Getting best results from a forensic accountant

By Ken Froese, CA*IFA, FCFI

It could be a vendor that’s been shipping counterfeit components to your client. Or, an employee who’s been “buying” services on its behalf — but the cheques are going to a dummy consulting firm set up by the employee. Perhaps the fraud involves collusion between an employee in accounting and one in sales.

Whatever the situation, you’ve been asked to work with a team of forensic accountants. How can you get best value and results from them? One of the most important steps is to work with the forensic accountants to determine, right at the start, the purpose of the investigation into money lost through fraud. Now that the horses have escaped from the barn, so to speak, do you want the accountants to help you round up the horses and get them back into the barn, or should the focus be on securing the barn against recurrences?

While the senior management team of your employer or client likely wants a positive outcome, it likely has a budget in mind and so resources need to be focused on the most important issues. Deciding the purpose helps determine the focus of the investigation and also guides the development of a work plan.

Be sure that the plan has clear deliverables in place, based in part on consultation with the forensic accountant. Phasing an investigation with many tentacles can help ensure that the most fruitful deliverables are carried out first. After the plan is in place, keep communication lines with the accountants open and work with them in a team approach.

On one hand, it’s important to stay involved with the investigation, in part so that the accountants don’t spend time digging in areas that are not important to the organization’s overall purpose. On the other hand, be sure not to tie the hands of the investigators. Use their specialized experience to the maximum — this may include using Anton Piller Orders and Norwich Pharmacal Orders to wrest information from sometimesreluctant third parties.

Forensic accountants can be valuable for communicating progress and results to those interested in the investigation, such as senior management. Having them on board and visible provides reassurance that the matter is being dealt with effectively. Some of the best value from forensic accountants comes from their experience with other fraud situations. While most people perpetrating a fraud must learn from the ground up, “reinventing the wheel” each time, the experienced forensic accountant has seen it all before and can uncover the truth.

Ken Froese, CA*IFA, FCFI is Senior Managing Director of Froese Forensic Partners Ltd; contact kfroese@froeseforensic.com; 416.926.4212.

Signs of fraud

Although someone perpetrating a fraud will try to keep it a secret, there are signs that point to risk of fraud, or that fraud is actually occurring.

Some of these are set out in the Handbook of the Canadian Institute of Chartered Accountants, in the Appendices to Section 5135. Here is a summary of key points:

Incentives and pressures
• Personal financial obligations may create pressure on those with access to cash or other assets susceptible to theft to misappropriate those assets
• Adverse relations between the entity and employees with access to cash or easily stolen items — for example if layoffs are expected or unfavourable changes to compensation or benefit plans are made.

Opportunities
Circumstances that can enhance the opportunity for misappropriation of assets include:
• Large amounts of cash on hand or processed;
• Inventory items that are small in size, of high value or in high demand
• Easily convertible assets, such as bearer bonds, diamonds or computer chips.

Attitudes and rationalizations
• There is a disregard for the need to monitor or reduce risks related to misappropriation of assets.
• There is a disregard for internal control over misappropriation of assets by overriding existing controls, or by failing to correct known internal control deficiencies.
• Behaviour indicates displeasure or dissatisfaction with the entity or its treatment of the employee.
• There are changes in behavior or lifestyle that may indicate assets have been misappropriated.

- Ken Froese, CA*IFA, FCFI