Report urges specialized technology to help companies track fraud

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MONTREAL – Bribery and corruption are most often at the centre of company fraud, with questionable payments often listed as “gift” or “cash withdrawal,” says a study by consulting firm EY.

Following the money trail — who is taking money out and where it is going — is complicated and can take a suite of software and technologies to get a complete picture, the Toronto consulting firm said Thursday.

That includes not just evaluating the numbers, but also key words in volumes of company emails and reports.

“Where there’s smoke, there’s fire,” said David Meadows, associate partner of EY’s fraud investigation and dispute services practice in Toronto.

Meadows said he has seen some interesting descriptions for payments, “even one as crazy as ‘customer fee.’ What the heck is that?”

EY said the high cost of forensic data technology is holding many Canadian companies back from widening their reviews, but notes that financial institutions and energy companies are doing the most on fraud detection.

Canada has been in “a little bit of denial” about the problem, Meadows said, but the issue has been highlighted in Quebec where bid-rigging and inflated contracts in the construction industry have been brought to light in a corruption inquiry.

“Now that it’s come to the attention of everybody and everybody is realizing it’s not OK.”

Montreal engineering and construction giant SNC-Lavalin (TSX:SNC) is among those that have been dealing with allegations of corruption and fraud in recent years.

The reputation of the SNC-Lavalin was tarnished when it disclosed in March 2012 that an internal investigation had found that $56 million in questionable payments had been made. SNC’s former chief executive, Pierre Duhaime, was “relieved of his duties”’ and was later charged with fraud involving $22.5 million in payments related to the construction of a Montreal hospital.

EY said it’s too easy to blame a company’s accounting department, noting that it’s a company’s executive leadership that sets the standard for what is acceptable business practice.

“If they turn the cheek, then the accounting side is not going to care because they will think it’s acceptable,” Meadows said.

The Association of Certified Fraud Examiners said, based on its recent study, that the most common methods of fraud in Canada involves billing schemes and corruption.

Companies already know they have to take steps to prevent fraud, said Scott Patterson, spokesman for the organization in Austin, Tex.

“It’s what is the best way to do this and what is the most comprehensive plan of action to be protected against fraud,” he said, noting that globally the average loss for a company in a case that involves corruption is US$250,000.

The EY fraud report, done between November 2013 and January 2014, looked at 11 countries. The study found that only 26 per cent of those surveyed used forensic analytics software.

The report did not include Canada, but EY said the Canadian situation mirrors what is going on worldwide involving companies with anywhere from 150 to thousands of employees.

EY also said consultants or contractors acting on behalf of a company can also pose a risk for fraudulent activity.

“If a company hires consultants or vendors and you’re paying them a $50,000 payment or a $25,000 payment, or whatever the number is, what exactly are they doing for that money is a big risk,” Meadows said.

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