Every company faces unique challenges with respect to fraud, depending on the specific type of business. For example, a chain of pharmacies may not have the same level of exposure to the Foreign Corrupt Protection Act as a steel manufacturer that sells its products around the world. Nevertheless, in our era of big government, professionals that value their liberty should learn about the various types of fraud, and the risk exposure that accompanies allegations of wrongdoing. Such knowledge, theoretically, will help people make better decisions:
All companies maintain corporate accounts to track transactions. Those corporate accounts may allow employees to order shipments on credit from a supplier; or the company may issue corporate credit cards so that employees don’t need to come out of pocket for travel expenses. Managers are often too overwhelmed to extensively review details, so long as the dollar amounts and types of expenses listed seem reasonable.
Corporate executives may use their corporate accounts to order car services, stay at luxury hotels, take first-class flights, and enjoy other perks while on a business trip. Many think nothing of keeping the frequent flyer miles and hotel points, even though those points technically belong to the company. Some credit-card benefits may include cash-back programs for expenses paid by an employee and reimbursed by the company.
What policies exist to track these transactions? Investigators with the IRS may want to know.
Members of our team served time with an executive that got wrapped up in a government investigation that stemmed from an alleged abuse of expenses. After a prosecution, a judge sentenced him to serve a lengthy term in prison.
If business owners or professionals blur the line with regard to how they account for expenses, they expose the company and their lives to potential civil or criminal liability.
Overbilling practices can also lead to charges of fraud. For example, we knew the owner of a plumbing supply company that used some of the products in inventory to repair rental properties. He then wrote off the items as business expenses, declaring he lost toilets as being lost due to damage. When a disgruntled employee turned him in to authorities, a government investigation ensued. He went to prison for tax fraud.
Managers should be aware of one of the more common variations of fraud: setting up phantom vendors and creating fraudulent invoices for non-existent goods and services.
This type of fraud requires planning and plotting by the perpetrators, but all managers can get wrapped up in the problem. Investigations that reveal this type of fraud can bring both civil and criminal liability.
Either giving or receiving something in exchange for a purchase order or project can lead to liability.
Regardless of where the bribe takes place, criminal charges can follow. In fact, Oderbrecht, a large Brazilian company paid a $3.5 billion fine in 2016 for bribery that took place outside of the United States; the CEO went to prison. DOJ prosecutors hold that bribery threatens our national security and the international free market system. And the FBI uses all available resources to both investigate and bring charges for corruption related to bribery.
Smaller independent contractors sometimes feel pressured to offer bribes just to get their foot in the door and keep it there. For example, we knew a former military contractor and West Point graduate that paid a bribe in the form of a “no-show” job to someone instrumental in helping him get a sizable military contract. The contractor, in turn, billed the Army $422,704 for the purported work. After a government investigation, a six-year sentence followed.
A company owner or manager has hiring discretion. Abusing that discretion, however, can lead to charges of corporate fraud. For example, if a company provides employment to a person that does not perform any duties for the business, investigators may allege a fraudulent transaction. The allegation may be that the company took an unfair business expense by providing employment to someone that did not provide any service.
If companies try to push revenues into a specific time frame in order to manipulate accounting, investigators may allege fraud. Remember, although we can control what we do, we cannot control what other people do. Accounting scandals can result when people turn their employers in to authorities.
Consider the case of an executive we knew that worked with one of the world’s largest software companies. In the years 1998 through 2000, the company began prematurely reporting $3.3 billion in revenues from 363 software contracts, creating what the SEC later facetiously referred to as 35-day months. Wanting to exceed Wall Street expectations to support the company’s rising stock price, the company used accounting trickery. The investigation resulted in the company paying a $225 million settlement; eight people went to prison.
Dozens of companies faced option-backdating scandals, which led to government investigations, fines, huge disruptions within their organizations, and imprisonment for some. Although companies have the right to issue option grants, their accounting practices must comply with regulations to order to withstand the scrutiny of investigations.
Telemarketing employees may increase their compensation levels by increasing sales. If not trained properly, however, they may go off-script. When anyone deceives consumers to strike a deal, that person may put the employer, and his or her liberty, at risk.