When it comes to detecting investment fraud, certified public accountants (CPAs) and other tax experts are a first line of defense. Accountant Bradley Preber of Grant Thornton LLP says that accountants aren’t just bean counters. Discovering financial fraud is a lot like the tv show CSI: Crime Scene Investigation.
Preber contends, “On CSI, you can tell what happened by looking at the facts surrounding the body and the crime scene. We do the same thing but with numbers—looking at the accounting books and records.”
Just like any CSI episode, finding the culprit and establishing the motive behind investment fraud is always complicated. Here’s how CPAs can protect their clients by identifying these red flags:
- Big losses: Clients should not be experiencing huge losses, especially losses that surprise the client. This could be a sign of bad investments or someone looking to take advantage of the client.
- Clients dismissing or overlooking internal audit finds: One job of a CPA is to identify potential internal control weaknesses — or deficiencies in operations or financial reporting that make a person or company more vulnerable to fraud. If a CPA gives the proper warnings that there are material weaknesses and the client brushes them off or willfully ignores those, the CPA should be on alert.
- Pay closer attention to more vulnerable clients: Elderly or recently widowed clients are more susceptible and are more often the targets of fraud and financial abuse. Keep an eye out for large, unusual withdrawals from accounts, especially if those withdrawals are happening on a regular basis. Also, be on the lookout for closing out accounts and clients trying to wire large sums of money.
- Question both extraordinary transactions and a lack of transactions: If there are huge, out-of-the-ordinary expenses or incomes listed on a client’s forms, that should always trigger a second look by an experienced accountant. But accountants should also be wary of bookkeeping that is perfect — almost too perfect. If the investments are always on target, then it could be a sign that the numbers are being manipulated.
- How is the money coming back to the client? CPAs should see red flags if the money the client is getting back on investments is coming in the form of principal, rather than income.
- Pay closer attention to private offerings, or private investments: Investments that are not brokered through the Securities and Exchange Commission can be very lucrative, but they are also better disguises for fraud. Is there a lot of detail attached to this investment? Or is the investment plan uncomfortably vague?
- Encourage clients to consult before making large investment decisions: An accountant can help his or her client in avoiding potential investment fraud by helping the client to research and decipher the private investment offerings on the table. Make it clear that the client can call you for advice or assistance in making sound investment decisions.
If you see something, say something. The most important thing accountants can do to protect their clients — and themselves — is to offer full and immediate disclosure of any discrepancies or red flags that have been raised in an audit or annual filings.
If you are an accountant with questions about how to protect your clients from investment fraud, or what to do after you have discovered investment fraud on behalf of your client, contact the law office of Fishman Haygood today for help.
