Collusion: What Are The Signs - And How Can You Prevent It?

For eight years, top officials of the Roslyn School District in Long Island systematically abused the district’s funds, spending at least $11.2  million on a variety of goods  and services, from lunches to luxurious vacations. The scandal, which was uncovered in 2004, is still the most widespread incident of school fraud in the country. The case even had repercussions in districts throughout New York State, where state auditors stepped up their scrutiny. 

How could such theft happen?

Using a coded system, the school's superintendent and his assistant for business maintained  a fake set of books in which they recorded seemingly legitimate payments to official vendors. In reality, those payments were being made to the personal accounts of participants in the fraud.

The Cost of Collusion

In this case, the primary victims of the collusion were the taxpayers. But the students, parents, teachers, and district residents at large were also negatively impacted. When collusion happens within a private company, the victims can be just as diverse, ranging from company executives and employees to shareholders, board members, and the public at large.

Furthermore, collusion can be extremely difficult to detect because it involves two or more individuals working together to deceive or gain an unfair advantage – just as the Roslyn School District example demonstrated. And when individuals collude, it generally renders a good system of internal controls ineffective, since each individual typically has different duties and can collectively push transactions through the system without setting off any red flags.

Collusion doesn’t always just occur within a company. It can occur across multiple organizations. And when that happens, the dollar amounts associated with the losses increase dramatically, according to the Association of Certified Fraud Examiners (ACFE) Report to the Nations. In fact, the median loss in a fraud committed by a single person was $80,000; that number jumps to $200,000 and $355,000 in cases with two and three perpetrators, respectively. In cases where there are four or more individuals involved, the median loss exceeds  $500,000.

Collusion Red Flags

While working with individuals in an organization can make it difficult to see red flags and detect collusion, there are still signs that fraud is occurring as well as analytical / statistical procedures that can uncover anomalies that point to collusion.

Payroll Scheme Example – This could happen if an employee colludes with a supervisor who has the authority over the timekeeping information. The supervisor would knowingly approve false timecards on the employee, and might get a portion of the unearned wages as incentive. While this is hard to catch, analytically looking into overtime accounts is one way to detect it. For instance, if normal business includes only a handful of employees receiving overtime and one specific individual is incurring significantly more overtime than anyone else, that’s a red flag that should be looked into.

 Analytical Procedures – Analytical procedures are extremely useful in detecting both fraud and collusion. They involve looking into differences between expected  and  actual  results for revenues, gross profit margins and expenses. If differences are detected, you need to ask: Are they explainable given the circumstances of that period, or do they need to be investigated further? Monitoring changes in expense accounts may detect collusion among employees if certain variations cannot be justified through normal business  reasons.

Other red flags to be on the lookout for include:

  • Numerous transactions with round dollar figures
  • In large companies with a large number of individuals entering and approving transactions, having the same group of individuals processing a disproportional percentage of those transactions
  • Employees living above their means
  • Employees who are irritable, suspicious, or defensive
  • Employees who refuse to take vacation days

Preventing Collusion

What steps can you take to detect and prevent collusion?

The most effective is segregation of duties; if collusion does exist, implement a periodic rotation of personnel and duties, which changes the relationships and conditions that allowed the collusion in the first place.

Every organization should also have a written policy regarding fraud. Within the policy, it should be communicated that it will not be tolerated and that violators will be terminated and prosecuted. In addition, you should provide a means for individuals to report suspicious behavior and irregularities, whether it’s by a phone call, voice mail, online form, e-mail, or regular mail.

Collusion can happen at any company. The key is to ensure tough controls are in place – and communication of those controls is done regularly – to help deter fraud and  theft.