Since half of the specialty finance companies that participated in a recent survey conducted by McGladrey experienced some form of fraud during the past 12 months, senior manager Ronnie Lee devised four strategies institutions can implement to overcome possible unscrupulous activity.

Lee discovered several common characteristics among the finance companies that sustained fraud activities within its operations; many of which had a significant auto finance presence.

The survey data showed branch managers and customer service personnel were the most common positions identified as involved in the fraud. They usually were not long-term employees as most employees had between one and five years’ experience with the employer.

Most firms found the fraud being committed within six months of the initial incident with thefts of cash and fraudulent loans being the most common types of fraud. The majority of frauds involved losses of less than $10,000, but in most cases, little or none of the losses were recovered, according to the McGladrey survey.

“These findings reveal some interesting patterns that specialty lenders can use to strengthen their internal controls,” Lee said. “Most fraud studies find that frauds are committed by long-time employees, more often male, with college educations.

“Yet, among the specialty lenders surveyed, the perpetrators are most likely to be females with the company for less than five years and with only a high school education,” he continued.

“In addition, the frauds reported in the survey were almost exclusively committed at branch locations, not at the home office,” Lee went on to say. “These frauds were almost always detected through internal controls or by management at home office locations.”

With those thoughts in mind, Lee began his fraud-prevent recommendations by mentioned that finance companies that sustain losses demonstrate a lack of controls and insufficient segregation of duties at branch locations.

For example, Lee explained fraudulent loan schemes often involve someone at the branch office recording a loan on the books and then writing it off.

“By ensuring those duties are performed by separate parties, this type of fraud could be largely avoided,” Lee said.

Next, Lee suggested that specialty lenders should ensure that branch locations have strong internal controls on-site and not rely exclusively on controls at the home office.

“While fraud losses among the surveyed lenders were relatively small and generally caught quickly, stronger controls at the branch locations, where fraud is most likely to occur, could prevent many of these instances from occurring in the first place,” Lee said.

The McGladrey senior manager noted that improved systems that would allow real-time reporting between branches and the home office could play a key role in improving controls and providing real-time oversight of operations.

Moving on to a third point, Lee noted that weak or poorly documented operating policies and procedures, including formal fraud policies, also play a role in increasing the likelihood of fraud.

“By making it clear to all employees exactly what your operating procedures are, deviations from those procedures are more immediately obvious to everyone,” he said.

Lee closed by recommending that specialty lenders should also consider educating new employees on common types of fraud. He contends this strategy would help honest employees spot malfeasance by co-workers.

“In addition, it would also underscore to employees who might be considering fraudulent behavior how small the gains from those frauds generally are, how quickly they are usually discovered and the consequences they could face,” Lee said.