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A truth about fraud

Someone usually knows

Duke University has recently come under fire after a whistleblower contended that Duke and some of its professors used phony data to fraudulently obtain federal research grants. The claim also alleges they ignored warning signs about the work of Erin Potts-Kant, a former lab tech who allegedly falsified or fabricated data that went into 29 medical research reports. (See Responding to whistleblower’s claims, Duke admits research data falsification, The News & Observer, by Ray Gronberg on July 2.) A lawsuit from former lab analyst Joseph Thomas also contends that Duke and some of its professors tried to cover up Potts-Kant’s fraud.

While the scheme itself is noteworthy, it might’ve never come to light without the whistleblower’s courage to say something. It doesn’t matter what kind of organization makes the news — whether it’s a manufacturing plant, a sales and marketing company, an importer, a nonprofit, a university or a government entity — when someone behaves badly, someone else usually knows.

Organizations have complementary and overlapping processes and people, so communication happens and information transfers all the time. Fraud rarely happens in a vacuum. Fraudsters seldom stop to consider the effects of their actions for their organizations and the people who are witnesses to and/or complicit in the fraud, nor do they let potential consequences change their behavior.

So, who secretly knows that these criminals are committing their crimes and aren’t reporting them? How do they know and why don’t they always stand up for justice against known fraud?

A July 13 article by Elizabeth Svoboda in The Washington Post explores this phenomenon of staying silent. According to the article, “What makes whistleblowers speak out while others stay silent,” whistleblowers are relatively rare. A recent experimental study by psychologist Piero Bocchiaro states that fewer than one in 10 people reported an authority figure who was doing something unethical. (See the study here.)

The who

These silent observers can be anyone in an organization. After working for more than 30 years in corporate America, I’ve found that these positions will most likely know of poor behavior (with examples for each from my personal experience):

  • Administrative assistants and executive assistants, who process paperwork, route calls and are near management and executives making decisions.
    • An administrative assistant where I worked years ago heard the plant manager tell the production manager to hide scrap in an employee’s field and to not report it. The scrap was generated by a change in chemical formulation, but by hiding the scrap and not reporting it, accounting wouldn’t be able to count it against the scrap goals assigned to the plant.
  • Managers with approval rights, like signing expense reports or purchase orders authorizing deals with family members. They also might not put contracts through the regular process of competitive bidding.
    • A product manager submitted an expense report for reimbursement for a prostitute’s services and the money she stole from him while in Las Vegas. His manager approved the expense.
  • Accounts payable assistants who process invoices, issue checks and/or see backup documentation.
    • A sales manager submitted a check request to “reimburse” a customer for a secret deal “just between us.” Great efforts were made by the sales department to conform to the “sales” goals, without regard to margin. By reimbursing a customer for “extra warranty,” “special discounts” or “repairs made” when those didn’t exist on the sale of a large capital item, the top line sales generated commissions, but the company took hits to the bottom line. I’ve always maintained that “we shouldn’t pay our customers,” but not all organizations share that belief.
  • Auditors who might be privy to employee information, or documents not seen by others, i.e. board minutes, contracts or transcripts.
    • A CFO received a home security system to the tune of $30,000. The CFO had it posted to the building repair and maintenance expenses account. It wasn’t taxed as income and wasn’t recorded in the notes to financial statements or in the board minutes along with the other executives to whom this benefit was provided.
    • An internal auditor, with a bit of help from the controller, found a $1.2 million “work in progress” adjustment made so executives could get their bonuses based on achieving profit goals.
  • Payroll assistants who process paychecks, deductions, bonuses and related documentation.
    • A wage change request for a “special friend” of the plant manager outside of regular processes. They were having an affair.
  • Bankers who have conversations with those discussing fraudulent actions.
    • A CFO, who regularly took a banker out to extravagant dinners and outings, asked the banker to keep loan covenants secret from the CEO and to baffle the CEO with trade terms if questions were asked. This enabled the CFO to hide financial risks from the bank and authorize other side deals. The CEO would simply okay the documents out of ignorance.
  • Managers who are friends with, confidants of, or golf buddies with fraudsters.
    • A plant manager told other managers not to discuss the process of reporting usage of customer-owned paper with anyone. They reported greater usage to the customer than actually used, which caused the customer to pay more for the end product. The plant manager justified the reporting at higher than actual as a “valid cost offset” and “everyone did it.” The plant manager said he’d deal with the controller who kept questioning the process.
  • Accountants and controllers who see the transactions and the overall effect of decisions on the financial situation of the company. Accountants are the first line of defense against fraud because they often know, or at least, should know what happens in almost every area of the business. Accounting handles bills paid, invoices issued, credits applied, expense reports processed, payroll generated, contracts analyzed and general ledger accounts reconciled, so almost every bad transaction is seen by someone within its ranks.

People talk. It’s the nature of business. Some bosses are openly frank with their employees and share details and opinions. Management meetings might tolerate bad behavior or even direct or condone fraud. Golf courses and other company events are great places to hear about plans and decisions that could defraud the company.

Employees might overhear conversations. Small details they glean over time can add up to entire trails of information that lead to fraud. Employees also might process a lot of company paperwork as part of their jobs, which can expose fraud schemes.

There are many reasons why multiple employees might filter the situation through their moral compass and make the decision not to confront, report, or otherwise seek justice for the company. Here are potential reasons why employees choose not to blow the whistle:

  • No clear means or method to report the fraud or suspicion of fraudulent behavior, like a hotline.
  • Peer pressure not to rock the boat or be a tattletale. Peers don’t not want to be guilty by association to whistleblowers.
  • Managerial pressure to keep quiet via covert or overt threats or changes in treatment.
  • Treatment of previous whistleblowers. Firing a whistleblower is a sure way to never have another employee report wrongdoing.
  • The assumption that the fraudulent behavior is “standard operating procedure” for the organization.
  • Poor tone at the top. Misbehaving executives will foster bad behavior throughout the entity.
  • Fear of consequences. Employees might believe that their organizations will retaliate by shunning, firing or demoting them. 
  • Employees’ personal poor behavior that others know about. Employees don’t want co-workers to call them hypocrites.

Employees have to be courageous  to stand against the tide of bad behavior at work. They aren’t certain that the rewards are greater than the risks. The consequences of reporting fraud could be overwhelming unless their moral compasses strive for truth and justice simply for the value of both.

Good behavior isn’t valued as it was when I began my career more than three decades  ago. Most people back then at least gave token resistance to obvious lies, deceit and stealing. That’s not the case today.

Telling the truth, transparency and fiduciary standards for protecting a company haven’t changed; people have. I believe courage has left the building, and people simply want to follow the path of least resistance. The alternative is difficult — not popular — and seldom results in anything positive for them personally.

But, make no mistake: One of the truths of fraudulent behavior is that someone usually knows.

Laura Wagoner Downing, CFE, owns a consulting business called Carpe Veritas ~ Pursue the Truth. Downing worked as a controller and cost accountant for almost 30 years in industries such as manufacturing of heavy equipment, printing & publishing, automotive, sales/marketing and nonprofit. She can be reached at: