In my earlier blog, I addressed the skill of the fraudulent employee. In today’s blog, we’ll look at fraud from the perspective of the client based upon a fraudulent employee’s actions.
Determining what a fraud examination will cost is nearly an impossible task – if not totally impossible. When meeting with a prospective client, or the client’s attorney, an honest inquiry as to the estimated engagement fees is a guaranteed question which generates a guaranteed response.
Before I get to the answer, let me state that it is also a fair question. Who wants to be a victim of a financial crime and then have to pay for a forensic investigation? It’s salt in the wound to many. I get it. Regardless, it is a question without a good honest answer.
The price of fraud
Forensic cases deal with the unknown. Unlike preparing an income tax return or performing an audit that can usually be reasonably estimated, in a forensic case, no one – and I mean no one – including the client, knows exactly happened other than that there was likely some financial misappropriation. Forget asking the target of the investigation to be truthful and quantify what they have taken. They are usually uncooperative and most don’t keep score of their thefts anyways. They leave such tabulation to the forensic professionals, like myself. Despite this, I know what is coming– with the wince they ask, “How much is this forensic investigation going to cost me?”
Candidly, I smile and reply, “I can’t tell you exactly. Not that I don’t want to…having worked forensic cases for 20 years, experience has taught me that you still can’t quantify a prospective case. They are all different.”
Let me share with you a real life story to explain my pricing dilemma. Early in my forensic career, we were called on a fraud case that was believed to involve a shareholder’s credit card abuse totaling nearly $2M. For those of you not in the forensic world, that is a pretty high amount of internal theft.
The engagement partner provided the client with a $25,000 quote. Within eight hours, we had determined that the overall fraud was in excess of $2M. I already totaled $2.6M of fraud and I hadn’t even scratched the forensic surface in my first day. The fraud was far more expansive than anyone ever imagined. Our examination took us back nearly 10 years and well beyond simply credit card fraud. At the end of the day, we quantified nearly $7M of unauthorized expenditures involving a multitude of bank accounts and involving half dozen family members. It was greed at its best.
That 18-month engagement (which resulted in a criminal pleading) also cost $300,000 – a far cry from the $25,000 estimate. And, the client and attorney were so pleased with the work product, no one batted an eye at the overall cost. I tell that story every time to demonstrate how forensic cases, at times, take on lives of their own due to the unknown.
The question is…
I will ask a slew of probing questions just to gauge the client’s clients estimated knowledge of the case. Many times, a business owner is aware of one type of theft – say for example, increased payroll. But once a person steals from you, is it reasonable to think that they limited their unauthorized conduct to just one avenue of theft? Hardly – they are stealing from you!
After attempting to understand the client’s forensic concern, I begin to ask some pointed questions on exactly what happened. I want the client to try to quantify for me what has occurred, how the thefts were committed, how frequently it may have happened, what methods could have been used, and the date when they think the thefts began. The answers are usually and repeatedly, “I don’t know.” Fair enough, but, neither do I.
It usually isn’t hard to quantify the number of bank or investment accounts to examine, but it’s the number, and types of transactions in them, that cause me concern. It usually isn’t hard to quantify the number of checks that were issued, however, do all of the checks exist? That’s about where the finality ends.
Other factors to consider
Let’s move on to the unknown. Do we need to examine depository detail? Do you believe the transactions were posted into the accounting system accurately? How many transactions (once identified which is unknown at this point) should we trace? For transactions that have been identified as questionable, how many of those do we need to verify to the underlying supporting documentation – assuming that it exists and hasn’t been intentionally destroyed.
And, there’s more! How many electronic bank transfers (EFT’s) are there to document, examine and trace? What about the volume of bank debits to examine or direct payments from the checking account? Since fraudsters have a tendency to remove incriminating evidence, how many transactions must we trace the cancelled check to the bank statements in order to verify the payee and amount to the general ledger? Just how many transactions were fraudulently altered in some way, whether it is the payee or amount?
I like to close with the question “When do you think that your employee first began stealing from you?” In reality, the exact term of the scope period may not be known, especially for a tenured employee. Many times, the employer guesses as to when the good person went bad, but that’s their guess, not mine. The longer the period in question, the higher the cost of the investigation.
The bottom line
After establishing our inability to price the forensic unknown, we propose establishing “steps” which requires us to notify the client when we hit predetermined billing thresholds. Once these are established and the threshold of work in process is exceeded, we stop work, explain to the client where we are, our findings (if any), and how much further we think we need to go. The dialogue is beneficial to everyone involved as it gives the client an excellent idea as to how much certain forensic steps cost as well as the results. With such communication, it better enables the client to control the overall engagement cost. As my experience can attest, many of these cases, like a work of art, are extremely time intensive.
If you require assistance conducting a forensic investigation, or if you believe that your company may have been a victim of unauthorized activity by a dishonest employee, please call the Skoda Minotti Litigation Support Advisory Group at 440-449-6800 and ask to speak with Frank A. Suponcic.
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