Comparing Occupational Fraud to B2B Fraud Investigations
By Rachel Organist
Many, perhaps most, of the fraud cases we work and the schemes we discuss here on the blog involve an employee (or group of employees) perpetrating fraud against an employer--what’s often known as embezzlement. But fraud can also be perpetrated on behalf of a business entity, whether the entity is a vendor, a customer, a debtor, or has another relationship to your or your client’s business.
Today we’ll discuss some of the similarities and differences between these two scenarios, the types of fraud schemes they most often involve, and how those differences might affect the way a fraud investigation is structured.
Fraud Schemes and Examples
Employee embezzlement can take a number of forms, but some of the most common are misuse of company credit cards, ghost employee or other payroll schemes, cash skimming, and expense reimbursement schemes.
Schemes involving transactions between businesses typically look a bit different. A debtor entity may obtain credit by submitting falsified receivables or other false financial statements to a factoring company or a bank, or use loan proceeds for unapproved purposes. The case described in The Investigation Game: Cash Flow Fiasco is an example of this kind of financial institution fraud, where the owner of a car dealership made false claims to the bank regarding vehicles purchased in order to obtain additional floor plan financing.
There are vendor fraud schemes that can be perpetrated by one business against another without the involvement of the victim’s employees, with overbilling and price fixing being the two primary types of fraud in this category.
Payroll can be yet another area with opportunities for business-to-business fraud. The 2019 case of Michael Mann and his company ValueWise Corporation is one high-profile example. One of Mann’s many schemes involved redirection of $26 million in payroll funds entrusted to ValueWise subsidiary MyPayrollHR to Mann’s personal accounts. Other schemes used in the Mann case provide examples of some of the types of financial institution fraud described above, including loans and lines of credit obtained based on fraudulent revenue and falsified receivables.
The Fraud Triangle
The fraud triangle model explains the factors that lead someone to violate trust and commit fraud. The three components of the triangle are:
Perceived unshareable financial need that can be met by committing the fraud
Perceived opportunity
Rationalization
This model can be applied to both individual employee fraud and business-to-business fraud, though the factors themselves are likely different in each case. Individual financial needs may include personal or medical debt, or simply a desire for a lifestyle that is currently out of reach. For a struggling business, needs may be the ability to make payroll, or a desire to avoid bankruptcy. The case story on which The Investigation Game: Cash Flow Fiasco is based involved a business that was stretched thin financially after the owner opened a second location that was not as successful. Insufficient cash flow to operate the business fueled the fraud.
The perceived opportunity for fraud can be as varied as the schemes described above. Rationalization is one place where individual employee fraud and business-to-business fraud have many similarities. In both cases, the fraudster often feels that their financial need is so great that it justifies the fraud; that the fraud will be short-term and that they’ll be able to rectify it once their financial situation improves; or that the victim’s financial situation is sufficient that they won’t be harmed by the fraud (“They have plenty of customers that do pay their bills” / “They have plenty of money to spare”).
The Investigative Process
Employee embezzlement schemes where our client is the business owner are typically among the most straightforward cases to investigate. Even a hands-off owner with little knowledge of the day-to-day operations of the business at least has the ability to request bank and credit card statements for accounts opened in their name or the company’s name, and should have access to internal documents such as point-of-sale system records, payroll records, or accounting records.
If the suspected fraud has been perpetrated by an outside entity like another business, the investigation can be a little more complicated. This is where involvement of the client’s attorney becomes essential, as documents may need to be subpoenaed from an uncooperative customer or vendor. On the plus side, this type of fraud is often less emotionally challenging for the victim, as they have typically been tricked by an “outsider” rather than betrayed by someone they may have personally hired and worked with for years.
In the end, whether the fraudster is an employee (or group of employees) or another business entity, the overall investigative process we follow for each case is the same. The ultimate goal of the investigations is also the same: focus on quantifying the missing cash by using best evidence. Once you’ve discovered how the victim business did not receive payment as it should have, or lost money it should not have, add it up!
If your business has been a victim of fraud from an employee or another business, we’d be happy to discuss how we can help you quantify the loss and get back to your business.