Suspicions of fraudulent activity are alarming and unsettling for any business owner. Whether there’s an inkling because something doesn’t seem right with the numbers, or the puzzle pieces are coming together to form a full-fledged fraud allegation, it’s important to know what to do when you suspect fraud in your business and how a fraud examination process plays out from here. First, let’s start with a basic explanation of what a fraud examination is and then what you can expect throughout the process.
What is a Fraud Examination?
When a company suspects fraud, a forensic accountant is typically hired to investigate further through a fraud examination. A fraud examination is a special kind of engagement where the forensic accountant undertakes certain hands-on fraud detection procedures by obtaining evidence, conducting interviews and potentially writing a report and testifying to findings. The examinations are usually conducted in-person and may be broad or narrowly focused on a single alleged issue. Some forensic accountants are also certified fraud examiners (CFEs credentialed by the Association of Certified Fraud Examiners) and have advanced technical skills to help business owners decipher potential evidence of fraud.
For companies to assess whether a fraud examination is the right next step for them, it helps to understand what a fraud investigation entails, at least at a high level. Based on my experience in forensic accounting and fraud examinations, no two investigations are the same, but there are some commonalities that are helpful to understand when deciding to move forward with a fraud examination. Below we dig into certain details of what to expect during a fraud examination.
Fraud Examinations Are Emotional
The fraud examination process is an emotional one for business owners, employees, and even the alleged fraudster themselves. Feelings of anger, betrayal, grief and regret are common during these investigations. For each new issue uncovered, the wounds are reopened and deepened. This is one of the primary reasons we recommend engaging an attorney, internal auditor, and/or a forensic accountant to assist in the project, as charged emotions often lead to decisions that are not in the best interest of the company in the long term.
Fraud Investigations Take Time
The fraud examination process requires a fraud professional to form a theory of what happened and test that theory through the evidence collected. It can take a significant amount of time to collect and assess evidence, probably longer than you hope or expect. It may also require a number of interviews. These take time to prepare, schedule, and execute, and often result in follow-up work. It can be frustrating while it is ongoing, but a well-executed, well-supported outcome takes time and hastily preparing a report can be extremely costly to the company in the long term.
You Will Be Involved
What do trips to Las Vegas, expensive tickets to sporting events, and luxury vehicle purchases have in common? These are all real-world examples of purchases that were fraudulent in one case but perfectly acceptable business expenses in another. Context matters.
A forensic accountant can be incredibly useful in applying their skills to detect potential fraudulent transactions, but there is no substitute for intimate knowledge of the business. Business owners and managers know more about their company than any forensic accountant ever will, and these key business representatives should expect to have significant input into the process.
Expect the Unexpected
Years ago, I performed an investigation into the underfunding of a health insurance fund that the company was certain was due to employee theft. After we began our investigation, we found that the shortfall was due to a simple mistake in an Excel spreadsheet which caused the employer to withhold too little from its employees’ paychecks.
There are often surprises you would never expect during an investigation. We have shown up to begin an investigation into one issue, and when word started circulating around the company that fraud investigators were present, confessions concerning completely unrelated issues started pouring in.
You may think you know exactly what happened going into a fraud investigation, only to find that the evidence does not support your original theory. A forensic accountant must keep an open mind and avoid “tunnel-vision” which biases their conclusion and skews the results of the forensic examination.
You Learn a Lot About Your Company
Even in cases that find no financial crimes, there is incredible value in the deep dive process of a fraud examination.
Business owners may learn about potential internal control weaknesses, discover potential process improvements, or uncover data insufficiencies. In almost every case, a business owner learns valuable lessons to help them run their business more effectively and efficiently going forward.
It Is Not All “Accounting”
While we call ourselves forensic accountants, the truth is financial accounting is just one aspect of a fraud examination. While there is a lot of useful information in financial statements and records, there is also a lot of evidence that is contained outside of the debits and credits of the general ledger.
As mentioned above, a fraud examination is an evidence collection and analysis exercise that includes evidence of all kinds that can sometimes make or break a case. That evidence may include email records, cell phone data, internet browser history, social media profiles, files saved to a hard drive or server, and interviews with employees and the alleged fraudster.
Business owners, with the assistance of their forensic accountant, should prepare to access all types of evidence during this process, accounting and non-accounting alike.
A Definitive Answer Is Not Always Possible
At the beginning of an investigation, assuming fraud occurred, one of the first questions that comes to mind is how much has been stolen. Unfortunately, it’s not always possible to get to a definitive answer for many reasons. Sometimes there is insufficient data or evidence, sometimes the fraud is so well concealed that it is practically impossible to discover all of it, and sometimes transactions fall into a grey area, where they are questionable, but not clearly fraudulent.
A company should prepare itself for the possibility that a fraud examination may not answer all of their questions. There is often a feeling that while certain things were found, perhaps there was more that was not.
That said, a well-designed fraud examination conducted by a professional forensic accountant should uncover all the evidence and answers that are possible.
It Takes Time to Recover
At the conclusion of an examiner’s auditing, a fraud examiner has determined what type of fraud took place, whether that be financial statement fraud, asset misappropriation, money laundering, etc. The question then becomes: how does the company respond? This can involve termination of employment, contacting law enforcement, civil lawsuits, criminal prosecution, tax return implications, and the need for internal controls or process improvements. The company should consult with their attorney before making any final decisions.
The legal process can be frustratingly slow. Both civil and criminal cases can take months or even years to play out. Improving internal processes requires employee training and may take months to implement. At Anders, we always encourage our clients to consider the ultimate goal of the fraud examination at the onset and help prepare for the steps involved in achieving that goal. Ultimately, not only will you take steps to address fraudulent behavior but will help you put fraud prevention strategies in place to mitigate future risks and provide deterrence to future fraudsters.
While the recovery process takes time, it is worthwhile and makes your company stronger and more resilient in the end.
We Are Here to Help
Anders has fraud and forensics advisors that take an empathetic and efficient approach to fraud examinations. We talk our clients through the process and prepare them for what is to come. To learn more about our fraud examination process, contact an Anders advisor.
