Directing the puck: Keeping forensic accounting in context and defining its success

In fraud, you might reasonably presume one party is clearly an evil-doer and the parties will separate. Sadly, this is not always the case.

Greetings from below the 49th parallel. As I ponder our first “conversation,” I realize that this is an ideal forum for me: I get to do all of the talking! (For substantiation of this comment, simply ask my wife). For now, I will be happy to carry the load of this exchange, though I truly hope to hear from you in the future so that it may evolve into a true dialogue of multiple parties. I intend to share thoughts on forensic accounting and related issues in real-time thought and I may try to provoke responses once in a while; more on that later.

The spring of 2013 is filled with great hope: the global economy continues to rebound in fits and spurts, winter is finally drawing towards a close and the NHL is back, albeit in condensed format. As a denizen of an “Original Six” city, I am thrilled that hockey’s back where it belongs – on the ice and not in the courtrooms and mediation centres. Interestingly, fraud is not so different from what happened in the NHL. Both represent breakdowns in the system, bad communication, misplaced trust, greed and damage to the business. If you think this is a real leap, consider this: the NHL lockout also involved accusations of unethical behaviour, self-dealing, misrepresentation and deceit as well as threats of continued litigation.

In fraud, you might reasonably presume one party is clearly an evil-doer (what a term!) and, unlike in the NHL, the parties will separate. Sadly, this is not always the case. I recall an investigation early in my career involving a small residential construction entity and the bookkeeper who wrote herself cheques right from the company cheque stock. An alert bank teller noticed the bookkeeper cashing a cheque for nearly $10,000 and contacted the business owner. My subsequent investigation identified thousands of dollars in unauthorized transfers. With great gusto, I recommended that the business owner terminate the employee and pursue criminal theft prosecution with the local authorities. I was informed that the bookkeeper was invaluable to the business and that the misappropriated dollars were being reclassified as loans on the company’s balance sheet. I was thanked for my effort and paid in full.

What a great lesson I learned about forensic accounting – everything must be considered within its context. In the owner’s mind, the bookkeeper was essential to business operations to the point where the business would implode without her. Learning a tangible lesson from that engagement, I now ask all perspective clients what it is they hope to accomplish by hiring me and how they will define success for this case. As for the comparison to the hockey lockout, you can consider who assumed the bookkeeper role, the NHL or the NHLPA. Neither the NHL nor the NHLPA can exist without the other, so they must look past transgressions and perpetually compromise for the good of the sport. In the end, the stakeholders, including the fans, get business back up and running.

These concepts of identifying context and defining success are critical in forensic accounting. Understanding and applying the right context can be a real challenge and the context can change based on perspective. For example, a cash disbursement to an employee can be classified as compensation, an expense reimbursement or blatant theft, yet an investigation may reveal that this single transaction is blatant theft hidden as a credit card expense reimbursement, a material amount. In this “micro” context, the transaction is grounds for legal action. However, if the proceeds went to the owner’s son (an executive within the organization), who suffered from a terrible drug addiction, in this “macro” context, what course of action should be taken and how would the various parties define success? Should this information be used to;

  • terminate the individual,
  • pursue a criminal action,
  • confront the individual to seek treatment, or
  • all of the above?

What if you are the payables clerk who is responsible for authorizing credit card expense reimbursements and you are presented with this transaction, which you know full well is for personal expenditures? Context: bad act. Defined success: honest employee blows whistle, bad actor gets punished. Remember, this is the owner’s son’s expense report. New definition of success: honest employee keeps mouth shut, keeps job. Self-preservation is a very strong instinct that can lead people to commit unethical acts and others to sit idly by. I have interviewed countless accounting professionals over the years who had very valuable information that they kept to themselves. When I would inquire as to why they never told anyone, the universal reply: “no one ever asked.” We accountants do take great pride in our discretion!

I hope I’ve got you thinking about this idea of context and success. Forensic accounting goes far beyond the debits and credits and requires analyzing all of the information surrounding accounting transactions. All too often, I have seen success left undefined between clients, attorneys and forensic accountants, resulting in exorbitant fees and disappointment all around. I’d love to tell you that solving these riddles is simple task. In truth, some of the best forensic work I’ve performed never saw the light of day. Due to a wide variety of circumstances, otherwise known as context, the information I provided led to very different actions than what I recommended. The successful forensic accounting expert understands that bad acts do not occur in a vacuum and must be viewed in “the big picture.” Thanks for letting me do all of the talking. I hope to hear from you soon. If nothing else, please help me understand why Lord Stanley’s Cup has resided in the States for so long. That is a “response provocation!”


About the Author

Brad Sargent, CPA, CFF