[
Spring 2012
]
values
Values is an informational
newsletter for attorneys who
assist clients in answering
valuation questions and
claims adjusters who work to
pay the proper amount of a
claim.
To qualify as an
extra expense, the
expense must
reduce the potential
overall insurance
loss. If it doesn’t do
this, it doesn’t
qualify.
CREMERS, HOLTZBAUER &
NEARMYER, P.C.
6200 AURORA AVENUE
SUITE 600W
URBANDALE, IA 50322-2871
PHONE 515.274.4804
FAX 515.274.4807
E-MAIL info@chncpa.com
www.chncpa.com
Post-Recession Blues: The Perfect Storm of
Opportunity for Fraudsters
Break open the champagne! Pull out the
streamers and noise-makers! The Great
Recession is over! Ok, we’re not exactly
economists, so we’re not going to stake
our reputations on predicting the direction
of our economy, but it sure feels like
things are improving. Businesses are
hiring. Employees are getting raises.
Executives are replacing their company
cars and rejoining country clubs.
With everyone happy and revenues
bumping back up to pre-recession levels
along with company budgets, it’s hardly
the same solemn environment that is ripe
for employee deception and fraud, right?
Think again!
See, the combination of things that change
as companies come out of tough times can
create the perfect storm of opportunity for
employee fraud. Here are three changes
that can spawn opportunities for fraud.
Upgrades in software and technology.
During a recession, companies put off
investments in technology and software.
As things improve, they have the money
to invest in upgrades. New software and
business systems take time for people to
learn. Often, issues and errors are
attributed to a learning curve, which may
be the case, but could also serve as
camouflage for a smart and deceptive
employee to defraud the company.
Example: A company installs a new
company-wide computer system.
Profitability is down despite the fact the
company is having a good year.
Questioned, the company bookkeeper
blames it on a reporting “glitch” with the
new system. Upon further investigation,
the owner uncovers that the shortfall
caused by the “glitch” is actually a
result of a “dummy” vendor account
that the bookkeeper had set up as a
monthly charge for support of the new
system. The company paid the fake
vendor that was really the bookkeeper
herself.
Tip: When investigating possible
business fraud cases, be aware of recent
changes in the insured’s business
systems and software. These can often
mask fraudulent activities. And, because
the systems are new, it can be difficult
for management to understand how to
pull the information you need out to
help in an investigation.
New People. It would be difficult to
find a company that hasn’t gone through
some kind of change in personnel over
the past couple years. With new people
come new challenges.
It is estimated that between 10 and 15
percent of all employees would steal
whenever the opportunity arises.
Another 70 percent will steal when they
have a need and they are sure they won’t
get caught. Strained personal finances
create the “need” for many. At the same
time, a manager managing new
employees may not want to appear
distrusting, creating the opportunity for
fraud by the new employee.
Example: A small company hires a new
manager. The manager has a
reputation for bringing new ideas and
fresh thinking to the many companies
she has worked
…Continued from Page 1
Insureds who have
exceeded their
property and
casualty insurance
limits sometimes
claim items
items like
office supplies or
equipment as extra
expenses. These
items should not
qualify under extra
expense clauses.
Forensic
accountants are
excellent resources
in determining
actual economic loss
and determining
if/how an extra
expense may or may
not mitigate a loss.
for. The new manager introduces
several ideas to streamline red tape that
eliminate redundancy. Employees are
thrilled with the changes that help
eliminate what they consider
unnecessary busywork. Unbeknownst to
the owner, some of these ideas also help
remove some of the oversight of the
company’s financial bookkeeping,
allowing the new manager to commit
fraud.
Tip: 100% of business fraud is caused by
people. This might seem obvious, but
with change in personnel comes new
opportunity for fraud and employee
dishonesty. In some cases, it can also be
the new employees who question
established business practices who
actually help in uncovering fraud in a
company. If inventory, financial data or
other figures don’t add up in a claim, it’s
smart to know the right questions to ask
the right people.
Improved business environment. It’s
easier to hide under a bigger blanket.
When times are tough, companies tend to
take a much closer look at expenses –
and they tend to find things that
shouldn’t be happening. When business
is good, people don’t tend to look at
things with the same critical eye. More
money. Higher budgets. Less oversight.
They all contribute to an environment
that can lead to employee fraud.
Example: A company has struggled for
more than two years through a bad
economy. Finally, business is picking up.
Budgets that had been slashed are being
restored. One small department, after
having faced budget cuts that lowered
salaries throughout the entire
department, feels that the company owes
them for their personal economic
“sacrifices”. They begin a systematic
approach to recouping what they feel
they lost by submitting reimbursements
for office equipment and
supplies that oddly never make it to the
office.
The fraudulent activity is easily covered
up by the department manager who has
authority to purchase the office
supplies. When confronted, the manager
claims that the company inventory was
extremely low due to tight budgets from
recent years and the higher-than
expected purchases are helping the
department replace these inventories.
While it is often the close scrutiny of
tough economic times that lead to
fraudulent activity being uncovered,
companies should be diligent and aware
of how emerging from that environment
can lead to the potential for problems.
It is often extremely difficult to identify
areas of fraud. Forensic accountants are
uniquely trained to find potential
incidents of fraud – and help put in
place measures to help companies
protect themselves from it.
Tip: By looking at historical
information over a longer period of
time, you can identify financial
anomalies in inventories, budgets and
other areas that could be easy to see in
lean times, but more difficult to identify
with growing budgets that go with
stronger financial performance in a
business.
Fraud and employee dishonesty
claims can happen in good or bad
economic times. They tend to be
discovered in a shorter time period
when the economy is weak because
more people are reviewing budgets
and financial records, but can be
larger and of longer duration when
the economy improves. The use of
forensic accountants will help you
understand and evaluate the proper
amount of these claims.
Can We Help You?
Dale Cremers, Bob Holtzbauer and Roger
Nearmyer have experience to help you
address questions about forensic accounting.
Please call for more information at 515-274-4804
or e-mail us at info@chncpa.com.