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Column: 'Catch the rat' by using forensic accounting

September 28, 2011
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Indiana Lawyer Commentary

By Howard I. Gross, Steven W. Reed, and Casey L. Higgs

Has your client experienced theft or maybe suffered from financial losses due to fraud? In hindsight did they wonder how the fraud was not discovered sooner? Help your client “catch the rat” by understanding how to better detect fraud and identify red flags that may indicate “a rat” is on the loose.

There are a lot of rats, or perpetrators, out there. According to the Association of Certified Fraud Examiner’s 2010 Report to the Nation on Occupational Fraud and Abuse, organizations typically lose 5 percent of annual revenue to fraud. Worldwide, this amounts to a fraud loss of more than $2.9 trillion. With the overwhelming amount of fraud loss to organizations worldwide; and with the potential for your client to be a victim of fraud loss, it is important to detect fraud when or before it occurs.

So how do you catch the perpetrator and win the race? By being aware of the top five common warning signs as indicated in the Report to the Nation:

• Employee living beyond financial means (43 percent)

• Employee experiencing financial difficulties (36 percent)

• Excessive control issues with regard to their jobs (23 percent)

• Unusually close association with vendors or customers (22 percent)

• Wheeler-dealer attitude (19.2 percent).

The most common perpetrator lives beyond their financial means. If employees or executives working for your client appear to live extravagant and lavish lifestyles not lining up with their position and title, it may be indicative of fraud and worth further investigation. For example, a CFO of a small company owns vacation homes and an expensive car, or perhaps a large boat or takes extravagant trips; it may indicate company money is being used to pay for those luxury items.

The second most common perpetrator experiences financial difficulties and hardship, which causes them to steal from their own company. For example, if they have a spouse or family member who is undergoing treatment and medical bills are high, or if they have significant debt, they might be motivated to steal money from the company to support their own family. This is especially true during these difficult economic times.

Employees or executives with control issues that may be committing fraud will be less willing to share duties and they will probably take very little time off for fear of being caught. A good control here is to make sure all employees (especially those with financial responsibilities) take time away from the workplace.

Having an unusually close association with vendors or customers is the fourth most common warning sign of a perpetrator. Being too friendly or close could lead to collusion, which means two parties’ scheme together to commit fraud. An employee or executive may be receiving kickbacks for selling business to the outside party, an example of fraud in which both parties benefit. Two or more parties involved make the fraud more difficult to detect; all the more reason to understand the warning signs.

The fifth most common perpetrator has a “wheeler-dealer” attitude, which is someone who advances their own interests by being conniving and aggressive. One of the more infamous perpetrators for exhibiting this “wheeler-dealer” attitude is Bernard Madoff and his $50 billion Ponzi scheme. Madoff used his power and prestige to steal from people who trusted him, a true “wheeler-dealer.”

According to the Report to the Nation, the “financial difficulties” red flag is more common with employees as they generally have lower incomes than management and executives, so their motivation for committing fraud is more often based on an immediate financial need. Additionally, management and executives were much more likely to display control issues, to have unusually close associations with vendors or customers, and to exhibit a “wheeler-dealer” attitude than employees because they are in a better position to influence organizational decision making, arrange deals with outside parties, and exert control over the direction of the organization and tone at the top.

In conclusion, there are warning signs and red flags for fraud that companies may use to determine if further investigation is warranted. The top five common warning signs of fraud are not a comprehensive list of all red flags, and do not necessarily indicate fraud has incurred. Additionally, the red flags may be different for your clients depending on their size and industry. However, awareness of the warning signs and red flags can help your client to better detect fraud … and maybe, just maybe, you and your client can catch the rat!•

__________

Howard I. Gross, CPA/ABV/CFF, CFP; Steven W. Reed, CPA/ABV; and Casey L. Higgs, CPA/CFF, CFE are with BGBC Partners LLP. The opinions expressed are the authors’.

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  1. Can I get this form on line,if not where can I obtain one. I am eligible.

  2. What a fine example of the best of the Hoosier tradition! How sad that the AP has to include partisan snark in the obit for this great American patriot and adventurer.

  3. Why are all these lawyers yakking to the media about pending matters? Trial by media? What the devil happened to not making extrajudicial statements? The system is falling apart.

  4. It is a sad story indeed as this couple has been only in survival mode, NOT found guilty with Ponzi, shaken down for 5 years and pursued by prosecution that has been ignited by a civil suit with very deep pockets wrenched in their bitterness...It has been said that many of us are breaking an average of 300 federal laws a day without even knowing it. Structuring laws, & civilForfeiture laws are among the scariest that need to be restructured or repealed . These laws were initially created for drug Lords and laundering money and now reach over that line. Here you have a couple that took out their own money, not drug money, not laundering. Yes...Many upset that they lost money...but how much did they make before it all fell apart? No one ask that question? A civil suit against Williams was awarded because he has no more money to fight...they pushed for a break in order...they took all his belongings...even underwear, shoes and clothes? who does that? What allows that? Maybe if you had the picture of him purchasing a jacket at the Goodwill just to go to court the next day...his enemy may be satisfied? But not likely...bitterness is a master. For happy ending lovers, you will be happy to know they have a faith that has changed their world and a solid love that many of us can only dream about. They will spend their time in federal jail for taking their money from their account, but at the end of the day they have loyal friends, a true love and a hope of a new life in time...and none of that can be bought or taken That is the real story.

  5. Could be his email did something especially heinous, really over the top like questioning Ind S.Ct. officials or accusing JLAP of being the political correctness police.

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