Forensic Accounting. The basics you need to know.

Welcome, everybody, back to the Juba Forensics blog post. Today, I wanted to talk about fraud in general. I've got some statistics here. So if I look off to the side a little bit, I've got my statistics that I'd love to run through with a little more broadness. What is fraud? What does that look like? We're not going to be specific to divorce today, but just in general, what does business fraud, personal fraud, how do you protect yourself? Who do you contact? What do you do exactly if you think there's fraud happening? So, we'll start with some facts. In 2024, the ACFE, which is the Association of Certified Forensic Examiners, published a report every year. And in that report, what they do is they take many cases that certified forensic examiners have worked on, and they go ahead and work up the numbers.

What does that look like? How much was lost to fraud? For the 2024 reports, they reviewed over 1,900 cases. They pulled out 1,921 cases, totaling $3 trillion in losses. On average, organizations lose about 5% of their revenue each year to fraud. The median loss per case was $145,000, with the average loss per case being 1.7 million. Tips detected 43% of fraud. The most effective way to detect fraud was through tips from employees, vendors, or other sources. In 89% of those cases, specifically the 1900 cases, the schemes involved asset misappropriation. I would love to, at some point get a little further down the rabbit hole with what is what are the different schemes out there, what do they look like, but today we're not going to go too far down the rabbit hole, but know that 89% of these cases were asset misappropriations. Assets are things that your business owns.

I guess I should back up a little bit further. What we're highlighting right now is just business fraud. It is not personal fraud. It is not your divorce cases. It is not elderly fraud and abuse. This is just in your business. The amount of fraud that occurs globally, not just here in the US, but across the globe. So 89% of the cases that were studied were asset misappropriations. Assets are things that your business owns. The things that your business owns include cash. So cash um 22% of that 89% were billing schemes. Won't go too far down that rabbit hole. You can Google that if you want to. And 22 another 22% were theft of non-cash assets. 5% of these cases were financial statement fraud. And that is where somebody is kind of fudging the numbers. They are moving things where they shouldn't be moving them in your accounting software. That's what that piece is 48% of the cases involve corruption.

Fraud occurs for more than 12 months before it gets detected. 12 months. That's a really long time. And that is not an average. That is not saying every case. On average, it was about 12 months. There are definitely cases where it goes on for years before it is finally detected. So these thefts that occurred, these 1900 cases that were studied, they occurred across the board. They occurred in nonprofits, the government, all forms of government. So local government, state government, federal government, as well as public companies and private companies. And not only was it just all spans of business in general, but it was also all spans and sizes of businesses. people that had more than 10,000 employees to people that had less than a hundred employees. People that brought in more than a million dollars in revenue, people that brought in less than $100,000. So, this covers all businesses all across the board. More than half of the fraud that occurred was due to a lack of internal controls or someone overriding internal controls. So, one of the best ways to prevent fraud is your internal control system. Make sure they're up to date. Make sure that you monitor them as you're going throughout your business.

Perpetrators, 84% of them had at least one behavioral red flag. Behavior red flags, that's going to be a whole separate video as to what that looks like, but 84%. So, someone could have maybe caught this sooner than what they did. The longer the employee works for an organization, the greater the loss is for that organization because that employee, the longer they're there, they're the more trusted employees. They're usually higher levels. Your sales clerk, maybe uh the cashier is not going to be there for 30 plus years. Eventually, they get promoted up the system up through the system. So, the longer the employee is there, they're more trusted. They're higher ranking. They know the ins and outs of your business. They know the ins and outs of what they can and cannot get away with. And they also have more access to everything because they've always had access to everything and there's never been a problem before.

Losses are seven times greater if they're carried out by the owners or executives of a business. The five departments that are most likely to commit fraud are operations, accounting, sales, customer service, and executive and upper management. Only 57% of cases were reported to law enforcement. Some of those reasons that's going to be also a whole another video is do you bring it to law enforcement or do you not bring it to law enforcement?

