Accepting a Fraud Engagement – “Look Before You Leap”

One of the primary considerations when contemplating accepting a fraud examination engagement is whether or not the work justifies the costs to our clients. Just like our clients, among the chief purposes of us being in business is to earn money, so we hate to turn away or minimize work. But if we truly strive to best serve our clients and be perceived as trusted advisers, there are times when we need to advise our clients not to hire us (or anyone else) or to more appropriately align the scope of our work with realistic expectations as to outcomes.

It’s not that unusual to get a call from a company that has cause to believe an employee(s) has committed a fraud and where the company is very angry at the betrayal of trust and worried about how big the loss is. That anger and fear can make them very attractive to inexperienced and/or unscrupulous consultants/fraud examiners/accounting firms, many of whom charge premium rates for this type of work.  Many times have I heard such prospective clients say “It’s a matter of principle, so I don’t care about the costs! I want to get to the bottom of it and put the [expletives] in jail!”

That feeling about costs passes quickly, particularly after the invoices for your work start coming and there is no insurance to cover the costs and the likelihood of recovering any of the stolen funds is remote. Lets face it, most people who embezzle funds from an employer are not hoarding up what they stole. They spend it.  And not on hard assets that may be converted to cash or otherwise benefit our clients. Simply put, it’s usually gone.

As a trusted adviser, when we believe that to be the case and absent some legal, regulatory, or contractual need for the client to conduct a full fraud examination, we are obliged to share our concerns with the client. We need to make the client aware of its risks and set their expectations on the outcome(s) realistically and practically. Where possible, we should devise other ways to help them that provide a reasonable return on their investment for our time and expertise, even if that return is more preventative of future misconduct (e.g. internal control suggestions) and/or just a moral victory (e.g. criminal prosecution) more so than a recovery of misappropriated funds.

In such instances over the many years I have been doing fraud examinations, I have both talked prospective clients out of hiring me for such an examination or into reducing the scope of my examination from that which they initially envisioned.  In either case, I never leave them lacking in understanding about why conducting a formal and/or exhaustive fraud investigation was likely not going to achieve the results they desired. I also never leave them empty-handed, in the sense that, for example, I teach them how to do some investigating themselves and/or provide some ideas on internal controls that might prevent the next internal fraud. I rarely charge for that time (it’s usually minimal time and a nice “thanks” is payment enough) and have found the favors are usually returned somewhere down the road, whether by referral, reference, or selling/maintaining other accounting/tax/financial consulting services for that client.

One great example of this is an embezzlement matter that I took on a few years ago for a relatively small business. The employee at issue, whom I will hereafter refer to simply as “Joe,” had been with the business for over a decade, much of which time was spent in nearly complete control over the accounting function(s). There were no internal controls to speak of and Joe not only had the ability to steal in a wide variety of ways (i.e. payroll, accounts payable, credit card usage, false vendors, accounts receivable, cash, etc.), but also had the knowledge, experience, and ability to well conceal such activities within the books and records of the business.

After meeting with the client to gain a full understanding of the matter, their accounting system(s) & controls (or lack thereof), and learn about Joe (family, lifestyle, etc.), I quickly realized that due to the many ways that Joe could have stolen from the business and could have attempted to conceal it, conducting an exhaustive fraud examination designed to uncover the full extent of Joe’s fraud(s) would be extraordinarily expensive, while the likelihood of recovering much, if any of the stolen funds was poor. I suggested to the client that I be retained, through the client’s counsel, as a “consulting expert” rather than a “testifying expert” (which was the client’s original intent), so that I could better leverage any work to the client and otherwise keep its costs for the examination down.

In this particular matter, I quickly recognized that the facts and timing allowed for an interesting and possibly significant cost-savings option for the client – the possibility that I could interview Joe. Joe’s employment had been terminated on a Wednesday for some cause other than fraud (the fraud concerns were not mentioned to Joe when his employment was terminated) and they called me that Thursday afternoon.  Following my directions, the client quickly identified and documented about $200K in alleged misappropriations. I spent about thirty hours reviewing and testing the work the company had very quickly done at my suggestion and learning as much as I could about Joe. Early the following week, I called Joe, identified myself, explained my purpose, and asked if he would be willing to let me interview him immediately. The ending result from the consensual interview of Joe was a hand-written confession.

The client had no insurance to cover Joe’s thefts and realized through our discussions that the likelihood of recovering much or any of the stolen funds was remote. More so than recovering their losses (which could not be completely quantified without significant work at great costs), the client’s desired outcome became “justice” and a criminal referral that included a hand-written confession was the ideal solution. The guidance and alternative solution that I proposed and undertook saved the client many tens of thousands of dollars in fraud examination and attorney’s fees and helped ensure that Joe became a current resident of a penal facility. In addition to a restitution order from the criminal prosecution, I believe the client eventually got a civil judgment, but to the best of my knowledge, both were more paper than currency. At least justice didn’t cost them much in this case.

I could have easily talked that client into an exhaustive forensic fraud examination.  They initially felt the need for that (it was also recommended by the client’s counsel) and that was why they called me.  But I knew that doing that was not in their best interests and I firmly believed that it was my duty to let them know it, even though I fully understood that if they agreed, the fees generated by my work would be many tens of thousands of dollars less.  I definitely lost some short-term revenue, but I gained a long-term friend who has many needs that I or my firm can be fully trusted to help them with.

The old adage “look before you leap” finds very sound application in this practice area, and it’s our duty as trusted advisers to not just apply it to ourselves when contemplating accepting a fraud examination engagement, but to help our clients apply it as well.

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The Fraud Guy

John has over 24 years of fraud investigations, forensic accounting, corporate compliance & ethics, and audit experience. He has applied his extensive experience in these areas across a wide array of areas and industries, frequently assisting counsel, government agencies and companies with internal corporate investigations and other matters arising from alleged fraud or misconduct. John is a thought leader and expert on Corporate Monitors/Compliance Monitors, a practice area involving the imposition of an independent third party by a gov't agency or department upon a corporation to verify that corporation’s compliance with the terms of a settlement agreement. John has previously served in a leadership role in a federal Monitorship and was involved in four other federal monitorships: two as the named Monitor, one as the "Independent Business Ethics Program Evaluator" and the other in support of the named Monitor. In these roles, John has reported to the Department of Justice, the Department of Interior, the Department of Transportation, the Small Business Administration, the Federal Highway Administration and the Massachusetts Department of Transportation. His practical experience as a Corporate Monitor and extensive knowledge in this area is currently being applied to the development of formalized Standards for Corporate Monitors, through John's Membership on the Task Force on Corporate Monitor Standards of the American Bar Association. John is a frequently sought speaker on the topic and has provided practical advice, ideas and strategies to lawyers, government officials, and corporate executives involved in such matters, as well as newly appointed Corporate Monitors. Prior to Artifice, John spent over 5 years as a leader in the fraud investigations and forensic accounting practice of a large publicly traded international financial consulting firm. Before that, he served for 10 years as an FBI Agent, specializing in complex fraud investigations.

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