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"Sadly, it’s always the employee that the company owner loves the best,” says Tiffany Couch, CFE, CPA, an ACFE faculty member and the founder and principal of Acuity Group, a forensic accounting firm in Vancouver, Wash.
Couch, of course, is referring to a trusted staff member who commits major fraud.
The economic consequences of such betrayal can hit business owners hard but its emotional toll also can be potent. That explosive combination can confuse and nearly immobilize some victims, who aren’t sure what to do about an apparent — and, for them, a previously unthinkable — insider fraud.
“That’s why they should get the help they need,” Couch says. “The sooner a forensic specialist is involved, the better, because average business owners understandably don’t even know what not to do. Their layman missteps might jeopardize an investigation, hinder asset recovery or create legal liability for them, the victims.”
Couch’s own experience — working with federal, state and local law enforcement officials on embezzlement investigations — has taught her how important it is for CFEs to understand and attend to clients’ volatile feelings as well as their losses, especially in the first days after signs of a potential or confirmed fraud emerge.
STABBED IN THE BACK… AND IN THE HEART
“I grew up in a small agricultural community,” Couch says. “And you can take my word on this: Farmers are not known for shedding tears.”
But there are exceptions. One arose, and with good reason, when a potential client sought Couch’s help in a crisis.
A farmer who owned a large fruit-growing company had just learned that his controller — a 20-year employee and personal friend — had misappropriated a mountain of company cash.
This embezzlement surfaced after the client had formed a partnership with another company, and he wanted the controller to train his counterpart at the new firm. During the joint review of the financials, the controller had failed to satisfactorily explain certain huge losses on the books. They were, in fact, the result of an ill-fated risky investment he had made — outside of established guidelines and without authorization — on the company’s behalf.
Prudently, the owner looked closer at the financials and asked the controller to provide the bank statement reconciliations. The controller complied and promptly went on vacation. The owner and his accountant examined the reconciliations and found the controller had made a suspicious $300,000 adjustment to the cash account.
The owner felt he had no choice, so he reluctantly notified the controller that he was immediately putting him on administrative leave pending an inquiry into the unauthorized investment and the questionable cash adjustment.
Nevertheless, after his vacation, the controller returned to work — accompanied by his attorney — who stunned the owner by saying, “My client has ‘borrowed’ $750,000 from your company’s accounts over the past several years. If you agree not to press charges, he’ll repay that ‘loan’ and cooperate with your investigation of this matter.”
A business associate of the owner recommended Couch’s firm; the owner phoned her and requested a forensic investigation as soon as possible.
“I took that call on Friday,” Couch recalls. “I could see this case required immediate attention to, among other things, secure potential evidence, so I went to the farmer’s office on Monday. By Wednesday, I had uncovered proof the losses were much worse than the controller had acknowledged: At least $1.2 million was missing — $500,000 more than he had admitted taking. Of course, this was the last thing any business owner would want to hear. So in addition to communicating the bad news, I had to counsel the farmer on how best to deal with the situation.”
That day Couch sat down with her new client and spelled out exactly how and why the controller’s story didn’t add up. To make matters worse, the controller’s concealment of his unauthorized transactions was suspicious, she told the farmer. Couch had expected him to be distressed by the additional bad news, but his intense reaction took her by surprise.
“That big, strapping man just broke down and wept,” Couch says. “His controller’s breach of faith devastated him. ‘How could it be?’ he asked. 'If I can’t trust him, I can’t trust anyone!’ I remember thinking, ‘This isn’t just about the money … it’s also about the relationship. He’s lost a lot more than $1.2 million.’ ”
And it was easy to see why the farmer hadn’t expected such treachery. He socialized with the controller, paid him a generous salary and each year contributed $10,000 toward the college tuition of each of the controller’s two children. The farmer’s ongoing generosity hadn’t, however, dissuaded the controller from defrauding him. Ultimately, Couch detected $2.1 million in fraud-related losses during the prior six years. Accounting software and financial documents covering earlier periods weren’t available for Couch to review.
Nevertheless, Couch’s findings were instrumental in recovering $478,000 of the stolen funds, in obtaining more than $1 million in insurance coverage and in helping federal and state prosecutors obtain multiple fraud convictions and sentences adding up to nearly five years in prison for the controller.
