Episode 3 Transcript: Trust Is Not An Internal Control


Mark:                    Welcome to Unsuitable on Rea Radio, the unique financial services and business advisory show that challenges your old school business practices and the traditional business and culture. You’ll hear from industry professionals who think beyond the suit and tie to offer meaningful, modern solutions to help you enhance your company’s growth. I’m your host Mark Van Benschoten On this episode we’ll be talking to Annie Yoder, one of our industry’s elite fraud examiners and financial, forensic experts, about what motivates good employees to go bad and why trust can never be considered a valid, internal control when it comes to protecting your business from the very real threat of occupational fraud. Welcome to Unsuitable, Annie.

Annie:                   Thanks Mark.

Mark:                    I trust your drive was uneventful this morning?

Annie:                   It was. It was pretty uneventful.

Mark:                    That’s good to hear. Before we get started, I just want to talk to you about something I know is very passionate to you, is this training and education. Whatever sparked the fire for that?

Annie:                   Absolutely. I really have a passion for it more because of the people development, as it relates to people development. I love seeing people grow, develop, and I always say I’m trying to train my replacement, because I can’t move up if I don’t train my replacement.

Mark:                    It extends beyond just what you do here at the firm. I know that you teach accounting classes and so forth.

Annie:                   Yeah. I actually am and adjunct professor at Walsh University. I teach auditing. I’ve done that for 4 years, so I’m going on my 5th year. I really enjoy that. I actually have to take a semester off because I’m expecting, but I hope to go back next year.

Mark:                    That’s very exciting. We appreciate what you do for it. It’s interesting you talked about the educational aspect and seeing people develop, as you mentioned, I wasn’t going to mention it, but you mentioned that you’re expecting. I’m sure that you’ll be a great parent to instill that in your children.

Annie:                   Thanks.

Mark:                    I talked briefly about trust that your drive up was uneventful. Something that I’ve heard you say is that trust is not an internal control. Can you talk about that a little bit?

Annie:                   Yeah. I usually say that ad nauseam when I’m presenting and talking to clients, and talking about fraud in general because people get lax. Especially, you look at small business, very often you’re working with family members, you’re working with friends, and they trust them. You have to obviously have some level of trust, but being, trust but verify. We know that saying, we’ve heard it over and over again, that you need to be skeptical, you need to have your ears attuned to what’s going on in your business. That’s incredibly important so I reiterate that over and over and over again when I’m having discussions with clients.

Mark:                    You mentioned small business versus big business. I would think that internal control is for any size business, correct?

Annie:                   It is. It’s definitely for any size business, but what happens is the cost/benefit of internal controls can become an issue. If you have a really large business, you might have an internal audit department. You have more people in your accounting department so you have segregation of duties, you have checks and balances. You move to a small business, you might have a 1 to 2 man accounting shop, where it’s very difficult to have those internal controls or those separation of duties. That’s why there’s often a difference between when you talk about large and small companies. Definitely the concept’s the same, that you need internal controls.

Mark:                    People say, “Oh. You want me to hire 4 more people in my accounting department. How much do you want me to spend to protect $1,000?” I would say, “Don’t spend a thousand to save a thousand.”

Annie:                   Right. Absolutely. That’s when I alluded to cost/benefit. That all has to be weighed, but there’s easy ways to look at internal controls for a small entity. Maybe there is an outside advisor that you could use to maybe send the bank statement to, rather than having it sent directly to the person that reconciles the bank account. I always tells folks too, their perception that you’re watching, even if you’re not watching, open the bank statement, open it up, don’t even look at it if you don’t want to. That perception that you’re looking, helps deter fraud from occurring.

Mark:                    It’s interesting that mention that. You’re going to find this surprising. I worked in a liquor store in college.

Annie:                   That’s not surprising.

Mark:                    I got to be good friends with the owners, it was a husband and wife. They put up fake cameras. They looked like cameras, but there was no tape in it.

Annie:                   Absolutely.

Mark:                    Obviously, they must have trusted me because they told me. They were right to trust me.

Annie:                   That’s the same concept there. It’s the perception that they’re watching even though they weren’t. It probably deterred people, even if it wasn’t an employee, maybe a customer from walking out, trying to shoplift.

Mark:                    That’s a good point. You mentioned the having an outside advisor look at the bank statement. Is there something else? If a client comes to you and says, “What’s 1 thing I can do?” You mentioned the advisor, is there something else that they can do?

Annie:                   I think, absolutely, just with lines of communication with those trusted advisors. I think business owners often feel like they get caught in the trenches because they want their businesses to thrive. Reaching out to, not just your CPA’s, but using your attorneys as resources and keeping those lines of communication open and knowing that you can go to them for advice, is critical, to know that you have someone there to help.

Mark:                    I also heard you mention this concept of tone at the top. Can you maybe tell us a little bit more about that?

