Fraud and Internal Control
by WILLIAM J. PLANTHABER Partner, Houston Office
Presented before the Texas Chapter of the National Office Management Association, Beaumont, Texas—October 1961
KNOWLEDGE of fraud and of factors important to its prevention is mandatory if men, such as you, who are a part of management are to carry out their functions capably.
Fraud and embezzlements are nothing new on the American business
scene. An introduction to a text on the subject, published over thirty years ago, stressed the alarming prevalence of fraud as one of the great problems confronting business. Today the emphasis is on its alarming growth.
The American Bankers Association reports bank embezzlements of more than $10,000 each for the calendar years 1958, 1959, and 1960 to be $6,400,000, $8,800,000, and $10,100,000, respectively. During the first half of 1961, a record annual rate of $17,000,000 was being established.
A decade ago, in 1951, the figure was $5,600,000. While these figures represent a substantial 300 per cent increase in one decade, they are, in the words of one banker, microscopic when compared with industrial pilferage and business embezzlements.
New business development in the consumer financing field has, in recent years, added to banks' vulnerability. This is a highly specialized
field of activity and requires especially good controls over loan approvals and pay-outs, and credit and collection procedures. It is always a suspicious circumstance to auditors when only one person in a finance company or consumers' credit department of a bank has handled all activities relating to a borrower's account. As a group, however, banks have done much to control embezzlements. This includes not only the work of bank-audit committees and more activity in independent verification of customers accounts, but additional
assurance by engaging the services of certified public accountants
There are no accurate statistics on the annual embezzlement loss to business. Some authorities say a million businessmen are victimized by embezzlers every year, and that annual embezzlement losses range from one to three billion dollars. If the annual losses are only one-half the maximum estimate, the daily losses are $5 million per work-