Fraud pervasive even in 'honest' Upper Midwest
Fraud is alive and well in the Fargo-Moorhead area.
"Per capita we have just as much crime here as there is in the big city," said Thomas O'Halloran, a 30-year federal and private fraud investigator.
U.S. organizations lose an estimated 7 percent of their annual revenues to fraud. In 2008, this translated into about $994 billion, according to the Austin, Texas-based Association of Certified Fraud Examiners.
"Cash is king. Where there is money flowing, there is opportunity," said O'Halloran, a partner in Fargo-based forensic accounting firm Forensic Solutions.Fraud isn't business-specific. Churches and other nonprofit organizations, schools, governmental agencies, individuals - you name it - can become targets of fraud.
"We have an Upper Midwest mentality where everyone is honest," O'Halloran said. "That plays into the hands of the fraudster or perpetrator."
How prevalent is fraud in the Fargo-Moorhead area?
"There's enough here not only to keep the government busy, but individuals (private firms) busy, too," O'Halloran said.
Fraud perpetrators range from 21-year-old bartenders to senior citizens, he said.
"The more highly educated you are, the more you will steal," said James Clifton, a North Dakota State University assistant professor of accounting practice who teaches a case-based course on advanced fraud examination.
Who are they?
Most people who commit fraud come from accounting or business backgrounds, Clifton said.
Most fraudsters believe their actions do not constitute theft, contending they are simply borrowing money and will pay it back.
Others help themselves to self-imposed pay raises with the rationalization that their employer is not paying them enough.
O'Halloran worked a case in which a single mother overextended her spending and couldn't pay her rent and child care costs.
"She was the bookkeeper of a furniture store and decided to give herself a raise," he said.
Clifton said his advanced fraud students, mostly accounting and criminal justice majors, investigate potential fraud situations that have been brought to his attention by tipsters.
"We try to find a new case every year," he said.
After certifying that the case is academically appropriate, Clifton turns it over to his students.
"I make the introductions. The management explains what's going on. I divide the class up into teams and away they go," he said.
Students conduct interviews, collect documents, try to assess fraud loss and provide tips on how to prevent fraud from reoccurring, Clifton said.
"I almost always manage to find an actual fraud after the fact," he said.
When that happens, the case is turned over to proper authorities or investigative agencies such as Forensic Solutions.
Clifton's students have uncovered fraud cases involving churches, businesses, a public library and other nonprofit organizations.
One case involved a high-end electronics company that had no internal money management controls, Clifton said.
An employee was stealing business inventory, selling it on eBay and using the company credit card for personal business, he said.
"He saw the opportunity and wanted to live better than he could afford. And he did," Clifton said.
Another case involved a well-liked Fargo pastor and a church board of directors that wondered where its money was going.
"We found out he was double-paying himself" and purchasing items using the church checking account, Clifton said.
"This guy ran the whole show and ran it right into the ground."
Parishioners were surprised when the details were made public.
"One of the most common things we hear is, 'I can't believe he did it. He was such a nice guy,' " Clifton said.
O'Halloran said churches and nonprofits are extremely vulnerable because one staff member often handles all money transactions. "There's no one there for oversight."
"You really need to know the details behind why your business is losing money," said Beth Mohan, a Forensic Solutions forensic accounting specialist and owner of a private accounting firm.
There are a lot of red flags that people need to be aware of, she said.
"I tell them to look at employee behavior.
"If you've got a bookkeeper earning $10 an hour and she's living in a huge million-dollar house and driving a fancy car and all this kind of stuff, two and two doesn't add up," Mohan said.
Another red flag: an employee who will not allow someone else to do their work, she said.
Or a bookkeeper who won't let anyone else see the business's accounting books.
"A lot of times it's the owner. They don't want them to see what's going on," Mohan said.
Business owners need internal controls that will prevent losses, O'Halloran said.
He advocates that victims of fraud take some sort of legal action so other potential victims become aware of who the perpetrators are.
"We've had nonprofits that didn't want any action taken because they didn't want their contributors to know," O'Halloran said.
"Our purpose is to stop the bleeding, get the money back where it belongs and become a thriving enterprise again," he said.
HAVE YOU SEEN THESE RED FLAGS?
* Employee opens the store during nonbusiness hours without management approval.
* Unusual number of coupon redemptions compared to other store locations or previous years.
* An unusual number of reversed sales can mean the cashier is up
* Employee who seems to be living above his or her means.
* Employee who seems to have an unusual amount of cash available.
* Employee who refuses to take a vacation or sick leave.
* Employee who is reluctant to provide information to auditors.
* Employee who has excessive number of checking accounts.