need more business software application rights and roles to accomplish the new expanded set of tasks. By increasing application rights and roles, a single employee could in fact be given enough authority to perpetrate fraud. (Remember our friend the accounting clerk who I mentioned in a previous post?) Job cuts often result in decreased monitoring and controls, overall leaving an employee with ample opportunity to commit fraud.

Now, with pressure building and opportunity soaring, what’s left to reign in the otherwise honest employee from perpetrating fraud? It is our morals, ethics, values, and principles. And when these fail – when the forces of pressure and opportunity become so great that they eclipse this final protective barrier, there is a good likelihood that fraud will be perpetrated.

For public companies that must comply with Sarbanes-Oxley laws and ensure good governance to protect their financial statements from materially significant impacts, are the corporate cuts leaving them exposed to even more risk from fraud than before? (Private companies and government agencies face the same risk exposure too.)

Have you had to cover for colleagues that were let go? Are there more gaps and less controls now than before? Are you one of the many who was made redundant and know that your absence has created or widened a gap where fraud can now foster and grow? Let’s hear from you.

Norman Katz, Katzscan

The Pressure To Commit Fraud

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Editor’s Note: This is Norman Katz’s third post as a regular contributor on Sourcing Innovation. Norman, who has published dozens of articles on the subject, is a supply chain fraud and supply chain risk expert and will be covering these topics in his new column, which are still indexed and archived.

A friend and collaborator, Doug Ross, a corporate integrity consultant among other talents, asked me to write an article on supply chain fraud that he would send to his contact base. He wanted to see what the reaction was to this subject and what nerves would be struck. And oh boy – did we strike a nerve and get a reaction!

In the article I wrote about how an otherwise honest employee could be forced to commit fraud due to organizational pressure when faced with what I describe as a variation on the response (by humans and animals alike) to an adverse situation. When facing danger there is a choice: fight or flight. When an organization pressures an otherwise honest employee to commit fraud or lose their job, the employee has a choice: fraud or flight – commit the fraud (which will contradict their ethics, morals, and values), or suffer from flight (be fired or be forced to quit their job). And when flight is not an option – when losing one’s job is not possible – the only response left is to commit the fraud to save oneself. Not much of a choice, is it?

Doug forwarded me the response from one of his contacts: this person is in mid-to-high level management at a $6B per year corporation. Let’s call him Sam.

Sam fired back at us with both barrels: He found the topic of fraud to be disgusting, and the suggestion in the article I wrote that an otherwise honest employee could be forced to commit fraud by his/her employer was something out of the realm of possibility. The insinuation that such a situation could even exist was repulsive to Sam, let alone that an employee would cave in and commit the fraud.

Quite frankly readers, I had trouble sitting for the next day or two as I had felt that we had been severely spanked. And my name was attached to the article when Doug sent it out! So much for my sterling reputation!

A few days later, Doug forwarded another e-mail from Sam, this one in a completely different tone.

Sam had some time to think, and one of the first things he did was to offer an apology for his prior response. In thinking this through, Sam openly admitted that if he were forced to make a decision between providing for this family – food, shelter, comfort – and committing a fraud that was forced upon him, he would commit the fraud to protect his family’s well-being and lifestyle.

Wow – what a turnaround.

What does this tell us about Sam’s ethics, morals, and values? They are right on track where they should be. Sam is an honest person of integrity who cares deeply for his family. Sam is a provider, a husband, and a father. Sam is a protector of the persons he loves.

So readers, if this scenario had actually played out in Sam’s workplace, who would be responsible for perpetrating the fraud: Sam or his employer? What would you do in a similar situation: would you commit the fraud or leave the company? Does the current economic recession – with record levels of unemployment and few jobs available – alter the choice you would make in an otherwise robust economy?

I look forward to your responses.

Norman Katz, Katzscan