Melanie Lindner, 06.10.09, 07:00 PM EDT
Swindlers abound--don't get suckered.
It's scary how many "smart people" get taken for a ride.
On the egregious end, there's the carnage wrought by money manager Bernie Madoff, whose deep-pocketed clients should have known something was up but were too busy being seduced by unnaturally steady returns. On the subtle side, there are the thousands of homeowners--many of them card-carrying grown-ups with families and, presumably, household budgets--who took out mortgages that some back-of-a-napkin arithmetic would have shown they couldn't possibly afford.
Bad stuff happens. Yet, sooner than later, the wounds scab over (led, say, by a rebound in the stock market or an onslaught of knee-jerk regulation), and our collective vigilance eventually wanes. That is until the next bad guy or pernicious cultural shift comes along, at which point we once again recoil in horror, and the whole cycle starts anew.
In Pictures: Seven Types Of Corporate Fraudsters And How To Spot Them
In Pictures: How To Sniff Out A Liar
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Here's the really scary part for entrepreneurs: Small businesses are more vulnerable to sneaky shenanigans than large ones.
Small companies often have one person doing multiple jobs and don't have the same internal controls required by large, publicly held companies, says Scott Grossfeld, chief executive of the Association of Certified Fraud Examiners (ACFE) in Austin, Texas.
An ACFE study covering 959 cases of "occupational fraud" (meaning the kind that transpires at work) between January 2006 and February 2008 suggests that U.S. businesses lose, on average, 7% of their annual revenue to fraud. (How many companies would kill for an extra seven percentage points of profit, in this or any economy?) Businesses with fewer than 100 employees absorbed a median loss of $200,000. Most small-business fraud cases involved wrongful billing and check-tampering.
There's a good chance the numbers will get worse. "In this economy, with layoffs, pay cuts and lower morale, we could definitely see a rise in the number of fraud cases," says Tim Hedley, partner at KMPG Forensic, the accounting giant's fraud-fighting arm. "We'll also see a lot more existing frauds unraveling as the perpetrators find themselves unable to continue mortgaging the future."
How to spot swindlers before they do any real damage? Start by understanding their motivations.
Hedley summarizes these using what he calls the "fraud triangle." Its three vertexes include: opportunity (the conditions that allow fraud to occur--say, an aggressive sales culture or lax controls); pressure (perhaps the perpetrator has medical bills or gambling debts to repay); and rationalization (as in, "My boss doesn't pay me enough" or "I'll pay the money back before anyone notices it's gone").
Cataphora, a Redwood City, Calif.-based firm that tackles corporate crime by tracking digital breadcrumb trails, has identified classic fraudster profiles, most of which don't derive from a burning desire to get rich quick. Here are just a few. They'll come in handy the next time you smell something fishy.
The Limit Tester
Some people just can't resist a challenge. If you boast that your financial-services firm's servers are impenetrable to hackers, rest assured someone will try to prove you wrong. The limit tester isn't about the money, though you may end up shelling out a lot of it on new safeguards once the old ones have been broken.
Jonathan James, the first juvenile to be convicted of a cybercrime in the U.S., was a classic case. At just 16-years-old, James was convicted of hacking into the server of the Defense Threat Reduction Agency, a division of the Department of Defense, and stealing $1.7 million worth of software. His crime forced NASA to shut down its computers for three weeks in July 2000 to fix the security breach. "I was just looking around, playing around," said James at the time. "What was fun for me was to see what I could pull off."
The Disgruntled Employee
Employees who get passed up for promotions, or who are saddled with more work for the same or less pay, may start to stew in their own spiteful juices. Worst case, they lash out--not by robbing the till, but by harming the reputation of another employee or the business itself by, say, leaking a planned merger or badmouthing the company to a prospective hire. "The best way to avoid these types of fraud is to identify passive-aggressive employees. Try to figure out why they're disgruntled and how to address their frustrations," says Elizabeth Charnock, chief executive of Cataphora.
The Wannabe
This fraudster craves the respect of his colleagues to bolster his own ego or perhaps to bag a promotion. Wannabe frauds often involve plagiarism and software code theft, according to Cataphora's research.
One of the biggest debacles in recent history came care of Jérôme Kerviel, a young financier at French bank Société Générale in 2007. Kerviel made huge, unauthorized, un-hedged bets on stock futures, ultimately costing the bank $7.2 billion. (He was formally charged for abuse of confidence and illegal access to company computer systems in January 2008.) Kerviel professed that his goal was not to steal from the bank but to impress his supervisors--and, yes, get paid more.
The Survivor
These often senior-level employees or executives figure they can temporarily mask their fraud because they believe they will be able to make up the difference before anyone's the wiser. Jeffrey Skilling, former chief executive of Enron, one of the biggest flame-outs in corporate history, is a classic example.
"Survivors are unlikely to categorize their actions as fraud, instead thinking of them in terms of metaphorically living to fight another day," says Charnock. "Most see themselves as entirely honest; if they live another day, there is another chance to sign that contract or remedy the product defect. In fact, they feel it is certain to happen--it just hasn't yet."
In Pictures: Seven Types Of Corporate Fraudsters And How To Spot Them
In Pictures: How To Sniff Out A Liar
Is yours one of America's Most Promising Companies? Take our survey and find out.
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