Fraud can be a mysterious topic, so let’s clear up some misconceptions related to it—and also to forensic accounting (other than the fact that it does not have to do with analyzing dead peoples’ numbers).
1. I can avoid fraud in my organization by letting only my trusted, long-term employees handle the money.
Beware. Statistically, long-term employees are those most likely to steal. Why? These are just a few reasons embezzlers have given me:
- I had better opportunity because I’ve been here a long time, so I had more access along with more responsibilities—plus it just became too tempting after a while.
- I was the epitome of a trusted employee and figured I would be the last one suspected or blamed.
- I attribute much of the organization’s growth and success to my hard work and dedication – so I rewarded myself, because no one else was going to.
- The owners have enough money and I needed it.
- I was going to pay it all back—they were supposed to be temporary “loans.”
- I just deserved it.
2. Forensic accountants are only used to investigate big corporate frauds or investor scams like I see in the news.
Forensic accountants are involved not only in the high-profile cases referred to above, but in everyday cases, contracts and disputes. Examples of forensic engagements range from one spouse who is suspicious of the other’s “real income” and/or believe that assets are being concealed, to a real estate owner who wants to know the true monetary damages experienced when a buyer backed out a deal and broke his contract, to an investor who is completing a large commercial project and believes the contractor was overbilling the job. Forensic accounting is also referred to as investigative accounting—and where there is a lawsuit, money and accounting usually follow.
3. A forensic accountant’s report will tell me which of my employees stole from me.
Forensic accountants deal with data and factual information. In the case of embezzlement, for example, that information may consist of money or an asset, where it originated from, where it went to, who had access or control and what documents or evidence shows that it is either missing or was stolen. A forensic accountant’s report may lead someone to file charges or conclude that a specific person or persons committed the theft, but we never offer an opinion as to anyone’s specific guilt or innocence. Only information and conclusions of fact that can be substantiated in a court of law are contained in a forensic report.
4. Since my CPA audits my financial statements every year, I’ll never need a forensic accountant to investigate fraud in my organization.
It surprises even the savviest financial investor that traditional CPA audits are responsible for uncovering only 3% of organizational frauds. In fact, more frauds (almost twice the amount) are detected accidentally!*
The purpose of a conventional financial statement audit is to provide an opinion on the fairness of an organization’s financial reporting as for a specific period, or periods, at a specific point in time—and that the financial statements issued are free from material misstatement. The purpose of an audit is not to ensure that no fraud has occurred or that all numbers are 100% accurate, since it is based primarily upon sampling and materiality. As an example, General Motors has worldwide sales of $150 billion—making a $10 million fraud difficult to identify during an annual CPA audit, because it is immaterial to the financial statements taken as a whole and represents less than 1% of total sales.
This list of misconceptions is intended to empower you, rather than to create panic. While it may be discouraging to learn that frauds likely will not be caught in the early stages by your accounting or auditing processes, also know that you have the ability to identify issues and areas of importance more efficiently with adequate internal controls.
* Association of Certified Fraud Examiners Report to the Nations on Occupational Fraud and Abuse, 2016 Global Fraud Study, pp.20.
Author: Richard C. Gordon, CPA/ABV/CFF, CFE, CGMA, Director of Forensic and Valuation Services