Commentary: Using forensic accountants and certified fraud examiners

St. Louis Daily Record & St. Louis Countian, Sep 17, 2006 by Lori A. Tesch

(This article was originally published in Michigan Lawyers Weekly, another Dolan Media publication).

Fraud in the workplace is a serious problem for organizations, and small businesses are especially vulnerable. With increasing frequency, business owners suspect their employees are stealing, and they want legal counsel to prosecute and get their money back. They may not know exactly how it's happening, but they think money is missing.

These business owners have certified public accountants who compile financial statements at the end of the year, and they don't understand why the CPA didn't notice that something was wrong. As a result, these business owners look to their attorney for advice on how best to proceed.

You're a legal expert,

not a bean counter

The last thing the legal expert wants to do is spend hours sifting through accounting records or computer printouts. After all, isn't that what the CPA should have done?

However, just like attorneys, not all CPAs are the same - attorneys specialize and so do CPAs.

In the majority of cases, the business owner finds out that the service they required from the CPA was not designed to detect fraud. A CPA can provide monthly, quarterly, or annual business advice and reports, or they can focus on other areas such as audit, tax, forensic accounting, or fraud examination. Which one can best help to prove a case?

Knowing the difference

Auditors determine compliance with accounting standards and consider the possibility of fraud. They approach an engagement with specific procedures that need to be performed and a plan for how to go about it.

Moreover, auditors determine "materiality" and then do testing and sampling based on that level of materiality.

In auditing, materiality is an important determination in terms of which transactions are investigated or tested. It is defined as a transaction's relative size as compared to revenue or total assets.

It is easy for a perpetrator to "learn" what the level of materiality is for his or her business and then work to keep any fraudulent transactions below that level. That is why it is commonplace for businesses to have had audits performed with no appearance of wrongdoing ever being discovered.

But for forensic accountants and/or fraud examiners, materiality does not exist, nor does a specific plan or list of procedures that can be used in every instance of investigation. Every investigation is unique unto itself and it is never known where one little piece of seemingly insignificant information may lead.

For that reason, forensic accountants and fraud examiners often look at every piece of information available. They strive to know not only what shouldn't be there, but what should be.

Typically both forensic accounting and fraud examination are associated with a negative connotation. While fraud examination is primarily focused on a negative issue or event, forensic accounting can be applied in positive assurance engagements, too. The level of precision that a forensic accountant employs can be utilized in such areas as due diligence reviews, business valuations, and risk management.

In both cases, what is most important is the individual's ability to identify, analyze, and communicate the evidence of the occurrence of the transaction within appropriate legal framework. Any detailed analysis will need to be presented in a variety of ways when numerous complex schemes need to be explained to third parties.

Picking a professional

Since both disciplines are used in judicial proceedings, the determination to hire one individual over another may be based on the individual's prior experience and their communication skills, both verbal and written.

Because the work usually ends up being expressed through depositions, mediations, or even trials, communication skills are vital. The ability of the professional to explain and present the details of the investigation may be what makes or breaks your case.

Additional issues that should be considered when hiring a professional include:

Retaining the professional early - They can assist with the examination for discovery, assist with settlement negotiations, and identify additional areas of damages.

Access to all relevant documentation - The acceptance of the findings may be impacted if restrictions are imposed upon the scope of the investigation.

Retained by counsel - In order to extend the privilege that exists between the client and counsel to the work of the professional, the professional should be retained by counsel.

If you are looking specifically for a professional in fraud, then a certified fraud examiner will be helpful. However, if you need someone to assist with other types of investigations or litigation support, a forensic accountant will be valuable. The ideal professional would be someone who is both.

Lori A. Tesch, CPA, CFE, FCPA, is a certified fraud examiner in the Saginaw, Mich. office of Yeo & Yeo, P.C.