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Business Risk Technology Risk Internal Audit Learning From Fraudsters Martin Gill Conducted by Perpetuity Research and Consultancy International (PRCI) Ltd Copyright © 2005 Protiviti Ltd. All Rights Reserved. No part of this publication may be reprinted or reproduced or utilised in any form or by any electronic, mechanical or other means, known now or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from Protiviti Ltd. Warning: the doing of an unauthorised act in relation to copyright work may result in both civil claim for damages and criminal prosecution. Price: £55 Eric was critical of accountants and auditors: “ Accountants can only work on the figures they have got, audit the same. Auditors came to see me and I just lied to them and gave them false pieces of paper and that was that. The checking process was abysmal. I was not worried because I have 20 years’ experience of auditors. Had they been better at their job I would have been in trouble. What I was doing was simple, but the lack of process enabled me to do what I did, the absence of systems, the lack of attention to detail, the lack of knowledge in auditing and accounting. I had three audits in those 18 months. And I recall a balance sheet did not balance. Now there was a good reason but I did not want it interrogated too much because that could highlight the bit I had taken. And so I worked hard at sorting this, I worked intensely for half a day. I gave the auditor the information and he said, ‘thank goodness for that’, and my thought was ‘you complete muppet’. I really went through that with a passion just in case it was something involving me. There was no interrogation from audit and that was good for me.” “ Accountants can only work on the figures they have got, audit the same. Auditors came to see me and I just lied to them and gave them false pieces of paper and that was that. The checking process was abysmal. I was not worried because I have 20 years’ experience of auditors. Had they been better at their job I would have been in trouble. What I was doing was simple, but the lack of process enabled me to do what I did, the absence of systems, the lack of attention to detail, the lack of knowledge in auditing and accounting. I had three audits in those 18 months. And I recall a balance sheet did not balance. Now there was a good reason but I did not want it interrogated too much because that could highlight the bit I had taken. And so I worked hard at sorting this, I worked intensely for half a day. I gave the auditor the information and he said, ‘thank goodness for that’, and my thought was ‘you complete muppet’. I really went through that with a passion just in case it was something involving me. There was no interrogation from audit and that was good for me.” Table of contents Foreword 7 Acknowledgements 8 Executive summary 9 1. Introduction 10 i. Staff dishonesty in perspective 10 ii. This study 11 iii. The sample 12 iv. Introducing the interviewees 14 2. Why the offences were committed 16 i. Debt (and greed) 17 ii. Boredom and lack of structure to life 19 iii. The search for status 20 iv. Blackmail 21 v. Temporarily unbalanced 22 vi. Organisational cultures and structures 23 vii. Opportunism 29 3. How they did it 31 i. The knowledge and skills needed 31 ii. The role of audit 37 4. Getting caught 41 i. How the crimes were identified 41 ii. Initial accusations 42 iii. The sentence 45 iv. Contemplating life after prison 47 5. Conclusions 49 i. Reducing opportunities for fraud 49 ii. Tackling resources used by fraudsters 49 iii. Assessing the offenders’ perspective 50 Appendices 51 A Methodology 51 B ‘Inside Time’ editorial 54 C Interview schedule 56 About the author 58 About Protiviti 59 6/7 Learning From Fraudsters Foreword Having investigated corporate fraud or The offenders taking part in this research I have known Martin Gill for many years ‘white-collar crime’ for many years, it can, in many respects, claim to be unlucky, and this research is something that we never ceases to amaze me how easy it is as the surveys into corporate fraud have discussed on many occasions – I am for people to commit fraud within their undertaken by the large accountancy firms delighted that it has now become a reality. place of work. In the last three years, there highlight the fact that many companies As he has outlined in Appendix A, this was has been a great deal of focus on fraud do not report employee fraud to the not an easy project, but I would like to committed by senior management, which in authorities or the police and deal with the commend everyone involved for helping the USA has resulted in the implementation problem internally, usually by dismissing to make it happen. of the Sarbanes-Oxley Act, but the reality the employee. If we are to fully understand is that all levels of employees commit the extent and size of this problem then In my opinion, this piece of research is fraud. This has been demonstrated by the companies must report internal fraud to the long overdue, and I believe that it will add numerous surveys undertaken by the large police. Whilst Martin Gill has not named greatly to the work already undertaken accountancy firms over the past decade. any of the companies, they should be in understanding corporate fraud and Whilst these surveys have highlighted the commended for supporting a prosecution. white-collar crime. It is an academic piece extent and depth of the problem globally, of research but at the same time – unlike they have only looked at the issue from the For my colleagues investigating financial many scholarly offerings – it is a very perspective of the company or employer. crime on a day-to-day basis, there will good read and I commend it to all senior The objective of this research was to take be no shocks or surprises in the findings management. Whilst I enjoy investigating a totally different approach, to obtain an and conclusions of this research. What it complex fraud cases, there is little doubt in understanding of corporate fraud from the does do is pull together the many years my own mind that putting in place effective very people who are responsible for these of experience that we have and present controls to prevent fraud is a much more criminal acts, and to try and understand it in a way that is easy to understand and cost-effective approach in dealing with the why and how they became fraudsters. interpret. The lack of, or weak internal problem of white-collar crime. In reading controls, no segregation of duties, this report, the most obvious finding is how In the current business climate of ever- disillusioned employees and ineffective easy it was for the employee to commit increasing regulation with the focus on internal audit are all well highlighted in this the fraud and get away with it for long improving corporate governance, we tried to research. If this research does nothing more periods of time. The evidence in this report focus this research on fraudsters who were than to encourage senior management to has clearly articulated the warning signs at a senior level within their organisation, look out for and react to the warning signs – they have come from the horse’s mouth in positions of trust and able to defraud of fraud, then it will have achieved a and it would be folly to ignore them. The large sums of money from their employers. great deal and hopefully it will prevent consequences of doing so could be great. The majority of the fraudsters taking part some frauds. in this survey were therefore serving prison Mike Adlem sentences at the time of the research, and In an environment of corporate governance, Protiviti surprisingly serving what I believe (and Sarbanes-Oxley and ever-increasing certainly they did) to be very long terms regulation, many people are arguing that of imprisonment. the pendulum has swung too far, and companies are now focusing on ticking boxes and not looking at the reality of the fraud risk. This report does bring the problem very much into focus; all of the fraud incidents are ‘real’. Acknowledgements I would like to thank Mike Adlem for all his interest, enthusiasm and advice. We first discussed this study in 1999, and he was always keen to support it – he has been an inspiration. I received help and advice from a lot of people, including Sean Holohan, Adrian Maxwell, Susie Pagan and her colleagues, and others who felt they should not be named. I am grateful to all of them. My colleagues were also extremely helpful, especially Vicki Wilkes and Heather Neal. The study would not have been possible without the co-operation of HM Prison Service; a lot of busy people gave up their time to help me organise interviews. As noted in the report, this was tremendously time-consuming for us all. I am extremely grateful to all of them for their time and effort. Finally, I would like to thank those convicted fraudsters who spared time to speak to me and share their experiences; they did not have to do so. Martin Gill Perpetuity Research and Consultancy International Ltd 8/9 Learning From Fraudsters Executive summary While it is now accepted that staff • Committing offences was easy, there • Some interviewees described being dishonesty is a serious issue and costs was little evidence of fraud prevention caught as a relief; some were shocked.