Teresa Reifs Insurance Fraud Case - Research Paper Example

Teresa Reif’s Insurance Fraud Case Introduction Research indicates that fraud is one of the biggest challenges that many organizations face today. Findings show that organizations loss billions of dollars in the form of fraud. A fraud refers to the intentional misrepresentation of facts for personal gains. Fraud is usually considered a crime, and any person found engaging in a fraudulent act is liable for fine and or incarceration. According to Ratley (2011), at least 5 percent of a typical organization’s revenue is lost to fraud. Ratley (2011) notes that when this figure is translated to the 2009 world GDP, what this means is that organizations lose over $2.9 trillion to fraud. Report also shows that occupational fraud is the most common. Nevertheless, white-collar fraud is also reported being on the rise. This call for organizations to put strong control measures to prevent and detect any fraudulent act in an organization. Pest, janitorial company fraud case of 2011 is one of the most publicized fraud cases of recent times in which the owner of the company was charged with insurance fraud. This paper will provide an analysis of this insurance fraud case in light of the environmental factors in which the fraud occurred, how the fraud was an accomplished, as well as how it was discovered. Finally, the paper will provide recommendations on how best a fraud of this type may be prevented in the future. Synopsis Teresa Reif’s Insurance Fraud Case In this case, Durand (2011) reports that the proprietor of San Mateo pest and janitorial services was accused of under-reporting over $10 million of payroll in a bid to avoid paying over $2 million in the employee’s compensation insurance. After the accusation, Terasa Reif aged 31 years voluntarily presented herself to the police at Redwood City on a $1 million warrant but was set free soon afterwards after having pleaded not guilty to 44 counts of insurance fraud according to Durand (2013). However, she was required to present herself back in court on 26 May for a review conference and a subsequent preliminary hearing on July 13. Durand (2011) reveals that Reif used to purchase employees compensation insurance between 2004 and 2009 from the State Compensation Insurance Fund and Redwood Fire & Casualty Insurance Company for her business known as Genesis Building Services. However, during a report of 2008, the insurance company claimed to have received conflicting information from the staff of Genesis regarding the number of employees making the company begin suspecting that Genesis was engaging in a fraud by under-reporting its payroll by approximately $544,440 Durand (2013). This triggered investigation by California Department of Insurance, which discovered that Genesis had indeed under-reported the payroll by $10,657,776.69 resulting in Reif avoiding remitting $2,957,089.20 in employee insurance premium according to Durand (2013). Subsequent audit conducted on the company discovered that Reif had misrepresented both its payroll and the number of employees by the time it was applying for insurance and while insured. The audit found out that Genesis had 140 employees, but instead reported less than half the number in a bid to avoid paying over 2 million in employee insurance compensation. In fact, Durand (2011) reveals that, during the investigations of the alleged fraud, Reif went ahead to give auditors investigating the matter false documents to back up her false monthly reports. Nevertheless, a subsequent search conducted on her business premises found the fraudulent books. Analysis of the Case Environmental Factors Where the Fraud Occurred Durand (2013) argues that the environment where Reif worked did promote his fraudulent activity. This is because there were no enough controls to deter her from committing the fraud. For instance, investigations found that Reif, apart from being the owner of the business, she was also the chief accounting officer with no oversight board to oversee what see was doing (Durand, 2013). This made it easy for her to commit the fraud without detection by other people within the company. At the same time, investigations conducted at the business premises discovered that the business had no internal audit department to verify the books of accounts and to ensure that the books of accounts present a true and fair position of the state of affairs of the company (Durand, 2011). As a result, it became easy for Reif to under-report the payroll without its internal controls detecting that a fraud was being committed in the payroll. In addition to lack of strong internal control systems to prevent and detect fraud in time, the company had no external auditor to assist in the fraud discovery. For instance, Durand (2011) reported that Reif started under-reporting the payroll from 2003 to 2008 without detection. This was partly attributed to lack of external audit teams, to assist in detection the fraud early enough before Reif could commit such a fraudulent act in the payroll. How the fraud was accomplished From the excerpt of the case, we discover that Reif accomplished the fraud by under-reporting the payroll. To make this possible, Reif ensured that she reported few numbers of employees than what the company actually employed. This is because a report by Durand (2011) indicated that Genesis had 140 employees. However, according to a report by Redwood Fire & Casualty Insurance Company where Reif purchased insurance for its employees, Reif had reported a number less than half the total number of employees it had. This made it possible for her to under-report over $10 million of its payroll thereby avoiding remitting over $2 million compensation insurance of its employees according to Durand (2013). Furthermore, she was the owner and the chief accounting officer making it possible for her to accomplish her mission. How the Fraud Was Detected According to Durand (2011), the fraud was detected by Redwood Fire & Casualty Insurance Company upon receiving inconsistent data