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. I have an open CHINS case I failed a urine screen I have since got clean completed IOP classes now in after care passed home inspection my x sister in law has my children I still don't even have unsupervised when I have been clean for over 4 months my x sister wants to keep the lids for good n has my case working with her I just discovered n have proof that at one of my hearing dcs case worker stated in court to the judge that a screen was dirty which caused me not to have unsupervised this was at the beginning two weeks after my initial screen I thought the weed could have still been in my system was upset because they were suppose to check levels n see if it was going down since this was only a few weeks after initial instead they said dirty I recently requested all of my screens from redwood because I take prescriptions that will show up n I was having my doctor look at levels to verify that matched what I was prescripted because dcs case worker accused me of abuseing when I got my screens I found out that screen I took that dcs case worker stated in court to judge that caused me to not get granted unsupervised was actually negative what can I do about this this is a serious issue saying a parent failed a screen in court to judge when they didn't please advise

  2. I have a degree at law, recent MS in regulatory studies. Licensed in KS, admitted b4 S& 7th circuit, but not to Indiana bar due to political correctness. Blacklisted, nearly unemployable due to hostile state action. Big Idea: Headwinds can overcome, esp for those not within the contours of the bell curve, the Lego Movie happiness set forth above. That said, even without the blacklisting for holding ideas unacceptable to the Glorious State, I think the idea presented above that a law degree open many vistas other than being a galley slave to elitist lawyers is pretty much laughable. (Did the law professors of Indiana pay for this to be published?)

  3. Paul Hartman of Burbank, Oh who is helping Sister Fuller with this Con Artist Kevin Bart McCarthy scares Sister Joseph Therese, Patricia Ann Fuller very much that McCarthy will try and hurt Patricia Ann Fuller and Paul Hartman of Burbank, Oh or any member of his family. Sister is very, very scared, (YES, I AM) This McCarthy guy is a real, real CON MAN and crook. I try to totall flatter Kevin Bart McCARTHY to keep him from hurting my best friends in this world which are Carolyn Rose and Paul Hartman. I Live in total fear of this man Kevin Bart McCarthy and try to praise him as a good man to keep us ALL from his bad deeds. This man could easy have some one cause us a very bad disability. You have to PRAISAE in order TO PROTECT yourself. He lies and makes up stories about people and then tries to steal if THEY OWN THRU THE COURTS A SPECIAL DEVOTION TO PROTECT, EX> Our Lady of America DEVOTION. EVERYONE who reads this, PLEASE BE CAREFUL of Kevin Bart McCarthy of Indianapolis, IN My Phone No. IS 419-435-3838.

  4. Joe, you might want to do some reading on the fate of Hoosier whistleblowers before you get your expectations raised up.

  5. I had a hospital and dcs caseworker falsify reports that my child was born with drugs in her system. I filed a complaint with the Indiana department of health....and they found that the hospital falsified drug screens in their investigation. Then I filed a complaint with human health services in Washington DC...dcs drug Testing is unregulated and is indicating false positives...they are currently being investigated by human health services. Then I located an attorney and signed contracts one month ago to sue dcs and Anderson community hospital. Once the suit is filed I am taking out a loan against the suit and paying a law firm to file a writ of mandamus challenging the courts jurisdiction to invoke chins case against me. I also forwarded evidence to a u.s. senator who contacted hhs to push an investigation faster. Once the lawsuit is filed local news stations will be running coverage on the situation. Easy day....people will be losing their jobs soon...and judge pancol...who has attempted to cover up what has happened will also be in trouble. The drug testing is a kids for cash and federal funding situation.