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.

In fact, CSOs—as relatively new corporate players—are often in the position of joining an effort already in progress. Their challenge is to figure out the best way to enhance the process using their experience.

John Frazzini, a former special agent with the U.S. Secret Service financial crimes division, believes that even though fraud-prevention teams, investigative departments, IT security staff and legal counsel are already entrenched in dealing with fraud, there remains a crucial role that the CSO is well positioned to fill. "Tearing down the walls between those departments and getting them to work together is the most cost-effective way to get ahead of the risk," says Frazzini. "CSOs should take the 50,000-foot view and make sure that, as the company moves forward with a fraud program, it does so with one voice."

This story will look at the technical and organizational challenges of fraud detection for CSOs, the relationships they need to build in order to be effective and the best practices that some CSOs have unearthed for tackling corporate fraud head-on.

Culprits and Schemes

The first thing to understand about fraud is its incredible breadth. Fraud encompasses everything from expense account and procurement scams to financial reporting irregularities, bid-rigging, intellectual property theft and more. Furthermore, specific financial-service sector industries such as insurance and banking have their own unique strains of fraud to worry about as well.

To a degree, fraud is still a pretty old-fashioned type of crime. Some of the techniques used in detection may have gone high-tech, but the same culprits and schemes that were popular a hundred years ago are still going strong. The vast majority of corporate fraud is perpetrated by insiders—employees and other trusted individuals who exploit their authorized access to do unauthorized things. Whether these people are embittered, financially strapped or just criminally opportunistic, they trade on their insider status by submitting doctored purchasing slips, thickly padding their expenses, setting up ghost employees or vendors, or simply selling the company's customer list or other valuable information to an interested outside party. Unlike the "pump-and-dump" stock fraud schemes that were popular during the 1990s market boom and the accounting scandals that have dominated the news in the past year, individual expense and procurement frauds, embezzlement and misappropriation don't wax and wane with the fortunes of the economy. They are easy to commit, produce high returns, are very hard to detect and are likely to fly under the corporate radar. Worse, in many cases they are tolerated as a cost of doing business. But when they rise above a certain financial threshold, these low-grade frauds become a legitimate business concern.