By Joseph S. Barbagallo
Special to the Legal
Many firms have annual financial statement audits, internal control reviews and complete background checks on all prospective employees. In my last post, I listed eight preventive measures you can put in place to avoid internal fraud. Even with all these efforts, many still suffer from embezzlements.
Are all of these lost funds gone forever? Maybe not -- when a problem is detected, sometimes a CPA who specializes in forensic accounting or fraud can identify offenders, help determine damages and possibly get assets returned.
Forensic accountants will begin by reviewing a firm and its daily operations. They will interview relevant employees about procedures and activities and partners/shareholders about related entities that the firm deals with regularly. Even if these interviewees have no direct knowledge of embezzlement, they can provide valuable clues or may know connections between entities that others don't.
Fraud professionals also scrutinize a firm's books and financial records. They will pay attention to the vulnerabilities associated with wire transfers and checks made out to cash or to unusual payees. Work programs are typically created to identify and track misappropriated funds. Visual aids are often used to explain complex embezzlement schemes.
There are numerous ways to abscond with funds, and many sophisticated perpetrators are very adept at covering their tracks. Embezzlers use numerous schemes such as improperly expensing embezzled funds as sales refunds, general and/or administrative expenses; and recording stolen funds as prepaid expenses or other assets.
Tech-savvy thieves may discover new ways to use computer applications to extract even greater sums of money. Forensic accountants, with assistance from IT professionals, can determine if a suspect has accessed or edited files and can often recover altered or even "destroyed" data. They also use specialized software to analyze transactions, to sort and group embezzled funds and to calculate damages.
If a matter goes to court, a CPA forensic specialist can be used as an expert witness to help the judge or jury understand complex financial concepts and how to follow the path of the embezzled funds. It is essential, especially in a jury trial, to keep the demonstratives simple and easy to understand.
Sometimes, even after exposing embezzlement and identifying the perpetrator, stolen funds cannot be recovered. It is not unusual for a person who has committed fraud to spend most of the money. A forensic specialist can often see whether a perpetuator converted embezzled funds into real estate or other assets. This may facilitate freezing and later seizing those assets.
Just as you would want a detective on the crime scene early, you should retain a forensic accountant as early as possible when embezzlement is suspected. This greatly increases your chances of finding the criminals and getting embezzled funds back. Unfortunately, time is often on the embezzler's side, so call as soon as you suspect or see something that seems out of line.
Joseph S. Barbagallo is a partner with Citrin Cooperman, an accounting, tax and business-consulting firm in Philadelphia. With more than 35 years of experience, he focuses his practice on business valuation and financial forensic services, expert testimony and litigation consulting services in fraud cases. He can be reached at firstname.lastname@example.org or 215-545-4800.