Forensic accountants detect, deter fraud

Margaret Jackson

If you don't want your employees to steal from your company, don't trust them.

That's the best advice that companies trying to prevent embezzlement and fraud will get from Peter Karutz, a partner in the St. Louis office of the international forensic accounting firm Matson, Driscoll & Damico.

"The best way to prevent fraud is not to trust your employees and to give them internal controls any business should have," Karutz said. "Most of the people who wind up stealing from their employers are basically honest people who have taken advantage of an opportunity that presented itself and didn't get caught, so they continued to do it."

The local office has seven employees who handle forensic accounting dealing with insurance claims and litigation services, including expert witness testimony.

The company, headquartered in Atlanta, employs certified fraud examiners throughout its network who help analyze and detect fraud. The company is usually brought in to investigate after fraud is committed, so it doesn't put the safeguards in place. The demand for forensic accounting has increased so much that the company is adding staff worldwide and has recently opened offices in Portland, Maine; Singapore; and Kingston, Ontario.

The typical U.S. business loses 6 percent of its annual revenue to occupational fraud, according to a 2004 study by the Association of Certified Fraud Examiners (ACFE). In 2003, U.S. businesses lost about $660 billion due to occupational fraud.

Large corporations have internal controls that help prevent fraud from occurring, but many small companies don't have those systems in place.

"At a large corporation, you would never have the person who records daily sales making the deposits," Karutz said. "The key is the classic segregation of duties. If you segregate duties, you have an internal control, and that prevents it."

Once the deed is done, the best ways to catch those who are stealing from a company is to have a hotline that employees can call anonymously to report dishonest co-workers, said Richard Krieger, senior manager and director of fraud and forensic accounting services at the accounting and consulting firm Anders Minkler & Diehl LLP.

"A lot of times somebody will just stumble on something and ask a question, and it will lead to another question," he said. "It may not involve a long, drawn-out investigation. People generally come clean once you confront them with it."

Anders Minkler & Diehl works primarily with privately held companies and small businesses in a variety of industries. It also has done fraud consulting for governmental entities and professional services firms. The company has four people -- all from its audit deparment -- with specialized training in fraud. The company employs a total of 80 people -- 10 partners, 60 professionals and 10 administrative staff.

In addition to its fraud and forensic accounting division, Anders Minkler & Diehl has formed a health-care team, headed by Brian McCook, targeting an industry that has been particularly hard hit by fraud.

The ACFE study found that confidential reporting mechanisms reduce fraud losses significantly. The median loss among organizations that had such systems was $56,500. In companies that did not have established reporting procedures, the median loss was more than twice as high.

Among cases that were detected by a tip, 60 percent of the tips came from employees, 20 percent came from customers, 16 percent came from vendors and 13 percent came from anonymous sources.

Because smaller, private businesses are more likely to be the victims of fraud than large corporations, it is more of a personal crime, Karutz said.

"There is a lot of emotion involved," he said. "It's almost a personal insult. Part of our job is to be a touch dispassionate and track down the schemes that were used and the value that was taken."

mjackson@bizjournals.com