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Arkansas Greed (Gwen Moritz Editor’s Note)

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A few weeks ago, I used this space to talk about my belated discovery of “American Greed” on CNBC and to give a status report on Tony Rand’s crime family. Last week, I had my dream speaking engagement: I reviewed half a dozen white-collar crime classics for the local chapter of the Association of Certified Fraud Examiners.

I called my presentation “Arkansas Greed.”

There is nothing an old newshound loves better than to retell a big story, and true crime has always fascinated me. Could there be a better audience than fraud examiners?

And those folks actually got continuing education credit for listening to my stories. I’m not sure how educational I was for them, but I know how educational the Association of Certified Fraud Examiners has been for me — and, by extension, for Arkansas Business readers. The ACFE produces its “Report to the Nations on Occupational Fraud & Abuse” every other year, and the ninth edition was released last week.

This report does not examine Ponzi schemes or other types of investment fraud, which are the specialty of the house on “American Greed.” Instead, the Report to the Nations focuses on fraud committed by employees (and sometimes owners or directors) against their employers.

I’ve been watching these reports since 2002, and this finding is consistent: A typical organization — business, nonprofit, government, whatever — loses 5 percent of revenue to fraud in any given year.

The cases included in the most recent study cost the victim organizations $6.3 billion, with an average loss of $2.7 million. But that average is skewed by some really big cases. Of the 2,400 cases reviewed for the new report, more than three-quarters involved a loss of less than $1 million, and more than half were less than $200,000. The median loss, meaning half were smaller and half larger, was $150,000.

One of the most educational parts of the Report to the Nations is the “Fraud Tree,” which has helped me understand the different types of employee fraud. All cases fit in one of three categories: corruption, financial statement fraud and asset misappropriation. The last category, which is basically employee theft, is by far the most common — more than 80 percent of the cases reviewed — but it’s also the least costly. The median asset misappropriation cost only about $125,000.

The big money is in financial statement fraud — overstating and understating net income or net worth. But that’s the kind of thing that happens at the top of the food chain, and that’s always where the bigger dollars are lost to fraud. Managers steal more than lower-level employees; owners are less likely to commit fraud, but it’s more costly when they do.

Men are more likely than women to commit fraud, but how much more likely depends on geography. In southern Asia, only a bit more than 3 percent of fraud is committed by women; in America, women commit more than 44 percent.

Around the world, tips are the most common way fraud is initially detected. That’s especially true in larger organizations (those with at least 100 employees). In the U.S., 37 percent of fraud is initially detected based on a tip, and about half of all those tips come from other employees. For organizations that have a hotline on which employees can leave tips, the share of frauds detected that way rises to more than 47 percent.

The complete Report to the Nations is available online. You might learn something that could keep your company from becoming just another statistic.

In addition to the six Rands and their oil and gas scam, I told the CFEs about:

  • M. David Howell Jr., my first Ponzi schemer;
  • Jim Bolt, the career criminal from northwest Arkansas whose money-grab included pretending to cure cancer;
  • Kevin Lewis, the manufacturer of phony improvement district bonds who apparently started to believe his own lies;
  • Gene Cauley, the former Little Rock lawyer whose use of client money to live like a Saudi prince would make him a perfect subject for “American Greed”; and
  • Aaron Jones, who was barely in his 30s when he resorted to arson and insurance fraud to get out from under his multimillion-dollar debt load.

I prepared four more, but ran out of time. Curses! This must be what it feels like when the orchestra interrupts an overlong Oscar speech.

The good news is the fraud examiners have invited me back for Arkansas Greed Part II in July.

The 10th season of “American Greed” started last week with an episode on an infamous former mayor: “Ray Nagin: New Orleans Shakedown.”

Gwen Moritz is editor of Arkansas Business. Email her at GMoritz@ABPG.com.
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