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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. All the lawyers involved in this don't add up to a hill of beans; mostly yes-men punching their tickets for future advancement. REMF types. Window dressing. Who in this mess was a real hero? the whistleblower that let the public know about the torture, whom the US sent to Jail. John Kyriakou. http://www.nytimes.com/2013/01/26/us/ex-officer-for-cia-is-sentenced-in-leak-case.html?_r=0 Now, considering that Torture is Illegal, considering that during Vietnam a soldier was court-martialed and imprisoned for waterboarding, why has the whistleblower gone to jail but none of the torturers have been held to account? It's amazing that Uncle Sam's sunk lower than Vietnam. But that's where we're at. An even more unjust and pointless war conducted in an even more bogus manner. this from npr: "On Jan. 21, 1968, The Washington Post ran a front-page photo of a U.S. soldier supervising the waterboarding of a captured North Vietnamese soldier. The caption said the technique induced "a flooding sense of suffocation and drowning, meant to make him talk." The picture led to an Army investigation and, two months later, the court martial of the soldier." Today, the US itself has become lawless.

  2. "Brain Damage" alright.... The lunatic is on the grass/ The lunatic is on the grass/ Remembering games and daisy chains and laughs/ Got to keep the loonies on the path.... The lunatic is in the hall/ The lunatics are in my hall/ The paper holds their folded faces to the floor/ And every day the paper boy brings more/ And if the dam breaks open many years too soon/ And if there is no room upon the hill/ And if your head explodes with dark forbodings too/ I'll see you on the dark side of the moon!!!

  3. It is amazing how selectively courts can read cases and how two very similar factpatterns can result in quite different renderings. I cited this very same argument in Brown v. Bowman, lost. I guess it is panel, panel, panel when one is on appeal. Sad thing is, I had Sykes. Same argument, she went the opposite. Her Rooker-Feldman jurisprudence is now decidedly unintelligible.

  4. November, 2014, I was charged with OWI/Endangering a person. I was not given a Breathalyzer test and the arresting officer did not believe that alcohol was in any way involved. I was self-overmedicated with prescription medications. I was taken to local hospital for blood draw to be sent to State Tox Lab. My attorney gave me a cookie-cutter plea which amounts to an ALCOHOL-related charge. Totally unacceptable!! HOW can I get my TOX report from the state lab???

  5. My mother got temporary guardianship of my children in 2012. my husband and I got divorced 2015 the judge ordered me to have full custody of all my children. Does this mean the temporary guardianship is over? I'm confused because my divorce papers say I have custody and he gets visits and i get to claim the kids every year on my taxes. So just wondered since I have in black and white that I have custody if I can go get my kids from my moms and not go to jail?

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