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VOL. 128 | NO. 95 | Wednesday, May 15, 2013

Non-Financial Fraud’s Growing Threat

By Chris Glenn

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Conventional fraud is all too familiar, including misappropriation of assets (better known as employee theft) and financial statement fraud (Enron, WorldCom and Stanford Financial Group).

However, a type of fraud climbing out from under-the-radar status is non-financial fraudulent statements – false or misleading information produced by an organization to the public or regulatory body.

The New York Times recently reported on the proliferation of colleges inflating standardized test scores and class rankings of their students, and the Wall Street Journal reported that Pratt & Whitney, a leading aerospace manufacturer, disclosed a scheme by one of its sister units to tamper metallurgic test results to meet stringent FAA standards.

Federal investigators recently caught a ring of insurance agents, brokers and farmers in North Carolina who conspired to falsify over $100 million in insurance claims for weather-damaged crops that were never actually damaged.

Here in Memphis, Clarence Mumford Sr., a career educator, recently pled guilty to charges that he created and provided false identification and paid “ringers” to take qualification exams for prospective local teachers.

Far from being victimless crimes, these examples of non-financial fraud create serious havoc throughout the economy.

Inflated standardized test scores and rankings by colleges and universities provide more prestige for the institutions leading to increasingly higher tuitions. Doctored metallurgical test results by an aerospace manufacturer compromise safety. Falsified crop insurance claims drive up insurance rates and premiums for the honest farmer. Ringers passing exams for prospective local teachers means unqualified teachers are educating our children.

Business owners and organization leaders have ample reason to take this kind of fraud seriously. They should be aware that organizations found guilty of issuing or producing non-financial fraudulent statements are subject to the same level of legal and penal consequences as the more conventional fraud types.

One of the more prominent agents in the North Carolina crop insurance case has already been sentenced to 30 months in prison and must pay more than $16.5 million in restitution. Mumford is going to jail, possibly for up to seven years. Federal agencies issue hefty fines to businesses that provide them with falsified safety test results.

Fraud can also cause almost irrecoverable damage to an organization’s brand.

Owners and leaders can take these steps to proactively address non-financial fraud in their organizations:

• Set a strong tone from the top on the subject.

• Provide anti-fraud training to your employees.

• Develop an anti-fraud policy that explicitly mentions this type of fraud.

• Conduct surprise audits.

• Be especially cognizant of conflicting interests when dealing with third parties.

The North Carolina crop insurance scheme required an intricate mix of agents, adjusters, brokers, and farmers to perpetrate. Evidence of their fraud was likely visible at multiple levels, if someone had been seeking it.

Always remember the phrase made famous by former President Ronald Reagan during the Cold War – trust but verify.

Chris Glenn is a manager at Dixon Hughes Goodman LLP, specializing in construction and real estate, financial institutions, and manufacturing, distribution and services.

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