Accounting fraud is everywhere.
According to the 2008 Report to the Nation on Occupational
Fraud & Abuse, prepared by the Association of Certified Fraud
Examiners, organizations in the United States lose 7 percent of their annual
revenues to fraud. Applied to the projected 2008 United States gross domestic
product, this 7 percent figure translates to approximately $994 billion in
fraud losses annually.
As a Certified Public Accountant
and Certified Fraud Examiner specializing in financial litigation, I encounter
fraud on a daily basis. I got into the fraud
investigation business 23 years ago when I was asked to help the receiver
appointed by the Securities & Exchange Commission figure out how to return
what was left $70 million stolen from 5,000 investors, mostly elderly, retired
couples. The fraudsters operated a “Ponzi” scheme using the facade of a bank.
Typical of Ponzi schemes, investors were offered substantial returns from
fictional investments, in this case phony commodities arbitrage trading and
gold mines. In fact, investors were paid “profits” using money collected from
new participants, since there were no profits from actual investments. In this
case the duped investors fared far better than most victims of such scams: on
average we were able to return 30 cents for every dollar the victim invested.
Of course, most frauds do not
involve millions of dollars. Small businesses are especially vulnerable to
accounting fraud. I have lost track of the number of times I have heard the
defrauded small business owner say, “I can’t believe (s)he stole the money.
(S)he worked for me as my (bookkeeper, office manager, secretary, assistant,
controller, …) for (5, 10, 15, 20, …) years. I trusted him (her) completely.”
Who commits accounting fraud? How much
do they steal? How do they do it? How are they caught? Here are some
median loss caused by a financial statement fraud[*] is
median loss caused by an occupational fraud[†] is
fraud is most often committed by the accounting department (29%) or upper
most common occupational fraud scheme in small businesses is the submission of
invoices for phony goods or services or for personal expenses (29%).
all perpetrators are first-time offenders (93%).
frauds are detected by tip (42%) or by accident (30%).
typical fraud lasts two years from inception to detection.
What can an employee, business
owner or investor do to prevent or uncover accounting fraud? It can be hard to
find out; most books about fraud are written by experts. In The Complete Guide to Spotting Accounting Fraud & Cover-Ups,
Katherine Nussberger, not a forensic accountant but a
journalist and writer, provides simple and clear explanations of important
accounting fraud issues using terms easily understood by the novice. She also
supplies numerous case studies, data sources, and results of surveys valuable
to the professional fraud investigator.
Directed primarily at the
layperson, this book provides a comprehensive overview of accounting fraud both
in large corporations and in small businesses. You will learn who perpetrates
accounting fraud, the different types of frauds committed, and how these frauds
are accomplished. You also will learn basic steps you can take to detect fraud
after it has occurred (for example, simply noticing that an employee previously
in financial difficulty now appears to be living beyond his or her means) and
to avoid fraud in the first place (for example, requiring that the person who
signs the checks not be the person who reconciles the bank statements).
One of the most important messages
of The Complete Guide to Spotting
Accounting Fraud & Cover-Ups is that, while accounting fraud is
rampant, armed with the knowledge found in this book you can protect yourself
and your investments against fraud and maximize your chances of success in the
dangerous world of business.
Thomas Neches, CPA, CFE
Thomas Neches & Company LLP
609 South Grand Avenue, Suite 1106 Los
Angeles, California 90017-3848
Web site: www.thomasneches.com
About Thomas Neches:
Thomas Neches, managing partner of
Thomas Neches & Company LLP, provides accounting, financial, business
valuation and statistical analyses to assist attorneys involved in litigation.
Mr. Neches has testified as an expert in state an federal courts in Arizona, California, Florida,
Missouri, Nevada, New York and Oregon. He is a Certified Public Accountant,
Accredited in Business Valuation, a Certified Valuation Analyst and a Certified
Fraud Examiner. He received his BA in Mathematics from UC San Diego and his MS
in Operations Research from UCLA.
Mr. Neches has testified to juries
on behalf of both plaintiffs and defendants in antitrust, breach of contract,
fraud, intellectual property, lender liability, personal injury and wrongful
termination cases. Examples of the litigation issues he has addressed include
lost profits, lost business value, determining a reasonable royalty and
piercing the corporate veil. Representative industries include banking,
entertainment, insurance, manufacturing, retail, securities and wholesale. Mr.
Neches specializes in applying computer database and statistical techniques to
assemble and analyze voluminous and complex data.
Mr. Neches has more than thirty
years of professional experience. During the past twenty-three years he has
provided litigation services exclusively. Prior to forming Thomas Neches &
Company in 2000, he was Senior Partner of Simpson & Company, a firm of
certified public accountants specializing in litigation services. Previously, he
was a partner at Coopers & Lybrand (now known as PricewaterhouseCoopers) in
its litigation services practice in Los Angeles. Prior to joining Coopers &
Lybrand he was a manager in the management consulting group of Arthur Young
& Company (now known as Ernst & Young), where he specialized in operations
improvement, systems analysis and litigation consulting. Before that he was
head of the technical staff at The Assessment Group, a consulting firm which
conducted economic and cost analysis for the U.S. Navy. Mr. Neches has acted as
a Judicial Arbitrator of the Superior Court of the State of California for the
County of Los Angeles.
Mr. Neches is an adjunct Professor
at Loyola Law School. He has been an instructor in numerous regional and local
courses on litigation services. Among other publications he has authored, Mr.
Neches is the co-author of “Use of Expert Witnesses” in Prosecuting and Defending Insurance Claims (John Wiley & Sons,
Mr. Neches is a member of the
American Institute of Certified Public Accountants, the California Society of
Certified Public Accountants, the National Association of Certified Valuation
Analysts, the Association of Certified Fraud Examiners, the American
Statistical Association and the American Bar Association.
statement fraud involves the international misstatement or omission of material
information from an organization’s financial reports.
fraud involve the use of one’s occupation for personal
enrichment through the deliberate misuse or misapplication of the employing
organization’s resources or assets.