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Forensic accountants detect fraud, measure its effects

Rochester Business Journal
January 11, 2013

Frank Torchio spends his time uncovering acts of deception in a world where cases of fraud are piling up and businesses are becoming more vigilant.
"Most of the cases we work on don't possess the same malicious intent as those seen in Ponzi schemes like the Bernard Madoff case," says Torchio, president of Forensic Economics Inc. "They are usually more like (situations) where initial deceptions snowball into a major scandal.
"It starts out as a bad earnings report that is 'massaged' by booking sales a quarter early or other methods, and those white lies catch up after a few quarters. Now earnings have to be restated, and you have a huge scandal on your hands."
Forensic economics is an offshoot of forensic accounting, a type of accounting that focuses on disputes or litigation in civil or criminal law. Forensic accountants investigate corporate and securities fraud, breach of contract cases, insurance and personal injury claims and the growing field of computer fraud.
"Once fraud has been found, our job is to step in and calculate what the exact value consequences are to investors," Torchio says.
Securities fraud leads to artificial increases in a company's stock prices, and his firm uses mathematical models and database examination in a process called valuation analysis to calculate the financial damage caused to investors by inflated stocks.
Whether it is a securities fraud case causing billions in damages or a cashier taking money from the till, corporate fraud and the art of preventing it are evolving. The "2012 Report to the Nations on Occupational Fraud and Abuse" from the Association of Certified Fraud Examiners studied 1,388 fraud cases around the world.
The survey estimated that organizations lose 5 percent of revenue to fraud, which would translate to $3.5 trillion annually worldwide. The most common fraud was fund misappropriation, which occurred in 87 percent of cases. Small businesses, which have few internal fraud controls, were the most vulnerable, and people in senior or management positions were found to be most likely to commit fraud. Half of the fraud victims surveyed recovered none of the money stolen, while only one in six was fully remunerated.
Although statistics vary with each ACFE report, trends can be noted, says Allan Bachman of Austin, Texas, a certified fraud examiner and education manager for the ACFE.
"Breakdowns of how fraud is detected, the types of fraud and how they are committed, the characteristics of perpetrators-all have stayed fairly consistent," he says. "The median loss in fraud cases ($140,000), the estimated duration of fraud before it is detected (18 months) and the most likely method of detection (tips, by a wide margin) are mostly consistent with previous findings."
Internal vigilance is imperative to fight fraud. Police investigations and external audits combined to catch 6 percent of fraud, while whistleblowers, management reviews and internal audits uncovered 72 percent.
The most effective anti-fraud strategy is encouraging employees to report signs of fraud, since 81 percent of perpetrators exhibited red flags prior to being caught, such as living beyond their means, having financial problems or displaying a lack of self-control.
"Installing a good whistleblower process is paramount; external audits often miss fraud, and collusion can evade internal fraud controls," says Tim Hungerford, president and partner at Hungerford Vinton LLC in Rochester.
His firm focuses on specialized and recovery audits, as well as fraud examination and forensic accounting.
"Although technology has helped extend our database and search abilities, there are more places to look and more places to hide," Hungerford says. "In the end, you still have to do the leg work to find fraud-make calls, talk to people and read the financial documents to get a picture of what's going on."
Like other firms, StoneBridge Business Partners has benefited from information technology that provides fast, efficient access to a wealth of data, says James Marasco, director of corporate services.
StoneBridge, a division of EFP Rotenberg LLP, specializes in forensic accounting and fraud detection, along with compliance auditing, business valuation and litigation services.

"We are able to see multiple entities and aliases, as well the complete background on subjects, and our database capabilities enable us to find anomalies from among hundreds of thousands of records," Marasco says.
ACFE's Bachman says the growth of information technology has escalated the cat-and-mouse game of corporate fraud.
"On one hand, new software can allow fraud examiners to analyze huge files of data with a simple keystroke to look for anomalies and red flags of fraud," he says. "Also, technology provides a new 'paper trail' in evidence collecting."
Adds Bachman: "The flip side is that it has made the world smaller, in many cases to the advantage of the fraudsters. ... Online banking and other services, combined with social media, provide a potential gold mine for identity thieves. These crimes can be difficult to trace over international borders and even more difficult to prosecute."
Because of the expansion of computer fraud, along with pressure from companies to reduce losses, forensic accounting is expected to expand. The U.S. Bureau of Labor Statistics predicts that employment in the field will grow 16 percent by 2016.
"There are more forensic accountants in the field now; when I went to school, there were no forensic-focused accounting programs," Hungerford says.
He has helped to establish a master's program in forensic accounting at SUNY College at Brockport, which currently enrolls approximately 20 students.
"In the last 15 to 20 years, forensics has really become its own field of accounting, especially in the area of computer investigations," Hungerford observes.
Though most of Heidi Caton's work as a partner at Bonadio & Co. LLP focuses on business development and real estate, fraud investigation is a growing portion of her duties.
"I used to handle one or two cases of fraud a year, and now I'm seeing five or six," she says. "I think the need (for forensic accounting) will continue to grow as companies become more aware of the scope of the problem and the incentive for eliminating fraud increases."
Demand for forensic specialists is high, Marasco says.
"We look for a person with an inquisitive mind and investigative talents, someone who is detail-oriented in their research and can also document their findings and write well, because their output is used in court, so it has to be factual, detailed and clear," he says. "Testifying in court is another skill our employees need; it is important to explain complex financial concepts in a clear, concise manner to judges and juries."
Caton says the job of a forensic accountant requires skepticism and street smarts.
"You must take nothing at face value," she says. "A lot of my job is doing background checks on information I uncover.
"If a manager suspected of fraud has written checks to vendors, for example, I will look up the business online, make calls, even drive to the location to ensure it actually exists. Fraud detection is all about catching red flags and using common sense to find the truth."
Jason Schultz is a Rochester-area freelance writer.1/11/13 (c) 2013 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email

What You're Saying 

ramya divya at 6:14:00 AM on 1/22/2013
Good tips on detecting fraud in organizations. I came across an informative whitepaper on work place fraud "How manufacturers can spot and mitigate fraudulent activity ", readers will find it useful @

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