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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. Where may I find an attorney working Pro Bono? Many issues with divorce, my Disability, distribution of IRA's, property, money's and pressured into agreement by my attorney. Leaving me far less than 5% of all after 15 years of marriage. No money to appeal, disabled living on disability income. Attorney's decision brought forward to judge, no evidence ever to finalize divorce. Just 2 weeks ago. Please help.

  2. For the record no one could answer the equal protection / substantive due process challenge I issued in the first post below. The lawless and accountable only to power bureaucrats never did either. All who interface with the Indiana law examiners or JLAP be warned.

  3. Hi there I really need help with getting my old divorce case back into court - I am still paying support on a 24 year old who has not been in school since age 16 - now living independent. My visitation with my 14 year old has never been modified; however, when convenient for her I can have him... I am paying past balance from over due support, yet earn several thousand dollars less. I would contact my original attorney but he basically molest me multiple times in Indy when I would visit.. Todd Woodmansee - I had just came out and had know idea what to do... I have heard he no longer practices. Please help1

  4. Yes diversity is so very important. With justice Rucker off ... the court is too white. Still too male. No Hispanic justice. No LGBT justice. And there are other checkboxes missing as well. This will not do. I say hold the seat until a physically handicapped Black Lesbian of Hispanic heritage and eastern religious creed with bipolar issues can be located. Perhaps an international search, with a preference for third world candidates, is indicated. A non English speaker would surely increase our diversity quotient!!!

  5. First, I want to thank Justice Rucker for his many years of public service, not just at the appellate court level for over 25 years, but also when he served the people of Lake County as a Deputy Prosecutor, City Attorney for Gary, IN, and in private practice in a smaller, highly diverse community with a history of serious economic challenges, ethnic tensions, and recently publicized but apparently long-standing environmental health risks to some of its poorest residents. Congratulations for having the dedication & courage to practice law in areas many in our state might have considered too dangerous or too poor at different points in time. It was also courageous to step into a prominent and highly visible position of public service & respect in the early 1990's, remaining in a position that left you open to state-wide public scrutiny (without any glitches) for over 25 years. Yes, Hoosiers of all backgrounds can take pride in your many years of public service. But people of color who watched your ascent to the highest levels of state government no doubt felt even more as you transcended some real & perhaps some perceived social, economic, academic and professional barriers. You were living proof that, with hard work, dedication & a spirit of public service, a person who shared their same skin tone or came from the same county they grew up in could achieve great success. At the same time, perhaps unknowingly, you helped fellow members of the judiciary, court staff, litigants and the public better understand that differences that are only skin-deep neither define nor limit a person's character, abilities or prospects in life. You also helped others appreciate that people of different races & backgrounds can live and work together peacefully & productively for the greater good of all. Those are truths that didn't have to be written down in court opinions. Anyone paying attention could see that truth lived out every day you devoted to public service. I believe you have been a "trailblazer" in Indiana's legal community and its judiciary. I also embrace your belief that society's needs can be better served when people in positions of governmental power reflect the many complexions of the population that they serve. Whether through greater understanding across the existing racial spectrum or through the removal of some real and some perceived color-based, hope-crushing barriers to life opportunities & success, movement toward a more reflective representation of the population being governed will lead to greater and uninterrupted respect for laws designed to protect all peoples' rights to life, liberty & the pursuit of happiness. Thanks again for a job well-done & for the inevitable positive impact your service has had - and will continue to have - on countless Hoosiers of all backgrounds & colors.

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