Protect your business: collusion and increased fraud losses

Demystifying Valuation, Economic Damages + Forensic Accounting

fraud, collusion. losses, Massachusetts State PoliceI recently read an article about fraud within the Massachusetts State Police (MSP)1. The author, a former MSP trooper, outlined an investigation by the U.S. Department of Justice (DOJ) and the Massachusetts Attorney General’s Office. The investigation involves a minimum of 46 troopers with the allegations including payroll fraud and conspiracy, among other federal violations.

The allegations involve troopers altering tickets written on different dates to support overtime wages. The troopers also allegedly wrote warning tickets by running random plates – again, to support overtime wages. The paperwork was often left for other troopers to hand in during their regular shifts to the overtime supervisor. As of this article, the DOJ had indicted six troopers, three of which had pleaded guilty. Three retired lieutenants had also been indicted having allegedly received thousands of dollars each in fraudulent overtime pay. One former trooper pleaded guilty to receiving $12,468 in fraudulent overtime pay.

Suspect fraud? How to plan for the worst 

This article reminded me of an article that I wrote in 2014 about collusion among employees and how fraud losses increase when two or more perpetrators are involved. The Association of Certified Fraud Examiners 2018 Report to the Nations compiled case details from 2,690 occupational fraud cases which were investigated from January 2016 through October 2017. The report found that the median loss from fraud cases involving one perpetrator was $74,000, while the median loss from cases involving two perpetrators was $150,000, or approximately double. The loss more than doubled again when three or more perpetrators were involved – to a median loss of $339,000.

Collusion among employees can lead to circumvention of controls in place, such as separation of duties and independent checks. While management may be working on team building among staff to encourage employee friendships and boost morale, they must be careful not to promote an environment susceptible to fraud. Management needs to establish and maintain the right culture and be sure to set a proper tone beginning at the highest level of management. A Code of Conduct, Ethics or Fraud Policy should also be implemented, and all employees should be required to sign to acknowledge reading the policy.

The perception of detection can also be a great fraud deterrent. Random fraud audits and high-level management spot checking of controls and procedures can help prevent or mitigate the impact of collusion among employees.

Forensic accounting + fraud examination services

As I said four years ago, go ahead, encourage your employees to be friendly. Pump up morale – it’s good for the bottom line. But be ever vigilant in carrying out your fraud prevention and detection policies.

Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV

  1. Victimization of the Massachusetts State Police, Lawrence P. Smith, III, CFE, Fraud Magazine, Association of Certified Fraud Examiners.