December 2018 JD Supra
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Should Business Owners rely on Whistleblowers or Forensic Accountants? was published by JD Supra on 12/21/18.

According to a recent Foreign Corrupt Practices Act (FCPA) Blog entry (11/28/18), over 40% of internal frauds are discovered by whistleblowers and statistics show that 74% of whistleblowers are terminated.  

The National Center for Whistleblowers states that: “Whistleblowers are vitally important in protecting all of us from fraud and corruption. Whistleblowers have an extraordinary moral compass and a steadfast dedication to the truth. They sacrifice an enormous amount and achieve great things for the public through those sacrifices.  Even with the tremendous progress we’ve made in securing legal rights for whistleblowers, we still face a largely hostile anti-whistleblower corporate culture that actively works to discredit, ostracize, punish, and falsely label those who report corruption through legal channels as “leakers””.

Business Owners ought to rely on outside help to detect fraud

Because 74% of Whistleblowers are subjected to retaliation, many are afraid to come forward.  As a result, business owners could benefit from a second set of eyes to help protect their businesses.  They often turn to forensic accountants who wear the multiple hats of the preventing, monitoring, or investigating fraud that may assist a business with reaching conclusions concerning the existence of dishonesty.  Analysis of financial transactions within business accounting records and financial statements yield significant and valuable information. Analysis of internal and external financial records provides useful information regarding transactions that can demonstrate sources and uses of funds.  Tracing a flow of funds can reveal fraud schemes such as money laundering, securities fraud and misdirected assets. Uncovering fraud schemes assist businesses with avoiding litigation.

Forensic Accountants play an integral role in the changing landscape of today’s business management and oversight

Successful business owners prepare for the possibility of malware attacks, internal fraud, lawsuits, accounting irregularities and white-collar crimes. Existing or potential dispute resolution proceedings and the occurrence or prevention of possible fraud are priorities.  The prevalence of fraud and the existing litigious environment have prompted business owners to build diverse management teams that include independent Forensic Accountants.

Business owners should have a clear understanding of where their money is coming from, and where their money is going.  Forensic Accountants are trained to follow the money. They are more than just number crunchers who happen to work on criminal or civil disputes.  Forensic Accountants looking beyond the numbers can assist business owners with identifying:

  • internal fraudulent activities, fraud prevention and fraud detection opportunities
  • asset misappropriation
  • financial statement misrepresentations

Forensic accountants assist with business dispute claims settlements and support the business valuation process

Through involvement with matters involving fraud risk assessments, fraud prevention and enhancements to systems of internal controls, they support effective corporate governance; as well as being an invaluable asset for developing anti-fraud programs and monitoring and enhancing established compliance programs.

Detecting fraud has long been characterized as an art requiring constant honing and in-depth experience that forms a clinical eye for spotting:

  • misrepresentation of a material fact
  • a false statement  
  • an act done with the intent to deceive  
  • where reliance was placed on a false representation and damages were sustained as a result of the reliance.

Business owners ought to be aware of financial statement fraud possibilities resulting from the manipulation of financial and accounting data

Financial statement misrepresentations are distortions of reality.  These misrepresentations include:

  • misstated revenue, expenses, net income
  • misstated liabilities, fictitious assets and asset valuation
  • misclassified cash flows
  • inaccurate notes to financial statements
  • non-disclosure of contingent liabilities or pending litigation

Published litigation results demonstrate that they violate enacted financial protection legislation including the Foreign Corrupt Practices Act (FCPA), Dodd-Frank Act or Sarbanes Oxley.  Indiscretions with respect to these legislations can jeopardize a business as a going concern.

Don’t be a Victim of your own making

A business owner can diminish the probabilities of a negative impact associated with the “unexpected” when Forensic Accountants:

  • examine internal controls
  • improve accounting information systems
  • assess a business ability to manage performance
  • liaise with the Board of Directors and other C-suite executives
  • resolve conflicts
  • identify opportunities, strategize and come up with solutions

As a business owner, ensure that the right controls and programs are in place to protect your business by working with a qualified forensic accountant to understand the internal control environment surrounding accounting activities while providing relevant observations and recommendations for control, risk management and improvement.