In Depth

The Fraud Squad

Whether it's done by customers, employees or organized criminals, fraud takes a bite out of business's bottom line. Here's what CSOs can do about it.

By Daintry Duffy

January 09, 2003 — CSO — It turns out that bases aren't the only thing stolen at Shea Stadium. After staggering through a losing season, the New York Mets suffered yet another indignity last October when it was revealed that four former Mets employees had allegedly bilked the ball club out of $2 million over a period of six years. According to Queens prosecutors, the suspects pulled off a variety of cons with the assistance of two accomplices who worked for team vendors. By overbilling the team for office supplies such as copy paper, setting up bogus companies and cooking up kickback schemes, the sextet netted hundreds of thousands of dollars a year for supplies that were never delivered. The Mets and Sterling Doubleday Enterprises, the Mets parent company at the time, proved to be easy marks. They were completely unaware of the scams, which dated back to 1994, until an internal audit in 2000 brought them to light.

As a company whose only product is baseball, the Mets organization provides relatively few opportunities for procurement fraud, certainly far fewer than do larger corporations. But even on a small scale, fraud can be incredibly damaging, and the Mets are a good example of both the ease with which fraud can be perpetrated and the difficulty of tracking it down. The "2002 Report to the Nation" from the Association of Certified Fraud Examiners found that the average fraud scheme lasts 18 months before it's detected, and that internal controls seldom catch the crooks. In fact, according to the survey (based on 663 reported occupational fraud cases that caused more than $7 billion in losses), the top two cited means of detecting a fraud were a "tip from an employee" (26 percent) and "by accident" (19 percent)hardly methods on which most companies are willing to stake their reputation or financial security.

As CSOs' responsibilities expand, fraud is a problem that increasingly falls into their lap. Whether they lead their company's fraud unit or govern just a piece of that apparatus, the CSOs' expertise with layered security architectures and forensic tools, and their understanding of the importance of enforced processes and procedures make them invaluable players in the battle against corporate fraud. When it comes to fraud, "the CSO is responsible for detection, protection, prevention and recovery of all the organization's assets," summarizes Vincent DeLuca, vice president of fraud control, security and risk management for MasterCard International. But DeLuca stresses that success in preventing and detecting fraud requires that CSOs build strong working relationships with the other key executives who also play a part in fraud response. "The CSO must first align himself with the CEO and senior management," he says. "They set the tone within the organization and [affirm] its commitment to protecting corporate assets."

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