Fraud Prevention: Lessons Learned from Société Générale’s $7.2 Billion Loss

Fraud is prevalent in our society. It hits people rich and poor and businesses large and small. It will hit you and your business if you are not vigilant in your efforts to prevent it.

The recent $7.2 billion loss reportedly suffered by Société Générale at the hands of rogue trader Jerome Kerviel apparently could have been prevented had Société Générale adhered to a very basic fraud prevention strategy: Require all employees to take an extended vacation — a week or more — at least once a year.

Yes, our world is highly evolved and complex, but even so, effectiveness, profitability and risk minimization often come down to simple things that legendary college football coach Lou Holtz calls blocking and tackling.

The Wall Street Journal reported on January 29, 2008 that Kerviel had not taken a vacation in years. It said that his supervisors “tried on several occasions to make (him) take a few weeks off but ultimately went along with his excuses for staying at work.”

Fraud Facts

Here are recent findings of the Association of Certified Fraud Examiners (ACFE) from its Report to the Nation on Occupational Fraud & Abuse:

• Occupational fraud schemes can be very difficult to detect. The median length of the schemes in the study was 18 months from the time the fraud began until the time it was detected.
• Certain anti-fraud controls can have a measurable impact on an organization’s exposure to fraud. Organizations that had anonymous fraud hotlines suffered a median loss of $100,000, whereas organizations without hotlines had a median loss of $200,000. Similar reductions in fraud losses were found for organizations that had internal audit departments, that regularly performed surprise audits, and that conducted anti-fraud training for their employees and managers.
• U.S. organizations lose 5% of their annual revenues to fraud. Applied to the estimated 2006 United States Gross Domestic Product, this 5% figure would translate to approximately $652 billion in fraud losses.
• Small businesses continue to suffer disproportionate fraud losses. The median loss suffered by organizations with fewer than 100 employees was $190,000 per scheme. This was higher than even the largest organizations.
• One reason that small businesses suffer such high fraud losses is that they generally do a poor job of proactively detecting fraud.
• Most occupational fraud schemes involve the accounting department or upper management. Just over 30% of the cases were committed by employees in the accounting department, and slightly more than 20% were committed by upper management or executive-level employees. The next most commonly cited department was sales, which accounted for 14% of the cases in our study.

What You Must Do

To lower your risk of suffering financial loss due to fraud perpetrated by your own employees:

• Install an anonymous fraud reporting hotline. Try offerings by EthicsPoint (www.EthicsPoint.com) or Silent Whistle from Allegiance (866-794-4785)
• Separate the money from the recordkeeping.

Don’t let the same person who receives and records receipts also book sales, generate invoices and reconcile receivables.

Don’t let the same person who approves purchases also pay for them (and the person who pays for purchases should be able to make a payment only when it is accompanied by appropriate approval documentation).

For assistance in implementing these checks and balances, contact your tax preparer or certified public accountant.

• Require all of your employees to attend an annual anti-fraud training program. For options in your community, call your lawyer, staffing firm or human resource consultant. They’ll be able to point you in the right direction.
• Require all accounting, financial and purchasing personnel to take 1.5 weeks off every year. Equally as important is not to let vacationing employees’ work stack up. Have another employee do all of the daily and weekly tasks of the vacationing one. This will require some cross-training but is essential.
• The business owner should directly receive and review unopened credit card statements and bank statements. Alternatively, have them sent to your accountant before they go to the bookkeeper.
• Personally sign all outgoing checks and require expenditure-approving paperwork to be attached to each check submitted for your signature.

The apparent fraud at Société Générale will in all likelihood put this venerable world bank out of business. The shame is that it easily could have been prevented if the bank had followed the simple guidelines offered above. And to be sure, fraud happens all the time in all sizes of businesses. Don’t let it happen in yours.

Table:  Fraud in Small Businesses