Small businesses: Learn about fraud from New Mexico's fraud doctor

Trust but verify is a motto Brett Newberry believes in. He had the quote, which was popularized by President Ronald Reagan, printed onto baseball caps to hand out to the audience of his recent talk on the importance of fraud prevention for small businesses.

The fraud doctor, as he’s known professionally, Newberry hails from Gallup where he works as a certified public accountant and a certified fraud examiner.

Newberry investigates fraud professionally, doing forensic accounting at Newberry & Associates, an accounting firm founded by his father.

“What people have a hard time understanding is that any person is capable of fraud,” Newberry said.

Circumstances in someone’s life may change. Financial issues, marital problems, gambling and drug issues can all lead someone to commit fraud, according to Newberry.

“I’ve dealt with people that when you talk to them, they seem normal like anybody, but they’ve ripped off the organization for $500,000.”

The average fraud is not sophisticated, said Newberry, but can be perpetuated because a company lacks internal controls, lacks a segregation of job duties, does not have proper training or does not follow its own policies. Small family-owned businesses can be especially susceptible to occupational fraud.

Occupational fraud is when someone who works for a business deceives its organization for personal gain, actions like embezzlement, cheating on taxes or lying to investors, according to the Association of Certified Fraud Examiners.

“Frauds can be devastating from the standpoint of you’re wiping out a business or creating a real financial burden for the company, and there’s some real sadness that can come from it. Suicide, people going to jail, people getting divorced,” said Newberry. “The consequences can be devastating.”

Not having enough staff to separate duties can lead to fraud.

“You may have somebody that does payroll, but they also have access to the general ledger. That’s dangerous, because if you can do transactions on payroll and then you can go into the general ledger, then a lot of times you can hide what you’re doing.”

Many businesses do not want to prepare for the possibility of fraud unless they’ve had a major scandal. But an open culture that includes fraud training and being accountable can better prepare companies for potential fraud and can make it clear to employees that fraud is not acceptable.

“I am amazed the number of organizations that said they have a really good system of internal controls, but they don’t really test it, they don’t modify it, and they really don’t train to it, and a lot of times they will violate their own policy for convenience purposes and that’s like the worst thing you can do.”

Internal controls can be tested by taking the policy and walking through transactions. For instance, a policy related to travel reimbursements could be tested by pulling a filed report and checking to see all of the documents are correctly filed and signed off on.

Widely available software that can produce bogus invoices has made it easier to perpetuate fraud related to expenses, said Newberry, making it a little more difficult to investigate.

“You’ve got to do some digging. Where’d they go? Did they go to a conference? What were the dates they were there? What city were they in? Because what happens when you’re committing fraud, it’s always hard to cover all of your tracks.”

A big red flag is lifestyle choices that don’t make sense. Newberry said to pay attention to what kind of cars the person is driving, what kind of vacations they take, if they talk about gambling a lot or are bragging about purchasing high end liquors.

“What happens, especially in these family businesses, is that you view everybody as like a family member and so a lot of times, a way a fraudster will cover what they’re doing is they’ll say, ‘Well you don’t trust me. I thought we were family,’ and most people get uncomfortable with that, and so they’ll back down.”

Newberry wants to make family business owners more comfortable saying, ‘I trust you, but I’m going to verify what you tell me because I have an obligation to the business.’

Newberry spoke at the Parker Center for Family Business’ June lunch and learn. Every other month, the center offers a free lunch and learn as a resource for local businesses.