What? Me Worry? Preventing Theft and Fraud in the Timber Industry


We want to believe that the employees, contractors, and others we work with are working with us in a responsible way and ensuring that outsiders do the same. For the most part, that is true. In fact, most theft and fraud is discovered and reported by responsible employees and contractors. Unfortunately, the unique nature of the forest industry makes it susceptible to theft and fraud. Left undetected, fraud cases can result in substantial losses to any and all parts of the forest industry.

As a Certified Fraud Examiner, I monitor the bi-annual “Report to the Nations” written and compiled by the Association of Certified Fraud Examiners (ACFE). The 2018 report included 2,690 occupation fraud cases that were investigated by Certified Fraud Examiners between January 2016 and October 2017.

Although it doesn’t specifically provide data for the timber industry, I think we can make some good comparisons with the Agriculture, Forestry, Fishing and Hunting Group. While the number of cases is comparatively small–only 2% are victims of fraud compared to 13% of banking institutions–the financial impact is large. The median loss out of 32 cases reported was $136,000 and many fraud incidents are undetected or unreported. In fact, there has been a 16% decline in the number of prosecution referrals in the past two years; the CFE numbers are likely understated.

Keeping that in mind, the 2018 Report estimates that 5% of annual revenues are lost to businesses each year due to fraud. For the Global Forest Industry that is approximately $945 million in losses (based on 2017 global revenue). And it’s important to remember that these loss numbers are for “normal businesses.”

I contend that the forest industry is not a “normal business.” The industry supply chain is based on several relatively small businesses such as consulting foresters, loggers, small wood dealers, sawmills, and many independent truck drivers who supply the larger paper and wood products companies. As a rule of thumb, fraud is more frequent at the lower end of the supply chain since small businesses lack many key internal controls and according to the 2018 Report to the Nations, small businesses lose twice as much per fraud scheme as big businesses.

Several other factors contribute to our increased vulnerability:

  1. Forest inventories are estimates until crossing the scales, making it difficult to measure fraud until after the trucks have crossed the scales. Any discrepancies before then are often shrugged off as miscalculations and not fraud.
  2. Once severed from the stump, timber is virtually indistinguishable from the timber it’s piled with.
  3. Many forest landowners are absentee owners. Land goes unchecked for long periods of time and neighbors have no connection with the landowners and little reason to suspect fraud when timber is cut.
  4. Valuable assets (including machinery, fuel, and equipment as well as timber) are in remote locations and unguarded, making theft prevention difficult.
  5. Reduced staffing levels in many forest industry companies provide greater opportunity for undetected fraud. Many employees wear several hats which can nullify normal business controls.
  6. Diverse operations and diverse markets add complexity to the supply chain. The more complexity and the more hand-offs, the greater opportunity for fraud.
  7. The growing use of subcontract labor heightens risks as timber is moved through the supply chain. Subcontractors add to the complexity of the ownership and hand-offs.

Adding to our challenges, violators have historically received light or no jail time and in many cases are unable to pay back the company even if convicted. Legal deterrents have minimal direct effect.

So, what does prevention look like?

One of the common problems within the forest industry is a belief that “it won’t happen here; we have been doing business with them for years.” Be alert. I have heard this phrase uttered at least once a quarter throughout my career from well-meaning managers whose trust is sometimes compromised in the end.

A valuable practice is to “trust but verify.” It keeps everyone honest. I have witnessed life-long friends at opposite ends of a fraud case. It is not a pleasant way to end a friendship. To ensure your company’s control environment is sending the right message, one that emphasizes prevention as well as detection, ask the following questions:

How often are the business controls in your company independently tested?

How fast is the business environment changing?

What is the effectiveness of your controls?

What kind of anti-fraud education do your employees receive?

Finally, to borrow from our military’s phrasing, “harden the target.” In other words, change your company’s stance from reactive to proactive. Conduct surprise audits using experienced and independent personnel. Test the control environment on a regular basis and review any red flags immediately. Provide training to your employees so they can readily identify red flags within their operations and establish a hotline to allow employees to report suspicious activity anonymously.

A great training opportunity is coming up in the form of FRA’s annual Forest Products Security Group meeting to be held in Starkville, MS on October 31 to November 1 this year. (See FRA website “events” calendar for registration information.) I’ve been a member of this group since 1995, and I can say that these meetings have been a great contributor to my knowledge of the forest industry control environment.