Ed. Note-today we are pleased to begin a three part guest series from our colleague Mary Shaddock Jones. 

My husband, Brian R. Jones, is a CPA, a Certified Fraud Examiner and a member of the Association of Certified Fraud Examiners. He recently received the annual publication entitled “Report to the Nations on Occupational Fraud and Abuse- 2012 Global Fraud Study” which is recognized as the authoritative annual national report on fraud.  One of the introductory statements contained in the report was as follows: “For businesses to operate and commerce to flow, companies must entrust their employees with resources and responsibilities, so when an employee defrauds his or her employer, the fallout is often especially harsh.” This statement rings true- whether the employer is a public or a private entity. Occupational fraud involves a personal breach of trust. The unfortunate fact is however, that organizations of all sizes invariably are losing some percentage of their annual revenues to occupational fraud conducted by employees.  So what can be done to minimize the risk of fraud occurring in the first place, then  detect the fraud once it has been perpetrated?

In order to answer this question, it is important for us first to discuss how occupational fraud is committed.  According to the ACFE, occupational fraud schemes fall into three primary categories:

• Asset Misappropriation – schemes in which an employee steals or misuses the organization’s resources, such as cash, inventory or other assets.

• Corruption - schemes in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit, such as through conflicts of interest, kickbacks, bribery, illegal gratuities or economic extortion.

• Financial Statement Fraud - schemes in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports, such as through asset/revenue overstatements via recording fictitious revenues or asset/revenue understatements  by understating reported expenses.

Once a company understands the typical method of committing occupational fraud, it can then devise internal controls to minimize the risk of loss in the first place, and/or to detect the fraud early enough to minimize the loss.

The Association of Certified Fraud Examiners has broken down corruption into four schemes, namely: conflict of interest, bribery, illegal gratuities, and economic extortion.  Attorney’s and compliance professionals continue to write articles and blogs on a daily basis.  The reason for this is simple- according to the ACFE, survey participants estimated that the typical organization loses 5% of its revenues to fraud each year. Applied to the 2011 Gloss World Product, the ACFE estimates that this translates into a potential projected annual fraud loss of more than $3.5 trillion dollars.  Unfortunately, it does not appear that Occupational Fraud and Corruption are going away anytime soon.

One can never lose focus on what I consider the key question as they enter or play within the international arena:  What are the socio-economic and cultural risk factors that make companies and individuals conducting business in a particular location more vulnerable to possible corruption schemes? Tomorrow I will discuss how a company can examine the “big picture” to try and predict and minimize these risk factors.

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Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries. She was the first woman to earn TRACE Anti-bribery Specialist Accreditation. Mrs. Jones has extensive experience in creating and designing compliance programs to reduce the risks of such violations, including policies and procedures, educational and training materials and programs, contract provisions and due diligence protocols. She implements and works with in-house counsel and compliance vendors to execute compliance policies and training programs tailored to the client’s business structure and the market conditions in the client’s target countries.  She can be reached at 337-513-0897 or via e-mail at msjones@msjllc.com. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.