International Fraud Handbook

CHAPTER 1Introduction^*

In the world of commerce, organizations incur costs to produce and sell their products or services. These costs run the gamut: labor, taxes, advertising, occupancy, raw materials, research and development, and, yes, fraud and abuse. The latter cost, however, is fundamentally different from the former: the true expense of fraud and abuse is hidden, even if it is reflected in the profit-and-loss figures.

For example, suppose a company’s advertising expense is $1.2 million. But unknown to the company’s executives, the marketing manager is colluding with an outside ad agency and has accepted $300,000 in kickbacks to steer business to that firm. That means the true advertising expense is overstated by at least the amount of the kickbacks – if not more. The result, of course, is that $300,000 comes directly off the bottom line, out of the pockets of the investors and the workforce. Similarly, if a warehouse foreman is stealing inventory or an accounting clerk is skimming customer payments, the company suffers a loss – one it likely does not know about, but one that must be absorbed somewhere.

The truth is, fraud can occur in virtually any organization. If an organization employs individuals, at some point one or more of those individuals will attempt to lie, cheat, or steal from the company for personal gain. So this hidden cost – one that offers no benefit to the company and, in fact, causes numerous kinds of damage to the company even beyond the direct ...