Why is Forensic Accounting Needed?

 “But in all my experience, I have never been in any accident… of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster in any sort.” E.J. Smith, 1907, Captain, RMS Titanic

  According to author Nassim Nicholas Taleb, a black swan is a metaphor that describes an event that comes as a surprise, has a large impact and is improperly rationalized after the fact. Taleb states in his book “The Black Swan” that in order for an event to qualify, a black swan precipitates from risks in areas that we have little knowledge or expectation (the “unknown unknowns”). One of Taleb’s main points is that it may feel good to have precise predictions extending into the future, but the accuracy of predictions rapidly decreases as the time frame is protracted. Using history to precisely predict the future can be a dangerous model. An example given here is being a turkey the day before Thanksgiving. Every single day for 364 days, the turkey is fed. This leads the turkey to believe that the expectation for the future is to be fed every day by someone looking out for his best interests. However, on the 365^th day (the day before Thanksgiving), the turkey will receive a rude surprise that will likely lead him to revise his set of beliefs. The idea behind Taleb’s theory is not to attempt to predict these freak events known as black swans, it is to be prepared to take advantage of positive black swans as well as to be prepared against negative events that may occur (e.g., how to not be a turkey the day before Thanksgiving). For a small business owner, investing in good tax planning, obtaining solid legal advice and properly training employees are ways to mitigate the effects of these potentially nasty surprises. One area in which small businesses are often lacking is fraud training. According to the Association of Certified Fraud Examiners (ACFE) in 2012, businesses with fewer than 100 employees often lacked formal controls and were shown to be three times more likely than their larger counterparts to discover instances of fraud by accident. Small business owners whose frauds were reported significantly trailed larger businesses in the implementation of antifraud controls. Below is the result of a 2011 survey of 1,388 Certified Fraud Examiners:  

*Source: 2012 Report to the Nations on Occupational Fraud and Abuse by the Association of Fraud Examiners

  While good planning and controls may not completely shield a business owner from a black swan, they certainly are necessary and often overlooked by small businesses. Therefore, it is important to keep an open mind about risk and to position yourself in a manner in which you will not be “crossing the street blindfolded.” For more information regarding risk areas that may be overlooked or to help implement some antifraud controls in your business, please contact us at bkenedy@lutz.us.