"Back office" fraud is draining corporate treasuries of billions of dollars a year, and the risk is growing as companies and employees struggle in the wake of the recession, finance managers and experts say.
Fraud schemes in company finance departments include the creation of fake vendors, billings for nonexistent goods, checks written to dummy companies and kickbacks from vendors.
"Most companies are weak in the area of back office and vendor fraud and that poses a significant threat to them," Michele Edwards, a fraud expert, told Reuters this week on the sidelines of a corporate finance professionals' conference.
Typically, it takes 18 months to detect a fraud, Edwards said.
In an informal poll of 622 finance managers during the May 8-12 Orlando conference, 72 percent reported seeing an increase in cases of back office fraud, Tom Bohn, president of the Institute of Financial Operations, said on Friday.
The institute, which groups several associations of corporate finance professionals from across the world, was launched this week during the Orlando conference.
Bohn and Edwards said some of the rise in reported losses might be a result of companies' increased focus on, and detection of, back office fraud over the past two years.
That focus came in response to U.S. federal regulators taking a harder line against companies that were not doing enough to prevent fraud that caused shareholder losses.
Squeeze on personal finances
But Edwards and Bohn said the recent recession had increased the risk of fraud.
Company budget cutbacks had resulted in some employees becoming solely responsible for what previously had been two or more separate duties, and there had been a reduction in internal checks and balances and office controls.
The squeeze from the recession on employees' personal finances and family life also was a factor, Edwards said.
"They didn't get a raise. They didn't get a 401k (retirement plan) match. Those are all additional pressures that have been on a lot of people over the past couple of years that may have caused them -- where they might not have in a normal environment -- to do something unfortunate like fraud," Edwards said.
She said the end of the recession won't solve the problem.
"You've got those expectations from the shareholders and the CEO that, hey, we're coming out of the recession. It's back to business. It's back to growth mode. That pressure isn't really going away," Edwards said.
Companies are beginning to employ safeguards such as software, analytical tools and fraud prevention specialists to detect problems early. They are also starting to search out and shut down opportunities for fraud, and to build a corporate culture that discouraged it.
"If you focus on the culture, you can reduce the risk from day one," said Bohn. "The more dollars you can save leaving the corporation, the better your bottom line is going to be."