'Fraud? I’m Lucky. People Don’t Steal In My Organization.' | By David Bleser

Bernie Madoff. R. Allen Stanford. Arthur Nadal. All of these individuals are alleged to have been the ringmasters of several recently uncovered frauds. When one thinks about it for a moment, are we really surprised that these frauds were perpetrated for years?

At a recent meeting with a client to discuss the 2009 internal audit program, I was asked about the fraud trends I observed through the year and what do I expect to see in 2009. The question that was not asked and should have been is why are these and other frauds now coming to light?

The answer is two fold. There is no doubt the state of the economy has played a major role in the downfall of the alleged schemes. Individuals are getting desperate for money. When desperation sets in individuals get careless and make mistakes that allow the fraud to be discovered.

The second reason is because as more frauds are discovered people learn how to recognize the red flags. If you have kids then you know that we use the same logic every day. It’s the “mom has eyes in the back of her head “ rule. All of us were kids at one time. That experience now allows us to recognize the red flags when our children might be doing something they shouldn’t or are doing something that could get them hurt.

Fraud at our hotels is no different. Yes it is occurring and yes it is getting worse. In January 2009 Bleser and Associates, LLC investigated over two thirds of the total amount that was investigated in all of 2008. That amount doesn’t include the twelve bartenders and servers that were terminated for theft.

Why was so much investigated? In part it was due to the fraud awareness training that many clients received in 2008. If the corporate staff and hotel managers don’t know how the frauds are being perpetrated, how can they learn to recognize the red flags? According to the Report To The Nation 2008 46% of all frauds were detected by anonymous tips.

An extremely effective tool that can raise the awareness in your organization is by publicizing when a theft has occurred. Yes. I did say publicize it but notice I didn’t say identify where or whom. Why not explain in your corporate newsletter the circumstances surrounding the theft? Explain how it happened, how it was caught, (red flags.) and the steps the organization is taking to prevent it from happening again. You might uncover similar type frauds. It also sends a very powerful message to all within the company.

Unfortunately there are signs in our industry that indicate we are willing to accept larger losses or even ignore the fact that fraud exists. Did we not learn from our mistakes as a result of September 11? One significant indication of this trend is the number of hotel companies either reducing or eliminating their internal audit program. This is very troubling. The internal audit program is proven to be an effective tool in identifying possible thefts at all levels or identifying areas where the controls are weak and ineffective. According to the Association of Certified Fraud Examiners in their Report To The Nation 2008 internal audits uncovered 20% of all frauds.

The internal audit program should be viewed as a journey and not as a destination. The audit process, like most travel tours, is only successful if the auditor has the experience and knowledge needed for that particular journey. What value do you receive from a tour guide who has never left New York City but is now guiding you through Rome?

The internal audit program should be viewed in the same light. When an effective internal audit program is in place the return on the investment is substantial. In fact according to the Report To The Nation 2008 businesses lose seven percent of their revenue each year to employee fraud. The good news is by having a proactive fraud prevention program in place businesses can reduce that amount by 50%. The internal audit is a key component in that plan.

If you ask individuals who work on Wall Street they will tell you more regulations wouldn’t have prevented or detected these frauds. These frauds in large part went undetected for a long time due to the lack of individuals who had experience in fraud and knew the inner workings of Wall Street. Those of us in the hospitality industry should learn from Wall Streets mistakes. We should not cut corners on internal controls just to make our profit and loss statement look better. The folks on Wall Street will tell you that in the long run it will cost you more than the salary position that was eliminated.

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