Alberta’s economy has curiously made fraud easier to spot, but businesses are still losing millions. Two local forensic accountants explain why fraud happens and how companies can protect themselves.
In 2002, a local Bank of Montreal branch made national headlines when its manager, Nicholas Lysyk, stole nearly $16 million in phantom loans. The loans, which were made out to people who didn’t exist and deposited in bank accounts set up by Lysyk, went undetected for six years. Lysyk’s case is unusual, both in the amount of money and time the fraud went undiscovered, but instances of employee fraud are actually on the rise in Alberta’s professional environment.
As opposed to identity fraud or Ponzi schemes, employee fraud always involves two things: willful deceit by a person in a position of trust, and theft of something of value. Examples can include anything from falsifying mileage reports to Lysyk’s strategy of approving loans for nonexistent people. Whatever the method, it’s a widespread problem in Canada. According to Statistics Canada, nearly “half of retail and insurance business establishments experienced some type of fraud” in 2008, and a third of Canadian businesses were victims of economic crimes in 2013, with median losses from fraud costing $100,000.
Most frauds are a crime of opportunity, in which an employee discovers a loophole or problem in their employer’s system that lets them take money. According to Justin Thoman, CA and founder of Thoman Forensic Accounting, things often get out of hand after that first instance. “[Employee fraud] often starts when [an employee] sees a chance to make a little extra for themselves. Once they discover that one way works, they’ll keep heading back to that same well.”
Recently in Alberta, the instances of fraud have gone up and, in some cases, the targets have changed. According to Lisa Majeau-Gordon, partner and leader in forensics at Edmonton’s MNP firm, people aren’t simply taking cash. She explains that “customer lists and patented technology” are common targets as well, however, no matter what’s being stolen, the base motivations remain the same: need and greed, and in Alberta, there seems to be ample room for both.
Need as a motivating factor is perhaps the easiest to understand since the usual situation is fairly obvious: faced with decreased hours, pay cuts and layoffs, people will find the money they need to stay afloat through less-than-legal means. “Let’s say you have an employee who’s hours have been cut back, or their spouse’s hours have been cut back,” Thoman explains. Suddenly the motivation to extract extra dollars from their employer is a lot higher.”
Majeau-Gordon says economic hardships are also closely linked to another issue: addiction. “We are definitely seeing an upswing in fraud because of the economy. I think what’s happening is people are turning to desperate measures if they are finding themselves in really tight circumstances,” she says. “We are also seeing upswings in addiction and gambling being the causation for [fraud].”
In Lysyk’s case, some of the money ended up at massage parlours, but many Albertans are taking their money to the casino and race track. The Alberta Gaming and Liquor Commission took in $12.5 million more than expected in the first six months of the 2015/2016 fiscal year, while during the same time period, many Albertans were facing layoffs and flat or lowered incomes.
Curiously enough, fraud in the past few years has also been discovered faster. The economic downturn is partially responsible. “A typical fraud will go on for 18-24 months before detection, but company owners are identifying fraud sooner because of the economy,” Majeau-Gordon says, “Organizations and companies are really watching their expenses.”
Thoman concurs, arguing many fraud cases are being discovered now precisely because companies have become more stringent in looking at the books. “We’re seeing lots of instances where a fraud was started a couple of years ago when the company was doing fine, but now they’re finding these frauds because they’re paying closer attention.”
While Alberta’s economy has led to an increase in fraud domestically, the methods of fraud itself have stayed the same over the years, even in the onset of new technology. Investigative methodologies and fraudulent behaviours are always playing catchup with tech, so while it may look different, most employee fraud is a technological variation of an old con. “The types of fraud are essentially always the same, but because technology changes, they get away with it,” Thoman notes. “Now that everything’s digitized, going through transactions is much easier. I can specify parameters and search thousands of documents a day. But at the same time, making things paperless has also made some types of fraud easier.”
Thoman uses the simple example of payday. “Twenty years ago, cheques were handed out in person. If you wanted to get paid, you had to physically walk down and pick it up,” he explains. “Now, it’s all automatic and digitized, making it easier to falsify cheques without anyone noticing.”
New digital methods may make fraud simultaneously easier and more difficult, but there are some tried and tested ways for businesses to protect themselves. Majeau-Gordon has counselled local businesses on how to prevent fraud and has numerous suggestions on how businesses can protect themselves.
First and foremost, Majeau-Gordon recommends businesses of all sizes obtain fraud insurance, especially since smaller businesses are more likely to be victims. Fraud insurance can help your company recover losses and can also help fund an investigation which, according to Majeau-Gordon, can be more work than business owners may expect, to meet the tests of criminal and civil courts.
Majeau-Gordon and Thoman both suggest segregation of duties as an important policy for preventing fraud since both have seen lax protocols lead to significant theft cases.
Majeau-Gordon recalls a recent incident where someone stole upwards of $5 million precisely because they had access to banking activities along with accounting and financial records. “No single individual [should be] responsible for handling cash, issuing cheques, and reconciling the bank statement,” she explains. “Wherever possible, segregate banking activities from accounting and financial reporting.”
Other tips Majeau-Gordon suggests include creating a regular financial reporting package to owners or executives, conducting background checks on prospective employees, adding “right to audit” clauses to contracts, and creating a series of documenting procedures to increase accountability and make investigations much easier.
Alberta’s economy is changing and, along with it, increasing cases of employee fraud. New economic times may have increased fraud frequency, but forensic accountants like Majeau-Gordon and Thoman are also using hi-tech means to discover people’s schemes. Like most things, defence is the best offence: protect yourself and your company and don’t think internal theft and fraud can’t happen to you.