United States businesses lose about 7
percent of annual revenue to fraud.
Small companies alone report a median loss of $200,000 to employee fraud. Yet,
executives do not always deal with fraud
wisely when it occurs at their companies.
Often, their immediate reaction is to investigate the issue internally. That sometimes
makes matters worse.
For instance, executives may identify the
fraudsters but cannot fire them because they
could not obtain sufficient evidence to prove
wrongdoing. In some situations, companies
find themselves being sued by fraudsters for
harassment and lose money by settling the
claim.
Such outcomes can be avoided. As
Chandra Papneja, director in the Fraud and
Forensic Accounting Practice of Burr, Pilger
Mayer LLP, suggests, “If you find or suspect
fraud in your company, hire a forensic
accountant who can obtain evidence to support the action you will take against the
fraudster.”
Smart Business spoke with Papneja to
learn how that advice can save companies’
time and money.
How does a company benefit from hiring
forensic accountants?
Forensic accountants can gather and protect evidence, determine the extent of the
problem, create a ‘no tolerance for fraud’
tone from the top down, give executives the
time they need to run the business, and assist
with the development of anti-fraud programs
and controls to prevent future loss from
fraud. The intrinsic and extrinsic advantages
to hiring forensic accountants outweigh any
drawbacks.
Should companies contact forensic accountants as soon as fraud is detected?
By all means. According to the Association
of Certified Fraud Examiners, embezzlement
schemes typically last two years before
detection. That explains why forensic
accountants play such a valuable role in
fraud protection and fraud investigation and
why they should be called as early as possible when executives suspect any kind of
financial irregularities in their operations.
What advantages do forensic accountants
have over internal fraud investigators?
Executives investigating suspected financial irregularities waste time and money in
their efforts. Their internal investigations
consume valuable time they could be using
to oversee business operations and to make
money. Often, they tip off perpetrators to the
fact that there is a probe going on. Consequently, they often exacerbate the problems instead of finding solutions. Worse, they
can create situations that lead to costly and
embarrassing harassment claims and lawsuits against their firms — and themselves.
The forensic accountants take the lead and
launch investigations at any level of the company — from the top down — to determine
whether financial irregularities actually
occurred. Once they make that determination, they ascertain how long the process has
been going on, identify the party or parties
responsible for the irregularities, calculate
the loss amounts from those irregularities
and assist in loss recovery. More importantly,
they recommend, implement and monitor
remedies to strengthen the company’s reporting systems — including deterrent programs.
Why are internal fraud investigations not
advisable?
The list of difficulties executives can encounter in their self-investigations is lengthy.
For instance, proof is hard to come by, it is
difficult to identify all the people who might
be involved in suspected irregularities, and
the wrong person or persons can be named.
As a result, the executives might determine
who has committed fraud, but they cannot
terminate individuals because of their inability to obtain specific evidence to substantiate
their suspicion. The list does not end there.
Results like these lead to bigger problems
for the company than would exist if executives had turned the investigation over immediately to forensic accountants when the
problem first surfaced.
Is it possible for companies to deter fraud?
Yes. Companies do not always have to wait
until they suspect that fraud has occurred to
bring forensic accountants on board. One of
the keys to detecting and preventing financial
irregularities is to develop, implement, publicize and enforce strong, effective deterrent
programs that let employees at all levels
know that fraud, embezzlement, etc., will not
be tolerated. That is another area in which
forensic accountants can be of help.
Forensic accountants’ services go beyond
uncovering irregularities and preventing
ensuing fraud-related activities. They also
provide liaison services between clients and
regulatory agencies, such as the SEC; oversee compliance with SOX, FASB standards,
etc.; instill in CEOs, CFOs and other executives a level of confidence that fraud and misconduct are minimal in their companies;
design effective anti-fraud controls to reduce
the risks of future lawsuits; and testify on
companies’ sides in trials.
Pragmatic executives recognize that fraud,
embezzlement, etc., are possibilities and prepare plans to prevent them whenever possible or deal with them when they do occur.
They can accomplish those objectives by
partnering with forensic accountants as soon
as fraud is suspected.
CHANDRA PAPNEJA is a director in the Fraud and Forensic Accounting Practice at Burr Pilger Mayer LLP. Reach him at (408) 961-6331 or [email protected].