Annie:                   Yeah. Tone at the top, I will tell you, anyone that’s had multiple jobs in their career, or, quite frankly, you can even go back to school and you had a teacher that you just hated going to class. Those folks at the top can set the tone and it permeates down all through an organization. If they’re negative every day or if they’re constantly bickering at the top and you don’t have consensus at the top, that, then, will flow down through an organization. It can cause issues. It can cause people to be disgruntled. It can increase risk, is the bottom line, it can increase risk of fraud occurring in an organization.

Mark:                    Sometimes you hear about small business owners who treat the corporate account as their own little fun-fund. They spend it on this personal item and that personal item. It gets recorded appropriately. I think the staff sees that and they say, “If the owner can do it, well then I can do it also.”

Annie:                   Absolutely. That’s the concept of setting the tone at the top too. A prime example of that, Mark, is when you look at restaurants and bars, especially bars. A owner will come in and they’ll pull money out of the till. All the waitresses see it, or the workers see it and they think, “Well, they can do it.” Then it starts with the 5, 10 bucks here, 20 bucks here, and it snowballs. That’s absolutely the concept of tone at the top. It’s a very good example of it.

Mark:                    There’s been a lot of studies on occupational fraud. Is there a certain demographic, you know, if the person wears blue socks with black pants. Is there something we can look for?

Annie:                   There are statistical red flags. The Association of Certified Fraud Examiners does something called the report to the nation every other year. They’re gathering data across, actually, the globe. They do hone it in to the United States as well. They do statistical analysis of fraud cases so users such as fraud examiner, et cetera, and people like us, can use it to show folks, yes, there are red flags. Demographically, I will tell you, that women are catching up to men.

Historically, men actually exceeded in the case studies, exceeded that they were perpetrating fraud. If you look at organizations, usually dollar wise, larger dollar frauds are committed at a higher level. Corruption cases, et cetera, they’re committed at the executive level, or financial statement fraud, where in the accounting department, the dollar amounts might be less, but are typically more frequent when they occur. As far as male versus female, the age range is somewhere between 30 and 45 is the most typical age.

Mark:                    That’s interesting. Maybe they have pressures at home, something’s causing that.

Annie:                   Absolutely. There’s something called the fraud triangle. That hits key on that, is that there could be a pressure from outside that’s causing them, typically, if it’s a female, it could be a sick parent, a sick child, the husband lost their job, so they’re feeling that pressure. Maybe they didn’t get a raise for the last 5 years. Now they’re rationalizing it, “Hey I need this money. They owe me this money.” Then, finally, they have the opportunity. They have an opportunity in their organization that they have some type of control, or there’s a lack of internal control or checks and balances. Now they’ve just met those 3 criteria, which are indicators. It’s very well-known in the fraud world, that fraud triangle, so those are the indicators.

Mark:                    Just because somebody has the opportunity, has the pressure, doesn’t mean that they’re going to. It just might heighten your risk.

Annie:                   The risk. Absolutely. That’s a very good point. When I do presentations on this topic, I say that all the time. I’m like, “I beg of you, these are the red flags, but don’t go home, or don’t go to work and start saying …” The number 1 indicator is actually living beyond your means. You might see someone buying a new car constantly, fixing up their house, et cetera. I always say, don’t go home, or don’t go to work and start telling people that, “Bobby Jo is stealing because she gets a new car every 6 months.” That’s not the case. It’s just an increased risk.

Mark:                    We go out and we do an audit of our client and they ask, “Is anybody stealing from us?” I really don’t like that question because that’s really not the design of our audit. What kind of success rates do audits or financial statement audits, have a catching occupational of fraud?

Annie:                   I’m so glad you asked that question because this is a huge misconception in the world of a company that’s getting audited. That’s not the point of an audit. The point of an audit is to make sure you know the financial statements are materially correct. Actually, only 4% of frauds are caught by external auditors. The highest rate is, I don’t know if you can guess Mark, but it’s actually tip, like whistle blowing. I think it’s up in the, maybe, 30% of frauds are caught that way. What happens, someone sees it happening over and over again and they finally get disgruntled and they finally say enough’s enough.

Mark:                    I would assume that we would want to encourage some mechanism to get those tips, to get people to come forward.

Annie:                   Absolutely. A hot line, like Red Flag Reporting. We can talk a little bit more about that if we need to. Just the concept of a hotline in general is incredibly important, that folks in an organization do have a mechanism to provide information and, most importantly, that they feel comfortable that it’s anonymous and that there won’t be repercussions about what they’re saying. This kind of leads in to making sure organizations, small or large, have the right policies. You want a whistle blower policy. You want to know your folks, that they’re comfortable talking about it. You want to have an anti-fraud policy. You can make them sign it and stick it in their personnel file, but if you don’t keep reminding them, it kind of loses it’s luster. It doesn’t mean much.

Mark:                    You mentioned this perception. I would think, say I’m struggling and I’m in the middle of that fraud triangle, I’ve got these pressures and if I knew, “Oh. Wait a minute. There’s this hot line. I think I can get away with this. Oh, wait a minute.” That might just be another deterrent that somebody’s struggling with.

Annie:                   Absolutely.