Some of the businesses that did not bring it to law enforcement felt like what they did was enough of a punishment, usually firing the employee, and other businesses did not want the bad publicity associated with someone stealing money from their organization. But of those cases that were brought to law enforcement, 72% of them led to a conviction. And so that then became on their on that suspect's perpetrator's record. Their record now shows that they stole money from an organization in the past. More than $5 trillion is lost to fraud annually. And that is just occupational fraud. That is just in business, not including any personal fraud. Good internal controls and a way for your employees to report anything suspicious can make a difference in fraud for your business.

That's just business related fraud. I do have separate YouTube videos about what personal fraud can look like. One of my YouTube videos is about an elderly fraud um elderly fraud and abuse case. And I've got another video all about a divorce case and what that looks like. So, I won't go down that rabbit hole right now, but know that you can see fraud on either side. So, then it becomes how do you protect yourself from this? It's everywhere. It affects most organizations. Most people at some point see fraud, hear about fraud, fall victim to fraud. Proper internal controls can help. But constantly re-evaluating those internal controls really helps make a difference because as your business continues to grow and change throughout the years, your internal controls also need to grow and change with your business.

Make this a conversation that you have with the people closest to you. Have this conversation with management. Have this conversation with your loved ones. Have this conversation with all of your employees. bring awareness to what is fraud, how do you prevent fraud, how do you help find fraud, catch fraud, what do you do if you think you see fraud, empower those around you with knowledge, but also empower them to speak up if something is going wrong. I know that's very vague with how do you protect yourself, but I've got a few specifics here.

Actual specific internal controls that you can perform in your business that you can work on within your business. Separation of duties, that's huge. You do not want one person in control of everything. You do not want one person paying all your bills, accepting all your cash, running your payroll, entering everything into your accounting software system because that leaves it open too. They could start stealing cash and you would never know. They could have a fake person in payroll and you maybe wouldn't catch it. They could make fake vendors and start paying themselves as a fake vendor and you maybe wouldn't catch that either.

People are crafty. They will come up with ways to cheat the system if you allow them to. So, separation of duties. Now, the smaller your business is, it may be more difficult to have a separation, some separations of duties, but you can get creative with how you work this out, how you make this work for you. A forensic accountant is a great person to talk to about separation of duties. We can help sit down and look at what are you doing currently, how can we improve that process, what do you need as an organization?

Another internal control that you can work on is to make your employees take vacations. And I know that sounds ridiculous because a lot of us love going on vacations and going fun new places, but if someone is knee deep in a fraud scheme in your business, they're probably not taking any time off because mo a lot of fraud schemes, someone needs to be there controlling the scheme, manipulating the scheme so it doesn't start to raise a bunch of red flags. So by forcing your employees, maybe you've had an employee that hasn't taken a vacation in three years. They have the time to take, I'm sure. So sit them down and say, "Hey, you're going to take a two week vacation. Here it is. Even if you don't go anywhere but sit at home, you're going to take a vacation."

Because that week or two that that employee is not there, if there is a scheme, it may start to unravel a little bit and it may raise some red flags. So, I'm not saying if you have an employee that's never sick and never takes vacation that they're a bad person because maybe they do love their job and never want to be away from their job, but they also could be running a fraud scheme. And if they're a great employee and they're not doing any fraud, they deserve a two week vacation anyway.

Something else you can do, pull statements and check them quarterly. When I say pull statements, do not go into the filing cabinet, open up the drawer, pull out the bank statement that your person has printed and compare that to what's in your accounting software system. It is very easy to manipulate that data that has been printed printed and put into that filing cabinet. So, pull those statements directly from the bank yourself. You log in, pull the statement, compare it to what is in your accounting software system. Seems like a lot of work. That's why I'm recommending quarterly. If you want to do it every six months, you can do that as well. But there's so much more to check besides just your bank statements. But you should also be checking things like payroll. Ideally, you should check it every payroll run to make sure there's nothing crazy happening in payroll, someone's not paying themselves a big bonus when they shouldn't have been, whatever it might be.

But keep your eyes on your financials and not just let me look at the profit and loss statement. Oh, everything looks great. No, dig deeper into those financials. And there are more suggestions besides payroll and bank statements, but I won't go too far down that rabbit hole. If you need recommendations and want some help, contact me. I can help come up with a list. You can also have a professional come in and look at this for you. Now, I wouldn't have a professional come in and look monthly to make sure someone's not stealing anything. That's overkill. But if you brought in a forensic accountant on a yearly, every other year, every three years, bring someone in to look at your internal controls. bring someone in to look at what is happening in your organization. Make sure there is no fraud. That is a great way to catch it before it happens or catch it early while it is actually happening.

And when I say bring a professional in, please do not bring your external auditors in. I love external auditors. They are amazing to work with. But external auditors, their role in your organization is to make sure your financial statements are reported accurately. So yes, fraud does affect financial reporting, but they are more check they're checking lots and lots and lots of boxes for you. So they do not have the time to go in and then check a bunch of things for fraud. Bring in the forensic accountant that knows what they're looking for fraud. Have them help you design an internal control system to prevent fraud going forward in the future. And also provide my fifth one here. Provide fraud training to your employees.

What that can look like, it can look like a webinar for your employees. Maybe once a year if you wanted once every two years, can be 30 minutes, can be an hour, but just get the information in front of them with what are the behavioral symptoms behavioral signs you should look out for. What is fraud in an organization? What is a check kiting scheme? What is asset misappropriation? How do people do that? Like what is the fraud triangle? Get someone in there that can talk about these things to your employees so this way they know. And then when they start to see things, if they see things, they can then say something to the right person and that should be part of that presentation. Not just what is fraud, what does it look like, but who do you tell within the organization if you suspect fraud on some kind of level?

So the my five recommendations for internal controls to protect yourself and your business. Separations of duties, make employees take vacations, pull statements and spot check them at least quarterly. Have a professional come in and do a spot check for you maybe once a year, once every couple years, and then provide fraud training to employees as well. What you should not do if you suspect that there is fraud within your business, do not fire that employee. The second you think they're stealing from you, because you may not they may not even be stealing from you. If if you haven't brought someone in to look at that, and if they are stealing and you fire them immediately without actually knowing if they're stealing, it's going to be harder to get them to cooperate on the back end, it's going to be harder to get them to be interviewed, to maybe confess as well, to tell you where more money is missing that they hid that you didn't even know about.

As hard as it is, keep that employee on for as long as you can. Now that you're alert to some of the things they have going on, bring in the professionals quickly, discreetly. Let them get to work and then figure out the best course of action. Do not trust the physical documents that the suspect has in the filing cabinet. I already hit that. I won't hit it again. Do not talk to other employees about the potential suspect and the things you think might be happening. The more people that know, the more likely it is to get back to that suspect, then they can start to destroy evidence. Then they can leave. They can do all these things that you don't want to happen yet. So, keep this a secret for as long as you can while you're working with professionals to come up with what is the total amount of loss? What do we need to work on?

Do not expect to get all of your money back. And I know that's a hard one to hear, but in most cases, the money's already spent. Whether that person has a gambling problem, maybe they bought a brand new couple brand new cars, sent their kids to private school or university, whatever it might be, most of the time this money is not sitting in some crypto wallet somewhere. Most of the time, this money is gone. So, do not expect to see every penny back while you're working through this with professionals. And do not expect the suspect to be put away for a long time. Do not expect if you give this case to law enforcement that the suspect or perpetrator is going to be put away for 20 years. Most likely, it won't happen.

Also do not contact a generic CPA or bookkeeper to help you with your forensic accounting case because they will miss something. And it's not because they're not intelligent. It's not because they couldn't figure it out, but it's because they are not trained to figure this out. They are not trained with what to look for, what reports to pull, how to type up the report accurately. Maybe they can do a great job, but maybe they don't do a great job. you won't know. So, go to a forensic accountant from the beginning. Who do you contact first? If you think fraud is occurring within your organization, if you're a business and you think fraud is happening in your business, the first person you contact is law enforcement. If you are looking to prosecute criminally, but also contact a forensic accountant at the same time. Like, you hang up with law enforcement, get a forensic accountant on the phone right after. or vice versa. Call the forensic accountant first, hang up, and then call law enforcement and then hang up. Those two should happen at the same time.

Not because law enforcement, yet again, not because law enforcement doesn't know what they're doing, but because law enforcement is not most of the time specifically trained on forensic accounting and white collar crime. They, depending on the state you live in, depending on how rural you live, they don't have much training or experience with cases like these compared to a forensic accountant. So, if someone was stealing from my business, I would want both players on my team from the get-go and then they can collaborate and work together and make this thing as airtight as possible for me. Uh the second person you should contact is a lawyer because that lawyer is going to help you work through can you terminate that employee? What does that look like? And the lawyer can help talk through civil versus criminal case. Do you prosecute? What does that process look like?

The third person you should contact, but you're going to wait on this one. The third person you should contact is business insurance. If you have business insurance, you might be able to file a claim and get some of your money back, but that claim, you most likely will need the report from the forensic accountant first before you can file for a claim. So, the business insurance is going to kind of wait, but keep that in the back of your mind. If it is a personal case, depending on the case, like if you're going through a divorce, you probably have contacted a lawyer first and then you're going to bring on forensic, a forensic accountant maybe, and then maybe if you need a PI, if you need law enforcement, then you start bringing more professionals on as needed.

If this is elderly fraud and abuse, you definitely want law enforcement working this through, but you want law enforcement working this through with a forensic accountant, like with a business. And also, you may need a lawyer as well if it's something like elderly fraud and abuse. So, the last piece that I've got here, I've hit on a little bit, but I do want to hit on one more time. Not every CPA can handle forensic accounting. Just because they have CPA after their name does not mean they can do everything accounting related. The CPA certification is very general, not specific. There are fraud specific certifications that accountants can have.

If you are looking for someone to handle your forensic accounting case and you find a CPA, the first thing you should do is ask them if they have any fraud specific certifications. If not, I would probably go somewhere else and find somebody else. I personally have both the CPA and the CFE, which is that fraud specific piece. And also while you're there at the CPA's office, ask them, "Have you ever worked on cases before, what were the outcomes like? What did that look like? What kind of report did you work up?" Ask them specific questions. And if they tell you they've never really done a case, do not I wouldn't go there. If it was me and my business or my issues that I'm having personally and I need a forensic accountant, if they've never worked on a case and they don't have any certifications, that means they have no training in forensic accounting. go somewhere else for your money. My first case that I got was handed to a CPA who had no idea anything about forensic accounting. No clue. And the case was eventually given to me because I had taken one college class in forensic accounting. Arguably, we should not have taken the case on and we should have told the client, I am so sorry. We are not qualified for this. Please take it somewhere else.

Now, I am grateful that did not happen because that is what has launched this for me. But we did the case anyway. Thankfully, that one college class, I was able to put my education to good use and was able to find what I needed to find, get it written up into a report, get everything taken care of that we needed. Now, I have a lot more experience. I've got the right certifications. Things are very different now than what they were in the very beginning for me. So, what forensics what forensic accountants can do for you? There's a very short quick list here. Forensic accountants can do asset tracing. They also can quantify your losses, testify in court, prepare expert reports, and they can also make internal control recommendations and work with you. Forensic accountants can also provide training to your staff if you need training. So, if you have any forensic accounting needs, any questions about what that looks like, please feel free to contact me. You can comment on this YouTube video or my LinkedIn, wherever you might want to get in touch with me. This was a very high level of forensic accounting. Hopefully you found it interesting and stay tuned for the next blog post.