What Fraud is Really Costing You

In many fraud litigation cases, the loss extends beyond the actual dollar amount appropriated and results in additional economic damages. The hidden costs of fraud can amount to far more than the perceived value and truly change the answer on everyone’s mind: “how much did they take?”  

Common elements to consider when calculating fraud cost
Depending on the type of scheme perpetrated, various elements should be considered, including:

Taxes
Payroll and sales tax as the result of fraud are a big deal. A recent fraud scheme involved a perpetrator who gave themselves unauthorized pay increases and fictitious overtime hours. In calculating the theft amount, it is common to calculate the loss as the gross amount overpaid to the individual. Unfortunately, the company who paid the wages also incurred additional, and unnecessary, employer paid payroll taxes. That's 6.2% of the gross wages for social security and 1.45% for Medicare. This additional 7.65% is a loss that can be easily overlooked.

Sales tax may also be overlooked when dealing with unauthorized purchases schemes. A common example involves a perpetrator who orders additional items through a vendor that is routinely used by the business. Looking through the invoices, there may be 50 items purchased, but only five of those items were fraudulent. In these instances, the portion of sales tax applied to those items may be overlooked. These are costs that otherwise would not have been incurred.

Shipping Costs
Shipping costs associated with any fraudulent purchases may also be neglected. Depending on the size, weight and frequency of the products fraudulently purchased, shipping costs may account for a significant portion of the loss amount.

Benefits
Payroll-related schemes often involve costs associated with benefits. When a perpetrator fraudulently inflates wages, they may also receive additional benefits tied to those wages. In one recent case, the perpetrator was receiving retirement benefits as a percentage of their wages. When they gave themselves unauthorized raises, they also received additional contributions to their retirement fund. These amounts, in addition to employer-paid payroll taxes, were included in the fraud loss suffered by the company.

Fees
Fees can be tricky as most businesses have recurring fees that can easily go unnoticed. Fraudulent disbursement schemes are typically where fees need to be addressed. Here are some examples:

• Misuse of a company credit card resulting in additional finance charges
• Cash back fees or over-limit fees incurred by the organization.
• Fraudulent check or debit card payments by a perpetrator resulting in non-sufficient funds (NSF) fees or overdraft fees.
• Transfer fees incurred as a result of fraudulent or unauthorized transfers from company bank accounts.

The cost of fraud in mergers and acquisitions
An added layer of complexity comes for organization’s engaged in merger and acquisition activity. The sale of a business is predicated on solid financial information and due diligence examination. A company is acquired because of their growth potential and their financial well-being.

When fraud hits a recently acquired or merged organization, hidden costs take center stage. A newly appointed CEO for a recently acquired organization could not figure out why his books wouldn’t balance. The long-time bookkeeper of the company had recently gone on vacation and he was helping in the interim. A fraud examination was initiated and it was determined that the bookkeeper had been embezzling money from the company for years. The loss was well into the six-figure range.

This loss directly affected the profitability of the company and its new owner. The new CEO took the issue to a civil court in an attempt to recover what he felt were lost profits due to the previous owners not uncovering this embezzlement prior to the sale.

Hidden Assets
The cost of fraud is especially prevalent when it comes hidden assets. Often, hidden assets occur in personal relationships, such as trustees of an estate or spouses going through a divorce.

Areas to pay special attention to include:

• Exclusive control of all financial accounts
• Redirection of financial mail to a PO Box or work address
• Lives a lifestyle of excess of reported income
• Multiple bank accounts with multiple transfers, deposits and withdrawals

One of the key areas where hidden assets can be uncovered is on the tax income tax return. Be on the lookout for:

• Reported wages and income don’t match the W-2 and 1099.
• Unreported brokerage account or distributions from a fund
• Compensation of company offers and shareholders

How to Know if You’ve Covered All the Costs Associated with Fraud
No matter how cut and dried a fraud scheme may seem, all costs associated with the activity should be considered. If you or your business has been the victim of fraud, consult with a professional fraud examiner. There could be more damage than you think.