How to Detect, Prevent, and Protect Your Clients Against Fraud

The security breach like the one that occurred with Target in December 2013 is another reminder that all businesses, no matter what kind of stop-gaps you put into place, are vulnerable to thieves who will do anything they can to steal your personal information.

Even though the Target security breach was related to stealing personal information, it naturally makes you think about the security of the information at your own firm and, of course, the information for the clients you serve.

As an accountant, you need to ensure you are doing everything you can possibly do to protect your clients from fraud. There is perhaps no better professional group better equipped to do this than accountants, not just because of the trusted-advisor status, but also because you are more involved on a regular basis with your clients’ information than almost any other advisor, including an attorney.

I look to my own accountant as someone who does more than prepare my taxes; actually, that’s just a small part of my business. I’d much rather have him take a long look at my business and educate me on the areas in which I’m leaving myself wide open for fraud, not only in terms of identity theft, but also in my internal accounting processes and controls.

The Bookkeeper Who Steals Money

The primary situation you’ll most likely run into with one of your clients is when someone commits some kind of fraud inside the company. In fact, the question I am asked most often, whether I’m consulting with a business or speaking to a room of 5,000 professionals, is what to do when a seemingly trustworthy employee steals money.

Consider one of your clients who has a family owned business and the bookkeeper who stole $50,000. Although she was caught and arrested, you pressed charges and the case went to trial. The former employee copped a plea and received 6 years’ probation with no restitution. She is now free, driving a new car and wearing new clothes, all made possible with the $50,000 she stole.

If you were to get a phone call from the owner telling you all this, how would you have responded? Although it seems there isn’t anything you can do about it, the U.S. government gave us a very valuable tool that most accountants and financial services professionals never think about.

File a 1099 on the bookkeeper. With the 1099, the money stolen is now taxable income, giving the owner a tax write-off of $50,000. Even though it’s not like having the $50,000 still in his account, he’ll receive a finder’s fee by the IRS and get the satisfaction of knowing the IRS is going after this person.

The biggest threat isn’t sending her to jail; there’s a much larger negative outcome for her if she does not make an attempt to pay your client back. Now, her wages are garnished, her car is taken away and there would probably be a lien on her property.

Remember that most people are more scared of the IRS than jail. It’s just a fact of human nature. Refer to Article 3, Section 4 of the Uniform Commercial Code to educate yourself on just what the law has to say about fraud, related to the controls, related to checks and other instruments.

‘Trust” Quickly Spirals

Let’s take the same example of the bookkeeper who took the money. What your client will readily say is something like, “How did this get out of control? She was such a nice person.”

Personality has nothing to do with fraud, but it has everything to do with lulling yourself into a false sense of security.

The biggest threat to any company is embezzlement, whether it’s a local church, large company or a small business. Most of the time, there’s so much activity going on inside a business that no one catches anything missing until it’s too late. These types of things happen more often in companies when no one supervises the bookkeeper or trusts too much. My own wife, who sits on a nonprofit ministry board, came to find out that the bookkeeper/controller embezzled $300,000 by writing checks to companies with which there is no balance owed.

Consider the dentist who hired a bookkeeper, asking her to write checks on Friday and place them on his desk for signature. She attaches all backup invoices, documents for review and even the stamped envelopes; all the dentist has to do is review the material over the weekend, sign the checks and put them in the mail.

Pretty soon, after getting more and more comfortable with the bookkeeper, the dentist gives her signature authority, and after a year or so, he completely stops looking at the bank statements.

You can see where I’m going with this example! If she took $10,000, the dentist would never know. We know that not everyone is inclined to commit fraud. People are basically honest, but they run into personal problems and get desperate.

The solution here is to advise your clients just how important a system of controls – checks and balances – really are, and instruct them on how to segregate the duties, not only for bookkeeping, but for any part of the business that leaves itself open to fraud.

It’s up to you to advise your clients on what they need to know to avoid fraud. In this example, the bank statements should be mailed directly to the dentist’s home rather than the office. Certainly, he has to spend the time it takes to reconcile his accounts and match up the checks to the statement, but now the bookkeeper knows there’s no way she can steal money because her boss is now seeing all the checks and withdrawals.

Communications is Key

What are you already telling your clients about fraud, and how much more work do you need to get up to speed, not only for your clients, but for your own firm or business, too?

The key component to all of this is to maintain absolute transparent communications between you and your clients. You may not know, and may not need to know, everything that’s going on inside your clients’ businesses, but as an accounting professional, you should make it your primary job to educate your clients about fraud. It’s good for you in terms of client retention and will make your clients much less vulnerable.

About the Author

Frank Abagnale

Frank Abagnale

Frank Abagnale is one of the world's most respected authorities on forgery, embezzlement and secure documents. For over 35 years he has worked with, advised and consulted with hundreds of financial institutions, corporations and government agencies around the world. He is perhaps best known as the central character played by Leonardo DiCaprio in the film, "Catch Me If You Can."

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