As forensic accountants, our job is to establish the true facts and the correct figures, wherever they are hidden and whatever is being claimed. In situations involving fraud — whether it is employee dishonesty, embezzlement, misappropriation or fidelity issues — forensic accountants assist insurers in measuring the actual loss resulting from the fraudulent action. We also provide the supporting evidence that identifies opportunities for misappropriation and possible methods of concealment. Finally, we work with the insurers’ lawyers and other advisors seeking recovery of the fraud loss sustained, providing litigation support and expert witness testimony in civil and criminal actions.
Case Studies in Prevention and Detection
Below are several case studies that depict how forensic accountants can detect and prevent fraud and losses to companies.
- Bob, owner of a luxury car dealership, filed a claim with his insurer for financial loss as a result of employee dishonesty. Forensic investigation revealed that Bob was partially right … but mostly wrong. Their financial analysis of the dealership’s accounts revealed that only a small portion of the claimed loss of inventory was due to theft by employees — and that the rest of the parts claimed as stolen were in fact still sitting on the shelves where they belonged. The entire claim was withdrawn after they reviewed our report.
- Barbara was a purchasing manager for a major retailer, and the mastermind behind a clever embezzlement scheme. She ordered shirts from a supplier and then insisted that they be delivered to a bogus firm she set up for the purpose of re-labeling the shirts and adding her own mark-up. Investigation by forensic accountants provided the audit trail necessary to prove that the embezzlement had occurred. Forensic accountants also demonstrated that the retailer had overestimated its claim against the insurer in relation to the embezzlement, because it had not excluded remaindered shirts from the claim — which figured a large proportion of the total. Their work resulted in a major adjustment of the loss — to the insurer’s benefit.
- Carl was the assistant treasurer of a U.S. University who had a penchant for fine clothes and fast cars. To finance his lifestyle, Carl devised a clever plan to circumvent the internal accounting controls of the university for the purpose of misappropriating funds. The scheme involved a complicated system of fabricated travel advances and vouchers, forged signatures and fictitious receipts. Eventually, Carl was caught and the university submitted a fidelity claim for $700,000. The insurer was concerned, as the amount of the loss did not appear to be properly documented. Forensic accountants conducted an accounting investigation to separate the fictitious travel advances from the genuine ones. As a result, the loss was adjusted to reflect the accurate figure.
- A plastics manufacturer submitted an insurance claim in excess of $800,000 — more than three times the fidelity policy limit of $250,000. Mark, the production cost manager, had exploited his expertise in raw material prices to convince a supplier to sell raw materials to a shell company for resale to his employer at a mark-up. The scheme went undetected for three years, in large part because Mark controlled both the authorization and payment of invoices. Forensic investigation revealed that some of the loss was not due to fraud, but to the impact of market forces on the price of raw materials. Forensic accountants also determined that the materials supplier, through the acts of its agents, was partly responsible for the misappropriation. Their findings enabled the insurer to file a restitution action.
When it comes to fraud, any entity or company is susceptible. Corporations and management commit a critical error and actually contribute to the opportunity of employees, vendors or suppliers to defraud them simply by believing that it cannot happen to them. Fraud prevention is as much awareness of the existence and potentiality of fraud, as it is the development of key controls to safeguard assets through the segregation of duties and periodic comparisons of actual to recorded transactions.
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Randall Wilson is a partner and the director of Fraud & Fidelity Services at RGL Forensics, the international forensic accounting and consulting firm, He may be reached at RGL’s St. Louis office at (636) 537-5589.