During periods of economic stress, both civil and criminal incidents of fraud tend to rise as businesses face increased financial pressures. The current climate is posing exceptional challenges resulting from COVID-19. Attorneys are more likely than ever to turn to the services of a CPA for support with settlement negotiations and trial testimony in fraud litigation.
Fraud covers a wide range of activities from intentional misrepresentation to more active deception performed with intent to obtain an illicit gain or advantage. While an exhaustive list of fraudulent conduct would be very broad, questionable practices may involve:
- Asset misappropriation
- Bribery and corruption
- Purchasing and kickbacks
- Wills and trusts
- Financial reporting irregularities
- Insurance claims
- Bankruptcy and preferential transfers
- Asset-based lending
- Securities and investments
- Electronic payments
Role of the CPA
The CPA work list in fraud cases incorporates a range of tasks such as:
- Evaluating cases by collecting and analyzing bank and credit card statements, journals, ledgers, and databases
- Reviewing documents and transactions for any details of theft or embezzlement
- Estimating losses
- Interviewing witnesses
- Preparing a written report, including graphs, charts, and spreadsheets
After the relevant records have been produced or subpoenaed, a CPA may work independently to ascertain and document exactly what happened and to identify who is responsible. In addition, a CPA will quantify all loss exposures and determine the applicable time periods involved.
All CPAs are not equally qualified to undertake fraud assignments. Those who hold advanced certifications such as the CFE (certified fraud examiner) are particularly trained in protocol and evidentiary requirements. In some cases, CPAs performing fraud investigations are required to maintain private investigation licenses to provide testimony in litigation (R&A CPAs’ principals maintain this licensure). Lawyers should also inquire about a prospective CPA’s fraud background in terms of previous cases and the outcomes in those matters.
Uncovering and investigating an occupation fraud scheme can utilize a variety of investigative techniques. These types of classic scams essentially rely on utilizing various methods to hide the theft of cash or other company assets.
Cash flow analysis is the central element for investigating many occupational fraud schemes, and the basic rules can be summed up in three words—follow the money! CPAs, using computer forensics and electronic discovery, can help quantify the fraud. They will utilize these steps to set up an inventory and document management system:
- Investigate bank statements, wire confirmations, debit and credit memos, deposit slips, and canceled checks
- Extract accounting system data to a database
- Create a cash database
- Compare accounting systems extractions to bank and brokerage statements
- Identify related entities and accounts
A typical occupational fraud case often runs into the hundreds of thousands of dollars, but a CPA can be an invaluable adjunct to the legal team.
R&A can help your organization identify and implement controls to manage fraud risks. We work with companies to prevent fraud or to investigate suspected fraudulent activity. Our risk assessments focus on providing valuable information to business leaders, allowing them to make strategic decisions to positively impact day-to-day operations while minimizing risk inherent in today’s complex business environments. ©
About this Author
A specialist in auditing and full disclosure financial reporting, Phil leads R&A’s assurance department and has extensive experience in resolving technical issues, communicating internal control and operational improvements, and implementing financial reporting and disclosure requirements. Additionally, Phil is a certified fraud examiner with experience in fraud risk assessments, fraud investigations, and litigation support. His industry experience includes investment companies, broker/dealers, real estate, construction, employee benefit plans, government contracting, and not-for-profit entities.