By Robert D Jones, CFE,CBM We often read books and magazine articles on how to be a successful entrepreneur. In some cases, if one applies text book principles of investing capital in an upstart company that appears to headed for big things or creating a product the public desires, one can turn a small business dream into a into a major league success. So let’s say your business is growing at a successful pace and the return on your investment is occurring sooner than expected and everything seems to be running on track. You decide to expand and upgrade your infrastructure, hire new salespeople, and streamline the distribution of products. Your dream of turning your small business into something bigger and better seems to be coming true until you receive an anonymous letter stating that one or more of your long-time employees are stealing from you. How could this happen, you ask, “Most of my front office staff has been with me from the beginning?” While you were dreaming of growing your business and taking the steps to fulfill that dream, you omitted a very important step. Investing in a fraud prevention program should be priority for growing a business.
Employee fraud is most likely to happen when internal controls are overlooked by management and/or circumvented by the fraudster(s). No matter the size, every business needs to protect its assets. By investing in a proactive loss prevention program, a business can minimize its risk. By enlisting the help of forensic accountants to assist with the implementation a loss prevention program, a business can grow while minimizing the potential for employee theft.
Forensic accountants wear many hats. They are Certified Public Accountants, Certified Fraud Examiners, and sometimes Private Investigators. The types of crimes they investigate are classified as “crimes against property”. They assist the business owner in a variety of ways. First, they conduct an in-depth review of books and records of the defrauded business, specifically, the internal control system. Then, they determine the method of defalcation and calculate the financial quantification of the loss. Personnel files may be reviewed and employee interviews are conducted in the search for clues and factual evidence which may be incorporated in a report and expert testimony.
Often, internal controls put in place by a company can either open or close the door to fraud. Forensic accountants are trained to look for “aspects of internal controls that can be breached”, or the “opportunity”. Classic examples are situations where one person handles all of the company’s cash or accounts receivable, or takes care of all bank deposits. Placing multiple financial duties in the hands of one employee creates the opportunity to steal, should they feel the pressure to do so. Fraud experts agree that three elements are typically present with internal fraud; motive, opportunity, and rationalization. Understanding these three elements which create the “fraud triangle’ aids in the discovery and prevention of fraudulent activity.
Because the reputations of individuals and companies are at stake, forensic accountants must be very discreet when conducting their investigations. They must be independent and impartial, taking into account both the financial records and employee behavior. Because fraudsters work hard at hiding their crimes, forensic accountants must look beyond the numbers. A thorough knowledge of investigative databases is necessary for the purpose of determining the subject’s lifestyle. For instance, a public record search may reveal the subject owns numerous residences, cars, boats, and investment land. All of this wealth was accumulated on a moderate salary. Not likely.
However, information related to the tangible assets of the subject can be helpful to the insurance company and the defrauded business for the purposes of possible monetary restitution for the amount of stolen money.
In summary, forensic accountants are more than just number crunchers. They can assist the claims professional in a variety of ways. They know how to conduct investigations, navigate various computer programs, and communicate well. They exist to solve problems and help the insurance, legal, and corporate communities.
About the Author:
Robert D. Jones, CFE, CBM has been involved exclusively in the field of Forensic Accounting and Corporate Investigations for over 25 years. He has worked extensively with insurance companies, public corporations and private companies, attorneys, and private individuals focusing his career on Financial Forensics and Investigations. He has testified on numerous occasions as an expert in civil and criminal matters. He is a proud U.S. Navy Veteran. Mr. Jones is also a California licensed Private Investigator.