When employees resort to fraud, the cost to a company can be staggering. Typically, a company will need to hire an expert to conduct a fraud investigation. It is difficult to estimate the cost of a fraud examination. During your initial meeting with a prospective client, or the client’s attorney, it is reasonable to expect a ballpark estimate. Here is what you can expect in terms of pricing for a forensic investigation.
The Cost of Fraud
Forensic cases deal with the unknown. Unlike preparing an income tax return or performing an audit that can usually be reasonably estimated, in a forensic case, no one – including the client – knows exactly what happened other than that there was likely some financial misappropriation. Don’t expect targets of the investigation to be truthful and to quantify what they have taken. They are usually uncooperative and most don’t keep score of their thefts. Despite this, I know what is coming– when they wince and ask, “How much is this forensic investigation going to cost me?”
My response is that I can’t tell them an exact amount—not that I don’t want to. Experience has taught me that you still can’t quantify a prospective case. They are all different.
The Question is…
I typically ask a slew of probing questions just to gauge the client’s clients estimated knowledge of the case. Many times, a business owner is aware of one type of theft – say, for example, increased payroll. But once a person steals from you, is it reasonable to think that they limited their unauthorized conduct to just one avenue of theft? Hardly – they are stealing from you!
After attempting to understand the client’s forensic concern, I begin to ask some pointed questions on exactly what happened. I want the client to try to quantify for me what has occurred, how the thefts were committed, how frequently it may have happened, what methods could have been used, and the date when they think the thefts began. The answers are usually and repeatedly, “I don’t know.” Fair enough, but, neither do I.
It usually isn’t hard to quantify the number of bank or investment accounts to examine, but it’s the number, and types of transactions in them, that cause me concern. While it can be easy to quantify the number of checks that were issued, do all of the checks exist? That’s about where the finality ends.
Other Factors to Consider
Let’s move on to the unknown. Do we need to examine depository detail? Do you believe the transactions were posted into the accounting system accurately? How many transactions (once identified which is unknown at this point) should we trace? For transactions that have been identified as questionable, how many of those do we need to verify to the underlying supporting documentation—assuming that it exists and hasn’t been intentionally destroyed.
And, there’s more! How many electronic bank transfers (EFTs) are there to document, examine and trace? What about the volume of bank debits to examine or direct payments from the checking account? Since fraudsters have a tendency to remove incriminating evidence, how many transactions must we trace the canceled check to the bank statements in order to verify the payee and amount to the general ledger? Just how many transactions were fraudulently altered in some way, whether it is the payee or amount?
I like to close with the question “When do you think that your employee first began stealing from you?” In reality, the exact term of the scope period may not be known, especially for a tenured employee. Many times, the employer guesses as to when the good person went bad, but that’s their guess, not mine. The longer the period in question, the higher the cost of the investigation.
The Bottom Line
After establishing our inability to price the forensic unknown, we propose establishing “steps” which requires us to notify the client when we hit predetermined billing thresholds. Once these are established and the threshold of work in process is exceeded, we stop work, explain to the client where we are, our findings (if any), and how much further we think we need to go. The dialogue is beneficial to everyone involved as it gives the client an excellent idea as to how much certain forensic steps cost as well as the results. With such communication, it better enables the client to control the overall engagement cost. As my experience can attest, many of these cases, like a work of art, are extremely time intensive.
If you require assistance conducting a forensic investigation, or if you believe that your company may have been a victim of unauthorized activity by a dishonest employee, please contact your MarksNelson professional.
About the author
G. Matt Barberich, Jr., provides business valuation, forensic accounting, and litigation support services for attorneys and clients