December 9, 2013

COUNTERFEIT COUPONS

Many shoppers may be unwittingly committing coupon fraud, according to a report by WBAY-TV in Green Bay, Wis. As online coupons have become more popular, some fraudsters are using online auctions to sell counterfeit coupons to bargain-hunting consumers. Typically, fraudsters gather the names and email addresses of auction bidders, and they later send messages to those individuals offering to sell them large quantities of other coupons. Each successfully counterfeited coupon can cost a manufacturer US $1 million, U.S. Postal Inspector Roberta Bottoms says. To stem those losses, manufacturers now are warning retailers that they will no longer reimburse them when they accept fake coupons.

The increased use of coupons and their equivalents by companies wishing to increase sales and profits is unlikely to go away anytime soon, particularly given the growing dominance of global, Internet-based sales of products and services. This story is a clear warning that this kind of fraud is on the rise and is well beyond levels considered simply a cost of doing business.

Organizations need to systematically address fraudulent schemes using discounts or coupons, as part of an overall fraud risk assessment and audit plan, and take steps upfront to strengthen the controls that will help detect and deter them. Often these schemes will lie outside an organization’s direct control. Some firms offer to create specialized loss prevention programs and systems, and for smaller companies lacking the internal resources to do this on their own, this can be one solution.

How can internal audit help? Auditors can have a positive impact by bringing this fraud risk to management’s attention, conducting a systematic review of relevant company policies and procedures as part of audit plans, and reinforcing the need for strong management oversight and action where needed. Other measures auditors and their organizations can take include:

  • Establishing rigorous controls over the production, distribution, and validation of coupons. Companies such as Starbucks require that coupons be validated separately with their security systems before being redeemed successfully.
  • Introducing software and analytic routines to help hunt down Internet fraud schemes as they appear.
  • Conducting random audits of clearinghouses and other third parties involved in coupon discount regimes. This should include the coupon distribution process, where copies of coupons can go missing.
  • Verifying who their company is dealing with before handing over the money. Clearly, a questionnaire and a phone call cannot verify the existence of a store adequately.
  • Helping to educate customers, clients, and stakeholders by publicizing tips on spotting and avoiding coupon fraud, such as legalities around coupon use (e.g., it is generally illegal to sell unused coupons). The campaign should teach customers and clients to scrutinize coupons for sale from individual sellers on eBay, stay away from offers of unbelievable products or incredibly high face values (e.g., usually anything over US $5), and avoid coupons printed from a site that has nothing to do with a large coupon printing company or manufacturer. They also should look out for coupons with value inconsistencies (counterfeiters often alter real coupons, but may not change all values correctly), bar code issues such as a missing bar code or a code that won’t scan, and unusual or missing legal copy. Typos are another red flag — while marketers can make mistakes, counterfeiters are prone to typos such as misspelling the brand name. Additionally, the organization should clearly and widely communicate the consequences to fraudsters from prosecuted cases.
  • Cooperating with and participating in industry associations to help leverage their company’s anti-fraud efforts. In the case of coupon fraud, organizations such as the Coupon Information Corp. promote reform efforts to improve security practices, enhance transparency, and open communications among all industry participants.

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