Commentary: Big frauds start small.

Byline: Tracy Coenen

Take a look at the frauds in the news, and most of them are huge. Huge frauds make huge news. As investors and the general public demand more transparency from companies and executives, the issue of fraud is being talked about more than ever. Everywhere we turn, the word fraud is rearing its ugly head. While fraud is a good thing if you make a living as a fraud investigator, it's not so good for business and profits. The impact goes beyond dollars and cents, as fraud can negatively affect employee morale, employee work ethic, investor confidence, and customer loyalty. The sad truth is that almost all frauds started small. They had to start somewhere before they grew to those headline-grabbing proportions. Think about Enron, everyone's favorite example when discussing corporate fraud. It's hard to believe that Enron ever did anything small, but it is true. In fact, the downfall of Enron can be traced back to some fairly minor manipulations in the grand scheme of things. One of the early frauds was a manipulation to boost quarterly earnings that otherwise would have fallen just a little short of Wall Street's expectations. This type of manipulation at Enron grew over the years. Add a little extra income here, shave a little off expenses there, and manipulate the accounting rules to boost earnings over there. The small fraud grew, and grew and grew. And the more management appeared to turn a blind eye to fraud (and maybe even encouraged fraud), the bigger it got. Easy Start It is eye-opening to trace a fraud back to its roots or to talk to someone who will be completely honest about a fraud she or he committed. You get a chance to see how easy it was to commit that first fraud. It was small, and therefore easy to rationalize in the mind. Maybe the thief decided it was just "borrowing" or rationalized that the money represented excess funds that no one would miss. Either way, a small sum of money was pretty easy to justify. Many frauds start with an error, which makes the process of justification even easier. That first fraud wasn't her or his fault anyway! Someone in a position of trust sees that an error wasn't caught by the company's system of checks and balances. Maybe a bank account didn't balance, but no one said anything about it. Or an accounting entry was made to an incorrect account, but no one ever noticed. These types of oversights can tempt an employee to take advantage of the weaknesses in the system. The...