The victims of occupational fraud (asset misappropriation, embezzlement, etc.) can range from individuals to several entities including, small business, public companies, government entities, not for profit entities, estates and trusts, and other entities. To function, these entities trust individuals with other people’s money (OPM) and allow them access to and control of the receipts, the accounting system, and/or the company policies. A recent study for the period January 1, 2016, to October 2017 issued by the Association of Certified Fraud Examiners (ACFE) titled “Report to the Nations” for 2018  revealed that private companies are being victimized 42% of the time, and the median loss is $164,000. Overall the study of 2,690 cases exhibited the loss from fraud to exceed USD 7.1 billion. There are various means employed to commit occupational fraud. This case study will synthesize information from several investigations conducted for criminal defense and civil suits (plaintiff and defendant) over the past 16 years of private investigation and forensic accounting practice.
Who is the perpetrator? The trusted long time (over three years) Chief Financial Officer, Controller or Executive of an organization who discovers a weakness or creates a weakness in internal controls. The closer the perpetrator is too controlling the cash flow of a company, the better for the fraudster. The perpetrator in the study was 69% more likely to be male, college educated, and have no criminal background. The age range of 56 or older was found to generate the largest loss. To commit the misappropriation the perpetrator conducts a scheme to create a controlled vendor, issue one or more corporate credit cards, refund credit card payments to their personal account, issues checks that are disguised in the books and records, add a ghost employee to the payroll, or they may use many other means.
Why does a trusted employee steal money in this manner? They always have a need, whether it is pure greed or a desire to have more than their salaries allow. Thus, the employee may be living above their means, may have financial or family difficulties, may be going through a divorce, dealing with addictions, feeling excessive pressure from within the organization, feelings of inadequate pay and other reasons. The perpetrator may see the business owner pay personal expenditures using corporate funds with no repercussions from government agencies, and therefore, decides they need extra money, and the business can afford it. These conditions do not justify the theft of money but may provide motivation.
The perpetrator may temporarily enjoy the stolen funds with the purchase of fancy cars, boats, trips, gambling, use of drugs, and extravagant personal expenditures. Their criminal mind does not allow them to think of the consequences, i.e., their loss of credibility and ethics, the exposure to jail time, restitution, and generally a large tax liability for the stolen funds. If found guilty, they may go to prison, and when released they will face the restitution and tax liability, which will be a crushing burden for the rest of their lives. They will be destroyed financially and may even consider suicide.
The victim, on the other hand, is affected by the misappropriation of assets with the loss of cash flow, embarrassment in the business community, and possibly discontinued operations.
Business owners must be on alert to the theft of their operating capital and credit availability. Businesses today must take actions to defend themselves from risk because law enforcement does not always have the resources to investigate. The prosecutors do not always take the case, or if accepted act promptly to prosecute the case. Financial investigations take months to prepare, and not all prosecutors can handle the presentation of a paper case involving misappropriations. The investigators of federal agencies such as IRS Criminal Investigations, FBI and Secret Service may not be available for your case because of designated agency programs.The US Attorney’s Office may not always be anxious to take on cases that are caused by business owners that do not have proper internal controls and business owners who do not plan properly to avoid the risk of misappropriation of assets. The best way to avoid the loss of money from the perpetrator, the time of an investigation, the legal fees for a civil trial, and the mental stress, is to have strong internal controls and random, thorough due diligence spot checks.
Recovery from fraud losses as analyzed by the ACFE indicates 53% of the victims recover nothing and the more money that the victim loses, the less likely they will make a full recovery. In the arena of occupational fraud, there are two victims, the entity, and the perpetrator. You and your client should consider the consequences and work for strong internal controls and due diligence.
In the end, a Forensic Accountant skilled in investigating, interviewing, and documenting evidence for a civil suit or criminal prosecution may be the answer in the likely event a misappropriation occurs in your business or that of a client. The forensic examiner can be a CPA or a person with special skills, training, education, experience, knowledge, such as a retired Federal Agent.
Private investigators can advise business leaders and attorneys about how much is at stake in the day to day operation of their business and their client’s business. If you are involved in misappropriation type cases, consider referring the law firm on the case to Sage Investigations, LLC, especially if the case continues beyond your involvement. If the case requires a forensic accountant and the testimony of an Expert Witness, you can still benefit from the case by a referral fee. Contact Chief Investigator Edmond Martin of Sage Investigations, LLC at 512-659-3179, email: firstname.lastname@example.org. Let our 26 years as an IRS Special Agent and 16 years of Private Investigation benefit you and your clients. View CV.
 Report to the Nations – 2018 Global Study on Occupational Fraud & Abuse