No business can ignore its bottom line. Family-owned and privately held companies have employees to pay, and goods or services that must sell. Public companies in particular face even more bottom-line pressure. Pressure to meet Wall Street expectations. Pressure to meet analyst projections. Pressure to beat earnings estimates.
Sometimes these pressures can lead to theft. According to Tiffany Couch, a Vancouver, Wash.-based forensic accountant, U.S. businesses lose an average of 5 percent of their annual gross revenues to insider fraud-theft committed by their own employees.
As we head into the tax-season crunch that finds companies reviewing income and expenses for the past year, Crain’s spoke with Couch about her newly released book, “The Thief in Your Company,” the realities of corporate pressure, and what companies can do about it.
Crain's: Tell us more about what it is you do. What exactly is a forensic accountant?
Couch: I’m an investigative accountant. I am somebody who gets called in when there’s something wrong with my books. Somebody’s stealing from me. Or there’s been some bad bookkeeping. Someone dies, and they think a caretaker didn’t take care of money appropriately. I go in and figure out what happened, or what didn’t happen.
Crain’s: Are there many of you in the profession?
Couch: No, there aren’t very many of us like me who’ve started a forensic accounting firm and only do forensic accounting. There are some large accounting firms who will have forensics in-house. But I saw a niche for specialty cases, and I do get called in a lot.
Crain’s: How did you decide to specialize in this?
Couch: I thought I was going to be a tax accountant and take that traditional route. I was working for a company in Tacoma (Wash.) initially, and they did nothing but business valuations. There was a woman whose husband was divorcing her, and we needed to value their business as part of the divorce settlement. He was saying his business had no value. But she wore these amazing designer clothes and sported the biggest diamonds I’ve ever seen. She was driving a Jaguar. She said they had money.
It turns out that they did. He was part Native American and was able to take tobacco and fireworks off the reservation and sell (them). He literally brought home bags and bags of cash for years, never reporting this to the IRS.
That was late 1999, or early 2000. I had never heard of fraud or forensic accounting, but I’d figured this whole thing out. And I thought, 'This is what I want to do.' I solved this puzzle. I helped this woman no one believed. I was able to communicate the situation to decision-makers and helped her move on with her life.
This started me on a quest to doing this every day.
Crain’s: What surprises you most in your work?
Couch: The biggest thing for me in doing what I do, whether it’s a small mom-and-pop business, or a large, publicly traded company: It’s always the last person my clients would ever expect – the most trusted key person. "Our board doesn’t want to say anything about so-and-so because she’s wonderful and nice, and (we're) afraid if we ask her questions, we’re going to hurt her feelings." You have to get over this whole emotional relationship part. It’s often the most trusted person.
I’m often the person dealing with the emotional fallout. A lot of clients in first years were small, privately owned companies. You realize no one is immune. It’s something everyone should at least consider. They’re not necessarily looking at the right people.
Crain’s: You mentioned it often is the most trusted people, and often the same scenarios over and over. Can you explain that?
Couch: What is most interesting to me is why fraud happens. It’s the anatomy of the fraud, and what I call the fraud triangle. You have an internal pressure. I can’t pay my bills. I’m a single mom, and my kids want to play baseball. I want them to play baseball, so I have to rationalize the actual theft. I’m not being paid enough. They’ve laid off two people, and I’m doing both their jobs. Or, I’ll take it now and pay it off later before anyone finds out. Last, there must be opportunity; I steal it before it makes it to the bank.
Crain’s: And how does this scenario play out in the public companies we’ve talked about?
Couch: In one word: pressure. It’s different than the individual pressure for fraud we spoke about earlier. But in public companies, there’s a collective pressure. You can imagine if I’m Amazon, the pressure to the push out the financials. And what was the fallout for Amazon (this month)? A 4 percent stock drop. That’s a huge thing they’re facing, knowing they’re not going to make their projections. Companies might do what they need to do to meet projections. They don’t want to lose 4 percent of their stock value. They don’t want negative headlines.
Financial statement fraud defrauds investors. As someone who understands how fraud occurs, I think it’s great that Amazon took the miss on the chin. In spite of what was likely insurmountable pressure, in spite of Wall Street expectations and the likely impact on their stock price, they reported their reduced revenues truthfully.
That, to me, is leadership. I think investors should hear this as great news. They can trust the financial reports they’re reading.
And Amazon said one quarter of missed revenue was no big deal. As an investor, they might wait a little, take a pause. But the need to meet analyst projections quarter after quarter can pressure companies to do bad things. Look at Enron. WorldCom. HealthSouth.
But as a forensic accountant, I would never say, "Give me just one quarter and let me see how you are doing." Usually we look at three to five years to get a decent understanding of trends and decisions and practices.
Crain’s: Describe one of your most difficult cases.
Couch: I was working for a client, and the suspect was so well-loved by this group. It was a school. Parents, school board, staff. She was a key person in that organization. She was put on administrative leave. I personally was getting phone calls and email messages that were hate-filled. This was before what we see on the internet every single day.
People told me I had no idea what I was talking about. She is so wonderful; she would never do anything. But I had evidence. I don’t choose the winners or the loser, or the fraudsters or the non-fraudsters.
When I put that evidence in front of someone I needed to interview, she pushed it away. She didn’t want to look at it and told me she understood what I was telling her, but that this was not the person she knew. I was personally attacked.
Crain’s: Can you describe for us a scope of work?
Couch: The smallest case I ever worked on involved a $1,500 loss. And the largest was in excess of $5 million. Again, the fraud was committed by someone who had access to a bank account and transferred money to himself as he needed it. Just $5,000 or $10,000, here and there. But it went on for over five years before the company owners started to suspect something was amiss.
Crain’s: What, if anything, can businesses do to protect themselves against fraud?
Couch: Hiring protocol is the first line of defense. Do they have a good background check? If it’s legal to do a credit check on them, do it. If they’re not managing their own money well, should they be managing yours?
Somebody’s writing checks to themselves, paying more payroll than they’re authorized. Even though almost 75 percent of frauds are in that category, most companies aren’t doing the simple oversight on credit cards, checks, etc. And the most important thing is to eliminate the mindset that it can’t happen here. I don’t believe fraud is happening in every company, but there’s an opportunity for fraud to happen anywhere.