Where There’s Smoke, There’s Fraud

Sarbanes-Oxley has done little to curb corporate malfeasance. Therefore, CFOs should implement a range of fraud-prevention measures.

As a convicted felon, Sam E. Antar, the former CFO for the now-defunct consumer-electronics chain Crazy Eddie, no doubt has regrets. Among them: he is no longer in the game at a time when corporate fraud is experiencing a resurgence. “If I were out of retirement today, I’d be bigger than Bernie Madoff,” he boasts.

In conjunction with CEO Eddie Antar (his cousin), Sam Antar helped mastermind one of the largest corporate frauds in the 1980s, bilking investors and creditors out of hundreds of millions of dollars. Today, he makes a living lecturing about corporate fraud (and shorting the stocks of companies he thinks may have inflated earnings).

Antar says that despite the antifraud provisions of the Sarbanes-Oxley Act of 2002 and the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, it remains as easy today for bad guys, both internal and external, to loot corporate coffers as it was during the Enron and WorldCom days. “Nothing’s changed,” he says. “Wall Street analysts are just as gullible, internal controls remain weak, and the SEC is underfunded and, at best, ineffective. Madoff only got caught because the economy tanked.”

Antar won’t get much of an argument from organizations that monitor corporate fraud. In fact, the consensus today is that financial shenanigans are markedly on the increase. “There’s a lot more employee fraud and embezzlement today then there was 10 years ago, and this past year there was much more than a year ago,” says Steve Pedneault of Forensic Accounting Services. “People blame the economy, but much of the fraud and embezzlement that’s coming to the surface now was in the works for 4 or 5 years before the recession hit.”

Last year, the Committee of Sponsoring Organizations of the Treadway Commission’s report on corporate fraud concluded that fraud continues to increase in depth and breadth despite Sarbanes-Oxley; the methods of committing financial fraud have not materially changed; and traditional measures of corporate governance have limited impact on predicting fraud.

Median loss due to fraud, based on presence of antifraud controls, 2010
No. of fraud cases, based on perpetrator's dept. (2010)

In other words, same old same old, only worse: in its 2010/2011 Global Fraud Report, risk consulting firm Kroll found that business losses due to fraud increased 20% in the last 12 months, from $1.4 million to $1.7 million per billion dollars of sales. The report, based on a survey of more than 800 senior executives from 760 companies around the world, also found that 88% of the respondents reported being victims of corporate fraud over the past 12 months. If fraud were the flu, this would qualify as a pandemic.

The most likely targets by industry are financial services, media, technology, manufacturing, and health care. Small and midsize companies are also more vulnerable. “Many of these organizations typically rely on a small accounting department, especially in today’s economy,” says Pedneault. They simply don’t have the resources to catch fraudsters.

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