Save time and money Featured

7:00pm EDT January 26, 2009

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 cpapneja@bpmllp.com.