corporate fraud Archives | CJA Forensic Accounting

Employee embezzlement is, unfortunately, a frequent occurrence in the workplace and often goes unnoticed for months or even years. Both outright stolen and mishandled funds can constitute embezzlement and lead to significant financial losses for your company or business.

What Is Employee Embezzlement?

Employee embezzlement is when an entrusted person steals from the business they are employed by. Some examples include padding expenses, creating fake vendor payments, or stealing customer credit card data. Vigilance is key to both preventing and eliminating these opportunities and others. When evidence or suspicion is present, action should be taken immediately. Recovering embezzled funds is a long and complicated process that requires the professional help of an experienced forensic accountant.

What Does Employee Embezzlement Look Like?

There are several questions to consider when establishing the likelihood of embezzlement at your company or business. Considering these questions can also help you to discover any opportunities for potential embezzlement which may exist, and which employees may be involved.

Is it one or multiple employees taking money from the company or business? According to this study, 79% of embezzlement cases include more than one culprit.
Do you see inconsistencies in your organization’s financial records?
Missing financial records, unknown vendors, and unapproved payments are all red flags.
Who has access to financial records and clearance to access funds? This study states 85% of employment embezzlement cases are perpetrated by an employee at the management level or above.

How Can I Investigate Employee Embezzlement?

If you suspect employee embezzlement is happening at your company or business, it is important to act fast. Theft of large sums can happen quickly and go unnoticed for years or even decades. Additionally, it is not always possible to recover all embezzled funds. The sooner you act, the more likely you are to recover as much money as possible.

Because so many cases of fraud include multiple people, uncovering the truth can quickly become complex and convoluted. A forensic accountant possesses the skill set to interpret and properly analyze discrepancies. They are specially trained to search for specific, key pieces of evidence and information. A forensic accountant methodically calculates both the magnitude and the duration of embezzlement, as well as identifies the employee or employees responsible for the misappropriation.

A forensic accountant’s expertise is essential in quantifying all the damages sustained in a legal dispute. Once the forensic accountant determines the extent of the activity, the evidence is documented in the form of an investigation report. This report is critical to recovering the embezzled funds through subsequent legal prosecution. Without a detailed report, a successful resolution in the form of recovered funds may not be possible.

In addition to facilitating the possibility of recovering losses, a forensic accountant will work with you to pinpoint areas in which the opportunity to keep this from happening again. A forensic accountant will offer advice on methods and strategies to be more proactive about possible employee embezzlement in the future. This insight is critical in preventing future employee embezzlement.

If you suspect employee embezzlement, take control of the situation today. Contact a forensic accountant immediately to protect your company or business.

How financial statements reveal corporate fraud

The U.S. economy is finally recovering from the effects of the recession, but at least one major financial risk remains — corporate fraud. Fortunately, a CPA certified in financial forensics (CFF) can help companies and investors minimize losses from fraudulent conduct by scrutinizing a business’s financial statements.

Fictional finances

Corporate fraud often is concealed when a company intentionally misrepresents material information in its financial reports. Such misrepresentations can result from the misapplication of accounting principles, overly aggressive estimates of figures and material omissions. For example, financial statements might report fictitious revenues or conceal expenses or liabilities to make a company appear more profitable than it truly is.

To cover fraud, perpetrators often conceal or omit information that could damage or improperly change the bottom-line results that appear in financial statements. Such omissions include:

Events likely to affect future statements, such as impending product obsolescence, new competition and potential lawsuits,
Liabilities such as loan covenants or contingency liabilities,
Accounting changes that materially affect financial statements — including methods of accounting for depreciation, revenue recognition or accruals — and are subject to disclosure rules, and
Related-party transactions, or those with a party with whom a member of management has a financial interest.

Perpetrators also might engage in fraudulent manipulation, particularly in the areas of revenues, expenses, reserves and one-time charges. Falsified financial statements can recognize sales prematurely, improperly value sales transactions (by, for example, inflating the per unit price) or report phantom sales that never occurred. Conversely, expenses can be manipulated by delaying their recognition — whether to match the expenses with their corresponding revenue or to avoid reporting a loss. Another trick is to improperly capitalize expenses so they appear on the company’s balance sheet rather than its income statement.

In some cases, fraudulent financial statements show reserves that have been calculated using bad-faith estimates. For example, fraudsters could justify a smaller amount of reserves by underestimating the percentage of uncollectible receivables. One-time charges, such as a write-off of goodwill or charge for research and development costs for a specific product, can further distort financial statement figures.

Reading between the lines

When fraud is suspected, a forensic CPA can dig into complex financial statements and uncover manipulation that might not be apparent to the untrained eye. A fraud expert begins by reviewing the suspicious statements for unusual trends and relationships. Any leads are followed by more intensive forensic accounting work, such as analysis of specific transactions, journal entries, work papers and supporting documentation. This type of examination goes far beyond a standard annual audit.

The CPA also may employ several types of analyses. Vertical analysis compares the proportion of each financial statement item — or groups of items — to a total within a single year that can be measured against industry norms. Horizontal analysis compares current data with data from previous years to detect patterns and trends. Financial ratio analysis calculates ratios from the current year’s data and compares those with previous years’ ratios for the company, comparable companies and the relevant industry. The expert, of course, must have experience in the subject industry and be able to recognize noncompliance with Generally Accepted Accounting Principles.

In fact, noncompliance is a significant red flag for financial statement fraud. The Association of Certified Fraud Examiners (ACFE) has identified several other behavioral red flags, including employees who live beyond their means and exhibit a cavalier attitude toward internal controls.

Keep a lid on fraud costs

The ACFE has estimated the median loss in financial statement fraud schemes at $1 million — to say nothing of the public relations damage that rogue executives who manipulate the numbers can cause. With their vast experience in crawling over financial statements, qualified forensic CPAs can help limit your clients’ losses.

Tag Archive for: corporate fraud

Investigating Employee Embezzlement