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At this writing, the Enron story is blaring from every radio and television, and filling up newspaper pages like some wild vine run amuck. Let us say that Enron plays out to have been caused by fraudulent behavior on the part of one or more corporate executives. Is it, then, occupational fraud? Are all the other corporate collapses that seem to shatter every now and then also occupational fraud? If so, fine, but how do we calculate the damage? Is it the money taken, directly or indirectly from the coffers of the corporation? Is it the loss in shareholder value or market capitalization? Is it the pensions and 401K benefits lost? Is it some combination of these factors? If it is pensions, for example, do we adjust for the future value of pension benefits now lost?
Such issues are more than a philosophical debate or parlor game. Until we begin to resolve them, through discourse, consultation, and research, we cannot truthfully say we have even defined our own field. The path may be strewn with pitfalls.
All measurement systems are subject to interpretation, if not outright manipulation, and this is a risk we run when we begin to think systematically about occupational fraud. Wells and his associates at the ACFE have done yeoman service in getting us as far as they have in our understanding of the scope of the occupational fraud problem in this country. But, even they, I am sure, would admit that their estimates, as good faith as they are, are only estimates. If we are to truly begin to capture numbers that will hold up to sustained analysis and analytical interpretation, we will have to develop a much more comprehensive and rigorous methodology to do so.
As I noted earlier, a collection and analysis entity is the necessary first step, but the second step may be a good bit bigger than the first. We need to decide what we are going to measure. In thinking about this problem, Enrons aside, I offer the following examples, some real and some hypothetical, of what we will need to address:
Co-generation. In my childhood we used to call these things dumps, but today they are big business. A co-generation facility is basically a power plant that runs on trash. Refuse is burned to produce electricity. This one had a problem. When trucks come into such a facility, they stop on an electric scale that weighs the truck, deducts the weight of the truck and the container, calculates the amount of garbage and the charge to the waste hauling company, and prints out a trip ticket. The truck then dumps its load, the garbage is burned, and the hauling
LIES, DAMNED LIES, STATISTICS (AND OCCUPATIONAL FRAUD)
company is invoiced. At this facility the scale operator had a scam. He would take cash from owner-operator-drivers to override the electronic scale and produce a handwritten trip ticket. He would pocket the cash, the driver had a trip ticket that allowed him to dump, but no invoice was ever generated. He could do this only because the scale was sometimes broken and handwritten tickets were needed. Obviously, no one ever stopped to ask why the scale was broken so many times when this chap happened to be working. This was clearly an occupational fraud; basically, a theft-of-service scheme.
We were hired by the company to try to calculate the amount of revenue it had lost through this scheme so they could file a fidelity bond claim with their insurance company. After three long, and smelly, weeks we came up with a rough number because it is difficult to determine how much garbage was or was not burned on a given day, and this scheme had been going on for two years. We knew how much the scale operator had pocketed, $200,000, mainly because he kept records for his own use and we got our hands on them, but coming up with a number to estimate the company’s losses was much more difficult. These are the sorts of issues we will have to contend with if we are to calculate the true amount of occupational fraud in the United States. Theft-of-service schemes can be tough.
Manufacturing. This could be thought of as a mini-Enron. This company was publicly traded and its CEO wanted to look good for Wall Street. When business began to slow, he took work-in-progress and counted it as inventory, an accounting no-no. At the end of quarters, he would ship product to distributors on consignment and call it sales, another no-no. When times really got tough, he would ship product to distributors that had not even been ordered, book a sale, and deal with the returns later.
When this daisy chain finally cratered, what were the losses? To the company, to the employees, to the shareholders, to the vendors who would probably never get paid? Were the legal fees some of these vendors surely ran up trying to recover some portion of their money also losses?
Again, issues to be dealt with. This sort of list could go on forever, and there is no point in putting forth endless scenarios, but several additional questions may be in order. How do we categorize the employee who leaves the warehouse door open so his buddies can help themselves ’round about midnight? He has enabled others to remove company assets. Are we properly picking up such instances as occupational fraud?