An area often overlooked when assessing fraud risk is the opportunity for employees to manipulate metrics used in determining compensation, including bonuses. Business functions that have high-volume, measurable workloads are susceptible to this type of fraud, which often occurs in plain sight of management and internal auditors. Investigations of these types of schemes involve analyzing records like historical performance measurements, metrics, reports and employee files.

In one case described in an article in the January/February 2012 issue of Fraud Magazine, employees working at a call center earned bonuses and promotions based on the number of payments they processed. The employees inflated their bonuses by manipulating the number of records processed without actually servicing more customers. The employees did so by setting up customer payments to occur in multiple small amounts rather than in the standard single payment. The customers were still paying the same total amount, just unnecessarily in multiple payments to benefit the employees’ bonus calculations.

Compensation schemes can be perpetrated by executives and managers as well. F3’s professionals investigated a senior-level executive, whose overall compensation package was comprised of numerous elements calculated using different formulas, including both variable and fixed components. The executive applied his own rates and definitions to the contract terms to manipulate and overstate many of the factors in the compensation calculations. The executive was able to perpetrate such a scheme because the calculations were not reviewed for accuracy, compared to the employment contract’s terms, or approved by anyone other than the executive.

The risk, cost and liability from such fraud schemes perpetrated by members of the organization not only includes the direct costs of the unearned bonuses and related promotions, but can also include damage to customer goodwill, the company’s brand, and possibly exposure to regulatory actions when the fraud is exposed. With diligent review, reconciliations, and the use of appropriate analytical tools aimed to identify performance anomalies, this type of fraudulent activity has an increased chance of being detected.

F3’s professionals have experience in investigating, quantifying and reporting on fraud schemes involving employee compensation. We have assisted boards of directors, management, special committees, internal and external counsel, and government agencies investigating allegations of fraud and evaluating internal controls.  We can evaluate existing anti-fraud programs and controls, and identify financial areas with the greatest risk for fraud.  Please contact Dave Weekly at 602.315.8543 or dweekly@f3az.com to discuss how F3 can help your organization or clients when it comes to investigating, detecting and quantifying fraud schemes.