Fighting fraud often means trusting one’s gut. If a co-worker earns wages that suggest a deep discounter’s wardrobe, yet suddenly shows up at the office in $5,000 suits, you might start asking discreet questions about how he’s making his money.
Unfortunately, clever fraudsters often find ways to deflect such questions, and in companies with weak management and accounting controls, they can game the system to falsely inflate financial results, cover losses, and put stolen money in their pockets.
Uncovering financial fraud—and creating new and better controls to prevent it—requires a painstaking examination of a company’s culture and processes. To do it right, a company should deploy forensic accounting methods that consider the geographic, economic, and institutional factors posing the greatest risk to the organization. A forensic accountant assessing geographic risks, for example, might identify countries where certain types of fraud are more prevalent and then counsel executives to retool controls to specifically address issues occurring in that jurisdiction.
Perhaps not surprisingly, where strong controls are in place, employees are far less likely to take a chance on creating a financial deception. If accounting rules are loose, they may seize an opportunity. This is especially true where morale is low, or with an employee who feels neglected, underutilized, or underpaid.
In those cases, groups of employees or a single committed individual with a keen understanding of a business can spot weaknesses and exploit them—sometimes for many years and for millions of dollars.
A Case Study in Swindling
Consider the senior manager at a private company, well-liked by his co-workers—and supposedly independently wealthy, having inherited a great deal of money from his father—who was in complete control of a complicated manufacturing process for the company. With little to no oversight, he could approve projects, hire outside contractors, and sign off on invoices. This gave him plenty of opportunity to create a long-running and lucrative accounting scam.
The manager sets up an outside company, which takes on fictitious work repairing and manufacturing equipment. He starts small, signing off on invoices no greater than $5,000, then gradually increasing the amounts—though never to more than $100,000, which might have triggered greater scrutiny. He also manipulates the accounting process by intervening with accounts payable to get the invoices paid quickly. This ensures that the invoices speed through the system with few questions.
The result: Within five to seven years, the manager siphoned millions from the company. He was only discovered when an employee started asking routine questions about one of the invoices. The company then launched a full investigation, hiring forensic accounting experts, who uncovered the full extent of the fraud.
The incident is a case study in what happens when an enterprise has few controls in place to prevent fraud. The company had failed to conduct a background check on the manager when he was hired and did not investigate when evidence surfaced of his lavish lifestyle. Had company executives checked, they might have discovered a crucial flaw in the manager’s story: His father had died penniless.
The Forensic Approach
Detecting fraud requires that companies implement and maintain strong controls and codes of conduct for their employees. As in the case described, a solitary figure should not have the ability to manage an entire process, including contracting and invoicing, without substantial oversight.
Changes in an employee’s behavior should also trigger questions. If an employee shows intense interest in a single client (like pushing their invoices through the accounts payable system), or if the employee’s financial status appears to have suddenly transformed, the company would be wise to pay close attention and ask probing questions.
When questions do arise, a forensic accountant can provide an organization with an unbiased investigative approach that uncovers bad behavior and identifies and remediates poor internal controls. At K2 Intelligence, our experts perform forensic accounting, financial investigations, securities litigation, and anti-corruption risk assessments and work side by side with an organization’s executives and inside and outside counsel to assess the vulnerability of management and accounting systems.
At the end of the day, a forensic approach can allow a company to turn a potentially painful investigation into a constructive experience. Forensic investigators understand how money should flow at a company, how comparable companies behave, and how transactions should—and should not—be reflected in an accounting system. Through their investigative experience, forensic accountants have also learned the common tricks used by bad actors to hide fraudulent activity. They can uncover fraud and, while doing so, vastly improve the efficiency and strength of an organization.