Worldcom and Enron are celebrity cases that have brought the recent spotlight to financial fraud and white collar crimes.  “It’s said that never since the time of Al Capone has it had so much attention,” says Kathleen Barney, forensic accountant at Eide Bailly LLP.

Eide Bailly is a CPA firm that provides forensic accounting and investigative services that disclose and work to prevent fraud in the workplace. Barney views her work as an asset and, often times, a necessity to the business world. She explains that fraud has always been infecting companies but, now more than ever, its prevention and prosecution are being viewed as important business strategy. When fraud strikes, it often continues on a regular basis for months to years before it is discovered and costs an average of 6% of the victim company’s gross revenue.

Barney says, “This may not sound like a lot, but if you are a large company, it could mean millions of dollars, and if you are a small mom and pop type company where every dollar counts, it could cause the end of your business.”  When a company discovers the occurrence of fraud, they have two basic options – civil or criminal. If fraud has not caused the high dollar loss required for criminal action, civil legal action is the alternative. Civil action requires a lawyer and criminal action requires the police. Either way, evidence and specifics of the case are required to take the action.

Barney says, “Police departments are often backlogged sometimes for years and attorneys often don’t have the accounting expertise required to gather the necessary information.”

Forensic accountants are the solution. They have the resources and expertise to define the total loss, the method used by the fraudster, along with the professional reports and supporting evidence. Barney says there are many forensic accounting and investigative service companies, but most focus on a specific area of fraud,

such as construction or trust fraud, or they only cater to Fortune 500 companies. This causes a problem for small to medium-size businesses, which happen to be the type of company hit most by fraud. Barney explains

characteristics like fewer employees causing lack of separation of duties allow for fraud and are typical in small to medium-size businesses. She says other organizations that have a high need for fraud investigation are nonprofits, which often lack controls as volunteers are their main work source, allowing for greater fraud opportunity.

Eide Bailly is one forensic accounting and investigation firm focusing on these needy companies. It offers more than just resolution for those already attacked by fraud, but solutions to help prevent it. Barney says there are three necessary components for fraud to be committed. They are burden or financial need (i.e. gambling problem), rationalization that a person should commit the fraud (i.e. “I need the money more than my company” or “I didn’t get my raise this year”), and opportunity. Fraud may be prevented if any one of these components is removed, and opportunity is the only component a business can accurately control. Barney says Eide Bailly offers services to evaluate a business for its weaknesses that allow opportunity for fraud, including placing people in a position of trust and giving them overlapping duties.

She says, “Internal controls can be put in place to keep honest people honest.” She adds, “It is significantly cheaper and easier to prevent fraud than to deal with its effects.”

One key prevention tactic is background checks of employees. This helps weed out those who have the potential of committing fraud before they ever join the company. It also protects the company if a person does commit fraud because it proves there were no suspicions the employee would commit the fraud and, therefore, fault lies solely on the fraudster’s side. Barney says that another important tactic that helps detect fraud before it escalates is a fraud hotline or some program encouraging employees to report their suspicions of wrongdoing with the option to do so anonymously.

Barney says, “The best way to detect a fraudster is through those who are right there working with them.”  Fraud can include anything from check embezzlement to ghost employees (employees getting paid who don’t work there) to unauthorized withdrawals.  Barney says fraudsters are generally people you would least expect.

“They are your best employee who has been at the company forever, works late and never takes vacations.”

This is because they have the company’s trust and the time to carry out the fraud as well as the need to keep the fraud going so no unusual change is detected (thus the lack of vacations). She says that another key sign that somebody is committing fraud is lifestyle improvements. Fraudsters generally use their extra money to buy things such as new cars, jewelry, clothing and other luxuries.

If you are noticing any of these red flags in your business or simply want to take some offensive measures against fraud, call a forensic accountant, fraud investigator or the Association of Certified Fraud

Examiners (www.acfe.org) for professional advice and more information.