Becoming a fraud fighter

In 1973 criminologist Donald Cressey theorized that financial fraud occurs when one or more of three elements are in place — opportunity, rationalization, and pressure. Cressey called his theory the fraud triangle.

Financial experts anticipate that the current economic downturn precipitated by the COVID-19 pandemic may last well over a year. Historically, instances of financial fraud increase during periods of economic downturn.

As employers impose furloughs, eliminate positions, reduce pay, make fast purchasing decisions, and adjust supply chains, some workers and business owners feel compelled to quickly pad their income.

The situation, however unfortunate, can create opportunities for forensic accountants, internal auditors, and other accounting professionals. By developing an investigative mindset, CPAs can make themselves indispensable during this trying time.

Adopt the following practices to help your clients prepare for the worst and minimize fraud.

Get organized. Chaos breeds fraud, says Larry Weiner, CPA, managing partner at Dealer Forensics, a firm that specializes in investigating financial irregularities in the automotive industry. “The automotive industry involves a very high number of transactions. Oftentimes, the accounting staff cannot keep pace and financial records become disorganized.”

When books are disorganized, Weiner explains, it is very easy for employees to skim cash or steal parts from the warehouse unnoticed. Due to the financial pressure created by COVID-19, Weiner expects the number of fraud cases reported by his clients to increase dramatically.

According to Weiner, CPAs help their clients keep organized by reviewing their records on a periodic basis. Weiner also suggests that CPAs advise their clients to hire people with good industry bookkeeping experience. If necessary, offer to assist your clients in the hiring process. It is far more difficult to steal from a business that maintains orderly books.

Establish strong internal controls. Now is a good time to advise your clients to take stock of their internal control environment and make any necessary adjustments. A strong set of internal controls is the first line of defense against fraud. Advise your clients to perform background checks on any prospective new hires to confirm a history of trustworthiness. If your clients have not run background checks on current employees, consider suggesting that they, at the very least, call previous employers for references. “I can’t tell you how many of my clients have terminated an employee for stealing, only to discover they’ve been hired by a similar organization,” Weiner says.

You can also offer to provide the oft-overlooked bank reconciliation control for your clients. By identifying discrepancies between accounting and bank records, your client can detect possible errors or fraudulent activity. Small businesses frequently lack the manpower for the segregation of duties required to perform a proper internal control procedure for the bank reconciliation. Bank reconciliation testing could be a service that could be outsourced to a CPA.

Review your receivables. Your clients’ employees are not the only actors more likely to engage in questionable activity during tough times. Customers, too, are more likely to try to cut corners when money is tight. It is therefore a good idea to advise your clients to closely examine their accounts receivable.

Brian Cohen, CPA, a tax specialist with Zeifmans LLP, recommends that business owners analyze their aging schedules. “You want to make sure your customers are paying you on time,” Cohen says. “If the bill is overdue and your customer has not provided you with a satisfactory explanation, it might be a sign that they are trying to bilk you.”

Cohen also suggests that CPAs test subsequent events. According to Cohen, subsequent events testing is an invaluable tool to minimize bad debts. It is easy to lose track of receivables in the period of time after the books are closed but before financial statements are prepared. Analysis of subsequent events may reveal unpaid receivables that might otherwise go uncollected.

Offer to analyze your clients’ accounts receivable and subsequent events and ensure they are paid what they are owed.

Communicate. Communication tends to suffer in times of uncertainty. When anxieties are heightened, the understandable tendency is to focus inward and concentrate on shoring up weaknesses and streamlining processes. But it is precisely in such times, such as the current anxiety-inducing climate engendered by the COVID-19 pandemic, that it is crucial to maintain robust external lines of communication.

Of primary importance is remaining accessible to your clients. Small business owners in particular are likely feeling the economic pinch and will look to you to help ensure business continuity. This provides CPAs with the opportunity to help business owners manage cash flows, maximize operational efficiency, and mitigate fraud. Many businesses will need help applying for and managing the federal relief programs like the Paycheck Protection Program or small business loans. Your clients will appreciate knowing that their CPA is on call to assist them with whatever business-related issue may arise due to the pandemic.

It is also an opportune time to strengthen connections with the attorneys in your network. Attorneys are great resources for forensic and legal accounting work. Their clients will likely turn to them to procure an accounting expert to assist with a fraud investigation, bankruptcy matter, or business dispute. Legal issues increase during economic downturns, and a lawyer is therefore a valuable referral resource.

AICPA experts discuss the latest on the PPP and other small business aid programs during a weekly virtual town hall. The webcasts, which provide CPE credit, are free to AICPA members. Go to the AICPA Town Hall Series webpage for more information and to register.

The AICPA’s Paycheck Protection Program Resources page houses resources and tools produced by the AICPA to help address the economic impact of the coronavirus.

For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA‘s coronavirus resources page or subscribe to our email alerts for breaking PPP news.

— Joshua Wiesenfeld, CPA, is a financial investigator at Labaton Sucharow LLP. To comment on this article or to suggest an idea for another article, contact Drew Adamek, a JofA senior editor, at Andrew.Adamek@aicpa-cima.com.