Discussions by Domain: How To Avoid A Forensic Accountant
“Remember that trust is not an internal control.”
Rebecca Fitzhugh is the Partner-in-Charge of Forensic Accounting at Sobel & Co., LLC, and has over eighteen years of experience in forensic accounting, litigation services and public accounting. Rebecca uses her technical and analytical skills to help attorneys unravel the financial and compliance puzzles their clients face, in order to resolve their issues efficiently. She leverages her experience to advise corporate and municipal clients with respect to assessing and strengthening their fraud resilience, as well as investigating occurrences of fraud.
5 ways your business can avoid engaging with a forensic accountant:
1. Have a comprehensive operating agreement when you first start your business.
2. Hire a bookkeeper with an accounting background.
3. Implement internal controls.
4. Train your employees about fraud and how to recognize it.
5. Find a team of professionals.
Have a comprehensive operating agreement when you start your business.
Rebecca: “This is coming after the fact for a lot of people who might be listening to this, who have been in business for quite a number of years or may have one or multiple partners. If you’re not at a point where you’re just starting with an operating agreement, you can always go back and take another look and maybe revise your operating agreement.”
Rebecca: “So when you think about the legal points and the administrative things like an operating agreement, you just want to get it out of the way. You’re not really looking down the road to where something might happen and you might have a disagreement with the people that you’ve gone into business with.”
Rebecca: “And while an operating agreement may not cover every single eventuality where you might have disagreements, you can really put together some good guidelines in order to hopefully better manage future possibilities.”
Hire a bookkeeper with an accounting background.
Rebecca: “So many people will try to do it on their own. But you don’t necessarily know when you’re starting a business what are the rules and the regulations and what the financial issues are going to be that you’re going to need accurate accounting information for.”
Rebecca: “Not only is it important for you to keep track of your income and expenses for tax purposes, but it’s important information for actually managing your business and understanding whether you are successful or not. It may look like you’re bringing in plenty of cash, but if you don’t understand where that’s going and what is happening with that, you’re not going to be able to really accurately measure how your business is doing on a financial basis.”
Rebecca: “So between just being able to keep track of all of your dollars and cents and where it’s going and where it’s coming from, to being able to tell what your profit margin is and then benchmark against other companies in your industry, and understand just how well you are doing or whether you have some sort of competitive advantage because of maybe certain knowledge that you have at your company. “
Implement internal controls.
Rebecca: “This is one of my favorite things to say to people, is that remember that trust is not an internal control. Internal controls are processes and procedures that companies put into place to make sure that things operate as they’re supposed to, and to try to prevent breakdowns in whether it’s integrity or breakdowns in information flow, breakdowns in the business in general.”
Rebecca: “So you put these internal controls around things, especially in the financial areas so that you can have accurate financial reporting so that people know what’s wrong and what’s right. More often then not, if an employee is stealing from a company, it is somebody who’s been there a long time, who is well trusted, and that nobody would ever suspect would do a thing.”
Rebecca: “There’s a concept called the Fraud Triangle. The Fraud Triangle is that somebody who normally wouldn’t commit fraud or betray trust in that way. There are three things that happen that then kind of allow them to do it or make them do it, and that’s opportunity, motivation, and rationalization.”
Rebecca: “Opportunity is when somebody is in a trusted position. Motivation frequently has something to do with a person has some sort of unshareable need, somebody who’s come upon financial troubles. The rationalization is that normally these people are not people who would steal from their company, but they come across this situation where they’re desperate.”
Train your employees about fraud and how to recognize it.
Rebecca: “The first question we ask is, ‘Do you have something like a code of conduct or an ethics policy that just tells people what they can and cannot do?’ Because sometimes you get into this group-think situation where everybody’s doing it. And because everybody else is doing it, they think it’s okay, especially if they see the boss doing it, or somebody higher up.”
Rebecca: “So you really need to tell people explicitly what appropriate conduct looks like and what inappropriate conduct looks like, and how to report it. Technology is making it so much easier to reach more victims, and that’s what everybody is seeing with these business email, compromised scams and social engineering where they start trying to gather information from you on their way to trying to break into your company’s systems.”
Find a team of professionals.
Rebecca: “I would certainly recommend that people start networking or getting to know professionals like accountants, lawyers, and bankers because as the business grows, you’re going to need one or all of them at one time or another.”
Rebecca: “Your accountant is going to help guide you in terms of the financial decisions you make. A lawyer is going to keep you on the right track when it comes to maybe there’s a regulatory issue in your particular industry, employment law, dealing with other companies, contracts with your suppliers and your vendors, all of those things. And a banker…whenever you’re going to need some more working capital or maybe you need to add on some capital equipment and expand your business, or get some sort of a loan to help you out. The banker is going to be your best friend.”
Rebecca: “It’s really a good thing to have all of these people know each other so that they can discuss and share information, with your permission of course.”
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