When I meet with small business owners and they learn that I am a fraud examiner, their reactions are generally the same. I call it the "how-interesting-but-I-totally-can’t-relate" response. I sometimes feel like I am selling hurricane insurance in the Midwest. While all agree that hurricane insurance is a good thing, they just do not feel they need it. Here are some of the more specific responses.
"My office manager has been with me 15 years."
While it may be reasonable to think that if an employee has not committed fraud by his/her 15th year, it is not likely to happen now, I believe that thought warrants further examination. First of all, do you know for sure that no fraud has taken place over the last 15 years? Secondly, things change. Please refer to the "fraud triangle."
"My office manager goes to my church."
Commonalities between an employer and an employee could foster a productive relationship. It could also mean, however, that the employee is the beneficiary of undeserved trust. One of the reasons that Bernie Madoff was so successful in his deceit was that he targeted the Jewish community, people like him. People of faith can be particularly vulnerable to being taken advantage of because they are taught to trust.
"My spouse handles all the front-office matters."
In most cases, I encourage this arrangement. Both parties are committed to the success of the practice-except when they are not. In the instance that I observed, the spouse was stockpiling cash in order to have a nest egg available when she took off with her new partner.
"My accountant sees everything."
This is the hardest one for me to hear. First, unless your accountant is sitting at the front desk, he or she does not see everything. Second, is your accountant’s understanding of his or her responsibility the same as yours? Do you have an engagement agreement? Accounting services range from bookkeeping to full advisory services and may or may not include tax return preparation. Most accounting and tax service agreements that I have seen-and sent-include a paragraph stating that "the role of the accountant is not to detect fraud, but if anything comes to our attention, we will notify you, if material." This does not offer much comfort.
Early stages: Suspicion and a plan
There are several stages of employee fraud investigation. Sometimes the stages are sequential, while others are concurrent. Each case is different but generally involves the same elements. Uncovering employee fraud starts with a suspicion. It could be that the schedule has been full yet collections have decreased, or expenses have increased significantly without explanation. What you do next is critical. An error at this stage could result in no recovery of money or property lost. In addition, while the impulse may be to confront the suspect, doing so could result in destruction of records or equipment and a possible lawsuit. In addition, confronting an innocent person could be just as damaging to you. Nearly every employee knows someone who knows someone who knows an attorney who can advise the employee of the ramifications of their "mistreatment" and remedies (most likely money-your money) available. The damage to employee morale and your reputation may take years to remedy. If your attorney handles human resource issues, you might want to get legal advice at this time. It is preferable to finding out later that you mishandled the investigation.
It is important that the suspicion be shared only with those directly involved with the investigation. It may also be necessary to enlist the help of an IT specialist at the initial stage to make a copy of the hard drive of the suspect’s computer so that his or her activity can be preserved.
There may also be a desire to bring in law enforcement at this point. Doing so with only a suspicion is a mistake. Without proof and an estimate of the damages, there is little that law enforcement can do.
In order to secure proof, you need a plan. If you have the knowledge to review the financial details, that should be your next step. Sometimes the best start in gathering the evidence to support an embezzlement is merely printing out reports already contained in your dental and accounting software. If you are not familiar with the reporting capacity of your software (something I hope you will correct today) you need to find someone who is. A conversation with your CPA may be appropriate, but note that not all CPAs have the training to do forensic work. Forensic accountants are trained to identify anomalies and other activity that is out of the ordinary.
A forensic accountant can develop the plan. If the objective of the investigation is recovery as well as prosecution, proper handling of the evidence is critical. If the "chain of custody" (a record of who has had possession of the evidence at all times) is not tracked, a prosecution could be in jeopardy because the evidence could be seen as subject to possible tampering, rendering it useless.
The forensic accountant, in addition to being charged with the chain of custody, is responsible for reviewing and organizing the evidence for prosecution.
What law enforcement wants you to know
While preparing for one of my presentations, I communicated with law enforcement officers. I asked them what they wanted me to tell the attendees. Their responses were similar. In general, they want you to know four things:
1. Do not do their job. Do not confront the person suspected and do not undertake the investigation alone.
2. They cannot give you advice. Their role is defined and they are not trained to help you evaluate your options regarding legal or accounting matters.
3. The process takes a long time, so be prepared to invest time-time that may be taken away from your production.
4. CSI is a television program.
Later stages: Law enforcement, plan assessment, interviews
If the preliminary results of the forensic work indicate that theft has taken place and the amount warrants prosecution, contact law enforcement before proceeding further. The procedures vary widely depending upon location, but in general, a complaint is filed with local law enforcement. From there the complaint is routed to the appropriate agency for resolution.
Now is a good time to reassess the plan to see if changes should be made to areas such as the timing of the next step or additional evidence gathering. Reference to evidence is often made in interviews with personnel. These interviews can take place early in the investigation, after the bulk of the evidence has been compiled, or at both times. The objective of the interview is twofold: First, information gathering, and second, an admission of guilt. Included in additional information could be the revelation of others who may be involved.
It is essential that the interviews are conducted by professionals. A professional interviewer, which can be the forensic accountant or law enforcement officer, is trained to guide the questioning to achieve the information gathering or admission of guilt objective. If it is likely that the interview will result in an admission, it is advisable to have a law enforcement officer on site.
The final stage for the forensic accountant is the issuance of a report which will become the summary of the evidence to be used for prosecution.
Final stages: Recovering and prosecution
The Association of Certified Fraud Examiners’ Report to the Nations is a biennial compilation of statistics from cases submitted by fraud examiners over the prior two years. According to the 2014 report, 58% of victim organizations had not recovered any of their losses due to fraud, and only 14% had made a full recovery. Grim at best. The decision to prosecute is a hard one. The cost of prosecution is high in energy, time, and money. Sometimes the best result of all your expenditure of time, energy, and money is the prevention of the fraud from continuing in another practice. Altruism aside, it is not a good place to be.
What to do before it happens to you
There are two things you should do now- before you need to. The first is to find a local forensic accountant. The ACFE website has a community section. Within that section is "Find a CFE." In that area, you can choose your location and discover what certified fraud examiners (CFEs) are in your area. Decide who you might engage if the need arises. It is easier to be objective without the pressure of having to make a decision immediately. You might also want to ask your CPA for "what-if" advice. The second is to check your insurance policy for theft coverage. In some policies, it is stipulated that you must prosecute to file an insurance claim. It is better to know the details now while the emotions are in check. Coverage changes may be warranted.
No one plans to be defrauded. Putting procedures in place to prevent it is still the best option, but no plan is foolproof. Knowing what to expect and relying on appropriate professionals could mean the difference between weathering the incident and losing your practice.