IMPRESSIONS AND MORALE
“As fraud examiners, we’re excited when the phone rings, and it’s a new client asking for our help,” Couch says. “That’s why we became CFEs — to render assistance. But we also should be very mindful of the client’s perspective. That’s why the first words out of my mouth are, ‘I’m very sorry you’ve had to call us.’ ”
Of course, as the initial shock wears off, any financial loss will again become the client’s most important concern. Once a CFE has listened to everything the client has to say about the situation and performed a preliminary check for potential signs of fraud, the CFE can determine whether there is predication for an investigation. If there is, this is when the client most needs and wants the CFE to present an initial plan of action.
“In addition to saying what you’ll do, make the client an active participant in the investigation,” Couch advises. “Ask the client to perform specific tasks, such as collecting documentary evidence. It’ll save you time and effort and give the client more confidence in your response to the crisis. Typically, clients thank me and say they’ll be in touch when they’re done. Nearly everyone calls me back to do the investigation.”
INVESTIGATION ESSENTIALS
When Couch investigates a case, she determines what forms and types of evidence, e.g., bank records for certain accounts and periods, are important and begins obtaining and safeguarding them. Other precautions Couch recommends include:
- Identifying how much information and transactional capability the suspect had access to.
- Obtaining a copy of the contents of the suspect’s email account.
- To the extent possible, making a forensic-quality backup copy of the company’s computer system and all its data, including any history of financial transactions.
COVERED… OR NOT?
Mindful that her new client might, especially under the circumstances, experience a sudden cash shortage, Couch asks about the owner’s business insurance policy, which might help pay her fee.
“Most clients don’t even realize they might have that type of coverage,” she says. “If they don’t know whether they’re covered for employee fraud, I’ll ask them to call their insurer.”
WORKING WITH COUNSEL
“The law is a ass,” said the character Mr. Bumble in Charles Dickens’ Oliver Twist. Those who agree cite an assortment of cases in which a convicted defendant won a countersuit against the party he victimized. Regardless of whether such verdicts serve justice, they do occur and have real consequences.
“It’s critical to minimize the chance that the client will inadvertently jeopardize its legal rights or options,” Couch says. “So a CFE should quickly find out whether a new client has legal counsel, preferably an employment law attorney.”
If the client doesn’t have an attorney, Couch recommends three reputable ones she has worked with. Otherwise, she quickly meets with the client and its counsel to discuss and agree on how they’ll work together and communicate.
“The mode of communication is critical,” Couch says. “It profoundly influences whether any or all the information you, your client and its counsel share will be legally discoverable by the suspect’s attorney.”
The governing legal doctrine in this context is the attorney work product privilege. Because its provisions and applicability vary among jurisdictions and they’re often complex, CFEs should learn how courts in their local jurisdictions have applied this principle in their judgments. In general, the privilege shields from discovery materials prepared by an attorney or his or her agents, such as a CFE working and communicating directly with the client’s counsel.
Couch seeks the privilege’s protection by typically asking the client and counsel for permission to present her investigative results and pose any questions directly to the client’s counsel. Still, she emphasizes, it’s hard to be sure whether the court will shield your work product from the opposition.
“It’s a big mistake to use email for substantive communications with the client or counsel,” Couch says. “Any paper or electronic files and documents related to your work on a case are potentially discoverable. That’s why I prefer to pick up the phone or speak in person.”
Couch also recommends that CFEs establish and enforce strict document retention policies in their offices.
“I destroy all my drafts and notes once I’ve delivered my final report on a case,” she says.
COLLEGIALITY IN ACTION
Given the variety of challenges that so many fraud examinations pose, relatively inexperienced CFEs might wonder how best to gain the much-needed insight their more seasoned colleagues possess.
“Yes, you have your certification, but hanging out your own shingle is a big, daunting risk,” Couch says. “So I recommend finding a mentor.”
In 2003, Couch attended an ACFE seminar presented by ACFE faculty member Janet McHard, CFE, CPA, president of McHard Accounting Consulting, LLC.
“I introduced myself to Janet, who was very supportive of my plans to become an independent fraud examiner,” Couch said. “Because of the encouragement I got from her and numerous others, including [ACFE founder and Chairman Dr.] Joe Wells and ACFE Fellow Joseph R. Dervaes, I pursued my dreams with confidence. I wanted to own a firm, and now I do. And I get to help newer CFEs develop their potential, as others did for me. I love it.”
RESOURCES
Robert Tie, CFE, CFP, is a contributing editor at Fraud Magazine and a New York business writer.
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