from Genesis staff regarding the number of employees. The conflicting data raised questions as to the accuracy of the number of employees that Genesis Company had. The suspicion prompted a thorough audit to be conducted by the insurance company, which discovered that Genesis had indeed under-reported its payroll by about $544,440 (Durand, 2013). At the same time, the audit also discovered that the company had been under-reporting its employees by more than a half to enable it avoid paying huge amount of insurance compensation. Apart from the detections made by Redwood Fire & Casualty Insurance Company, the California Police department also conducted its own investigations which discovered that Genesis actually under-reported its payroll by $10,657,776.69 resulting in the company avoiding remitting $2,957,089.20 in the employee’s insurance compensation as noted by Durand (2013). In addition, their investigation also found that Genesis had reported its employees less by more than half of the 140 it had. However, Reif has so far pleaded innocent to the counts and is awaiting the court verdict, which might see her spend more than 17 years behind bars according to Jernigan (2011). Recommendations on How a Fraud of a Similar Nature Can Be Prevented In The Future As earlier indicated, many companies lose millions of dollar to fraudulent activities either committed by employees or employers as has been seen in Reif’s insurance fraud case. Research indicates that fraud of this nature is not always very easy to detect once it has been committed. This is affirmed by the fact that it took more than five years for Redwood Fire & Casualty Insurance Company to detect that Genesis Company through its owner Reif has been defrauding it by under-reporting payments. Therefore, it is very important for organizations to put in place measures that can help prevent fraud of this nature from occurring in the future. To prevent fraud of this nature from taking place in future, Albrecht, and Albrecht (2011) argue that companies should ensure that a strong internal control system is instituted to ensure that all the activities of the organization is verified. This will involve instituting an internal audit department whose function is to ensure that an accurate number of employees are presented in the final insurance compensation report. Certainly, this will bar any manager or the business owner from engaging in fraudulent acts. To prevent such a fraud in an organization, it will be very important that an organization consider rotation of duties in an organization according to (Petrucelli, 2013). This will prevent a situation where one employee or manager perpetuates a fraud for long without detection. Furthermore, it will act as deterrence since an employee or manager will be afraid of his or her fraudulent acts being discovered by the person who will take up his position (Petrucelli, 2013). For instance, it can be argued that in case there could be rotation of duties in which someone else was given the responsibility of overseeing the payroll, this could have barred Reif from committing fraud they way she did which led to loss of huge amounts of money. From of such a nature can also be effectively prevented from taking place in an organization with the help of an external auditor. In this regard, it will be exceedingly crucial for organizations likely to face frauds of this nature to consider appointing an independent external auditor to keep verifying the books of accounts of an organization periodically (Petrucelli, 2013). Findings have shown that external audit, being independent can easily prevent such fraud. This is because the existence of an external audit makes employees and employers become more accountable to their actions for fear that any misrepresentation like that of Reif can be detected with ease. In fact, it was seen that Reif defrauded the employee insurance premium because of lack of an external audits to detect from of such a nature. Albrecht, Albrecht, and Albrecht (2011) argue that the commission of fraud is in itself unethical behavior. As such, an organization can easily bar its employee and managers from engaging in fraud by ensuring that everyone is taught of the importance of behaving in an ethical manner. This is because an ethical person would not see the need of committing fraud according to Albrecht, Albrecht, and Albrecht (2011). This has helped many organizations, which have maintained high ethical standards. Finally, a fraud of this nature can be prevented by punishing those found engaging in a fraudulent act according to Albrecht, Albrecht, and Albrecht (2011). In this regard, the punishment needs to be strong so as to act as an example to the rest. For instance, Durand (2013) reveals that Teresa Reif is facing 17 years imprisonment if found guilty of fraud. This kind of punishment is welcomed because it will deter others from engaging in fraudulent activities in an organization. References Albrecht, W.S., Albrecht, C.C., & Albrecht, C. O. (2011). Fraud examination. New York, NY: Cengage Learning. Durand, M. (2013). “Insurance fraud nets year in jail, $2M in restitution.” The Daily Journal. February 20, 2013. Retrieved from http://archives.smdailyjournal.com/article_preview.php?id=1764172&title=Insurance%20fraud%20nets%20year%20in%20jail,%20$2M%20in%20restitution. Durand, M. (2011). “Pest, janitorial company owner charged with insurance fraud.” The Daily Journal. The Daily Journal. April 16, 2011. Retrieved from http://archives.smdailyjournal.com/article_preview.php?id=156833. Jernigan, L. (2011). “$ Billions In Employer Fraud: Top 10 Cases of 2011.” North Carolina Workers’ Compensation Journal. December 29, 2011 Retrieved from http://www.ncworkcompjournal.com/2011/12/billions-in-employer-fraud-top-10-cases-of-2011/. Petrucelli, J. (2013). Detecting fraud in organizations: Techniques, tools, and resources. Hoboken, NJ: John Wiley & Sons. Ratley, J.D. (2011). 2010 report to the nations on occupational fraud and abuse. Association of Certified Fraud Examiners. Pp. 2-80. Read More