SOME OUTSIDE COUNSEL ON INTERNAL FRAUD

Employee fraud, also called "occupational fraud," affects more companies than we may realize. In fact, a recent report from the Association of Certified Fraud Examiners (ACFE) estimates that U.S. companies lose roughly 5% of their revenues to occupational fraud, which would represent $652 billion of our annual Gross Domestic Product.

ACFE defines occupational fraud as the "use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets." While that description would apply to taking a few office supplies, it's a lot more serious for many U.S. businesses.

For example, the 2006 ACFE Report to the Nation on Occupational Fraud & Abuse found that the median loss caused by the 1,134 occupational fraud cases investigated by its members was $159,000, with one-quarter of these instances causing over $1 million in company losses and nine of them representing more than a $1 billion loss to each of those companies and their shareholders.

Regardless of the amount, ACFE says there are always four characteristics of occupational fraud: The activity is clandestine; it violates the perpetrator's fiduciary duties to the victim organization; it is committed for the purpose of direct or indirect financial benefit to the perpetrator; and it costs the employing organization assets, revenue or reserves.

Dan Polatsek, an attorney with Katten Muchin Rosenman, whose practice focuses on white collar crime and internal investigations, believes that the clandestine nature of employee fraud is the reason to avoid the immediate impulse to fire perpetrators when they are initially discovered.

As the ACFE study found, nearly 40% of all cases involve some form of collusion. Moreover, frauds involving multiple perpetrators are much more costly than those committed by a single individual.

With the first employee that's discovered representing the tip of the iceberg, working with outside counsel on a thorough investigation is a lot more effective in uncovering what lies beneath the surface.

Polatsek's experience with companies that immediately fire an employee for a fraudulent act is that it can lead any colluders to quickly cover their tracks. The undiscovered employees can engage in activities like paper shredding, deleting e-mails or quitting before they're found out.

Polatsek also suggests that conducting the investigation before making any internal or external announcements may be better for the company's reputation in the long run.

The best way to minimize speculation about the extent of any damage is by exploring all of the possible aspects before discussing them publicly as opposed to having each chapter play out in ongoing press reports. As Polatsek has found, it's the best practice for minimizing the broader damage that occupational fraud can bring to an organization's financial health.

We don't have to look far to find examples of employee fraud that have affected media companies. Although it is lower than a number of other industry sectors, the ACFE report found that 16 of the companies involved in its members' investigations were from the communications/publishing category. The median loss for these media industry cases was $225,000.

With this in mind, the Broadcast Cable Financial Management Association (BCFM) has asked Dan Polatsek to present a session on employee fraud at this year's annual conference for BCFM and its Broadcast Cable Credit Association subsidiary. While we hope no one has to deal with a case of occupational fraud within one of our member companies, Dan will provide an overview on what to do in case of that emergency.

Offered to both our BCFM and BCCA attendees, the joint session will review the steps companies need to take when they discover occupational fraud, including determining when an investigation is necessary and the mechanics and necessary documentation that need to be part of the process. Attendees will also learn how to optimize the process for capturing the loss and discovering the employees and third parties that are involved.

Having an expert from outside the industry address this topic also serves to remind us about the importance of engaging outside counsel for addressing employee fraud in order to ensure a truly thorough investigation.

The ACFE report found that management-level employees were involved in nearly 40% of the cases they investigated. Although owner/executives made up less than one-fifth of the perpetrators, they accounted for the largest losses experienced by these companies.

The median loss in a scheme committed by an owner or executive was $1 million, five times more than the median loss in a scheme committed by a manager and almost 13 times more than the caused by employees, according to the report.

The session on employee fraud at the BCFM/BCCA Annual Conference is just one example of a packed three-day agenda that encompasses the full spectrum of topics that have a bottom line impact on our attendee's businesses and promise a great ROI for the minimal investment required to participate.

With sessions running the gamut from business modeling new media ventures and credit and collections tips to accounting and FCC updates, most of the topics will provide 2007 Conference attendees with an immediate benefit.

At the same time, forewarned is forearmed and learning how to minimize losses is also important for improving operating margins.

Mary Collins is the president of the Broadcast Cable Financial Management Association, a professional society for financial, MIS and HR executives in the electronic media. Her column appears here every other Friday. She can be contacted at mcollins@bcfm.com or 847-716-7000.