Mark:                    I’m not a fraud expert, as yourself, but I would think the hotline’s relatively inexpensive?

Annie:                   Yeah. They are typically very inexpensive, not only from a fraud perspective, but also a lot of times, these fraud hotlines can handle issues like HR issues or maybe safety issues. Think of a construction company that someone’s not wearing their helmet like they’re supposed to. Obviously, I don’t know anything about construction minus the fact that they’re supposed to have that on. The concept being that if there’s safety issues, they can also provide that information and it can move up to the appropriate channels.

Mark:                    I assume that there’s information on our website about a hotline?

Annie:                   Absolutely. There’s a wealth of information about Red Flag Reporting on our website.

Mark:                    As you go through fraud examinations and so forth, and you look at, you mentioned the demographics and women are catching up, do people ever say they’re sorry? Do they like, “Oh. I was going to pay it back. I never meant to.”

Annie:                   Absolutely. I would say remorse is typically there. You hit on something, again, that very often people think, “I’m going to borrow this. I’m going to pay it back. This is just something I need for me to get through this period of time.” I mentioned earlier that it snowballs. It just continues. Very often they are remorseful. I go back to those small, family owned companies, most of those folks in the accounting departments are like family, whether or not it’s blood, they are like family. When a fraud is committed in those types of organizations, I tell people, “Yeah, you have a fraud. Yes, you need to do the right things, whether it be prosecute, fire, et cetera immediately.” There is an emotional toll that this takes on folks.

Mark:                    That’s a good point. Probably just the distraction from running the business, you have to deal with this. You have the cost of the fraud and then you have this indirect cost of, “Now I have to deal with this. Somebody I trusted is now stealing from me.”

Annie:                   Sometimes what will happen is, instead of taking the steps to, whether it be prosecute or at least let it be known and fire the individual, what they’ll do is folks will sweep it under the rug.

Mark:                    They’re embarrassed?

Annie:                   They’re embarrassed. They don’t want it to hit the front in the newspaper. They might fire them quietly and push them out the door, but what happens? They go to the next organization, if it’s that type of individual, they could commit that fraud again. That’s why I tell people sweeping it under the rug just because you don’t want it splashed on the front page of the newspaper is a bad idea. You could potentially be letting a person go do it to the next company.

Mark:                    Sure. I could see that. I could see the people making that decision. You’d like to hope that they could make a better decision, that standpoint, to go through the process and get it taken care of. Do you have any, in your career, any examples? Anything that sticks out? Like, here was a situation that we found, that we came across, that you sit back and chuckle at?

Annie:                   Oh, sit back and chuckle at? I always say these fraud situations are, you go in to them and the work is exciting because it’s different. It’s not typical accounting work. I go back to the emotional thing, it’s very sad to have the conversations with people. I always say, “I’m glad I’m here to help. I’m sorry it’s in this particular situation.” I recently worked on a case, I won’t get in to the details of it, but I will tell you it was a family situation where you had an older sibling that was pilfering from 3 other, younger siblings in this situation. It ended up in court. I had to testify, et cetera.

Mark:                    Oh, that must have been fun.

Annie:                   It was interesting. It was definitely interesting. It’s just sad to see the emotional aspect [crosstalk 00:17:02]

Mark:                    Sorry about that. My insensitivity coming through there. When I first started in accounting and working for a firm in New York, we had where a son in law stole from his father in law. I was like, “Oh my goodness.”

Annie:                   I had another case where a grandson was stealing from his grandfather because the father actually had passed away prior to the grandfather. Then, actually, the grandfather passed away and the individual passed away. The widow was the 1 that ended up in court because of the estate. That was another family situation.

Mark:                    What a mess. One last question, or one last question before we get to our final questions. Does this happen in any business? Is any business at risk for occupational fraud?

Annie:                   Absolutely. Any business is at risk. The biggest thing is, folks need to go back and look, “How can we deter? How can we reduce risk? What can we do?” I go back to a lot of people are going to say, “It’s too costly.” There are very simple things that you can do using those outside advisors, actually glancing at your cancelled checks, things that aren’t very expensive that will help reduce the risk.

Mark:                    That’s good information. I appreciate that. Before we wrap up, there’s a question we like to ask all of our guests. If you could have 1 super power, what would that be?

Annie:                   The 1 super power that I think I’d really enjoy, let me preface this by saying, only if I could turn it off and on at will, is I would love to read people’s minds.

Mark:                    A shark at what you think, I’m glad you don’t have that now. That’s very interesting. Obviously you’ve thought about this.

Annie:                   Yeah. Definitely with the caveat that I could turn it off and on.

Mark:                    Thanks for joining us today Annie. Thanks to our listeners for tuning in. Do you want more insight in to occupational fraud and what you can do to help protect your business? Visit us at www.reacpa.com/podcast for additional content. You can also subscribe to Unsuitable on iTunes and never miss an episode. Until next time, I’m Mark Van Benschoten for Unsuitable on Rea Radio encouraging you to loosen up your tie and think outside of the box. Thank you.