SOURCE: Marks Paneth & Shron LLP

Marks Paneth & Shron LLP

November 17, 2011 10:00 ET

Small Businesses and Nonprofit Organizations Are Hit Hard by Employee Fraud -- They Lack Internal Controls and Often Miss the Warning Signs

Senior Executives Commit More Fraud and Do More Damage Than Managers or Line Staff; Management and Board Members Need to Recognize Red Flags

NEW YORK, NY--(Marketwire - Nov 17, 2011) - Employee fraud hits organizations hard -- especially small businesses and nonprofit organizations that lack internal controls and may miss the warning signs that fraud is taking place, says Marks Paneth & Shron litigation advisor.

Management and board members need to recognize the red flags and act early to stop fraud, according to an authority on forensic accounting.

"Organizations pay a high price for fraud," says Sareena Malik Sawhney, MBA, CFE, CFFA, a forensic accountant who serves as a director in the Litigation and Corporate Financial Advisory Services Group of New York accounting firm Marks Paneth & Shron LLP (MP&S). "The damage can be particularly severe at small organizations where losses can be extremely threatening. These organizations often do not have the systems in place to detect fraud and prevent or limit their losses."

According to the Association of Fraud Examiners 2010 Report to the Nations on Occupational Fraud and Abuse, the typical organization loses five percent of its annual revenues to fraud. Frauds last a median of 18 months before being detected.

The report adds that frauds committed by senior executives or owners were more than three times as costly as frauds committed by managers, and more than nine times as costly as employee frauds. Executive-level frauds also took much longer to detect.

"There are warning signs for the most common types of fraud," Ms. Sawhney says. "If management and board members recognize them, they will be better able to detect fraud early and prevent or minimize the losses."

Ms. Sawhney is available for interviews and can author a bylined article about the impact of fraud on small organizations and the warning signs that a fraud may be occurring. Among the red flags -- and the ways to detect the underlying fraud -- are these:

  • Shrinking inventories. "Skimming is defined as diverting funds before they get recorded into an organization's books. For example, employees often skim funds by pocketing customers' checks and trying to cash them," Ms. Sawhney explains. "But customers will complain if they don't receive their goods, so the employee ships them. The result is that goods disappear from inventory, but no sale has been recorded. Inventory comparisons can reveal the fraud, as can analytical procedures such as gross profit analysis."

  • Bank deposits that don't match cash receipt records. "Cash larceny involves diverting funds after they're on the books -- it's clearly outright theft. An example might be an employee who steals checks or cash before they can be deposited at the bank. The best detection method is to compare receipt records to deposits. Data analysis software can help an organization check for this kind of fraud."

  • Checks made payable to an employee, an unknown person, an unapproved vendor, or "cash." "Any of these are signs of a kind of check fraud known as a 'forged maker scheme' where an employee intercepts, forges or alters one of the organization's own checks. Usually, the check is made out to the employee, but it might be made out to an accomplice, an unknown vendor, or simply to cash. Strange endorsements can also be a sign of fraud, as can missing checks or missing disbursement documentation."

  • Payroll fluctuations -- or poorly documented employees on the payroll. "In a payroll scheme, fictitious employees are added to the company's payroll. If you find unusual fluctuations in payroll, or employees with minimal or no personnel records, or employees with missing social security numbers receiving payroll checks, you should suspect payroll fraud. High overtime for a particular job category can be a red flag, as can discrepancies between net payroll and payroll checks issued."

  • Changes -- or unusual patterns -- in employees' expenses. "It's common for employees to commit fraud by inflating their expenses or submitting fictitious expense reports. Look for unusual fluctuations or changes in patterns in employees' expenses. Also watch for expenses that end in round numbers, recurring expenses for the same amount, and expenses that fall just below the reimbursement limit. This is another area where data analysis software can reveal the patterns and help detect the fraud."

According to James P. Lagios, a Partner at Iseman, Cunningham, Riester & Hyde, LLP, organizations who detect fraud will need to take several immediate steps:

  • Contact an attorney or prosecutor. "This is the first step in creating an effective, professional investigation that gets at the fraud quickly and protects the chain of evidence. An attorney or prosecutor will typically call in other professionals such as forensic accountants who can trace out the details of the fraud faster and more efficiently than the organization could on its own. It's crucial to contact an attorney quickly -- in order to recover misappropriated funds, prompt legal action is required -- both to preserve evidence and keep the fraud from continuing."

  • Notify the Board of Directors and the Audit Committee. "Both individual directors and the Audit Committee are likely to have specific responsibilities concerning the investigation and the response."

  • Consult with your attorney about notifying the Attorney General's office if your organization is nonprofit. "Not-for-profit organizations are under state-level oversight, usually conducted by the Charities Bureau of the Attorney General's office. Prompt notification can increase the chances that the fraud can be contained and the organization's reputation can be protected."

  • Review insurance policies. "Your organization may be covered for fraud."

  • If you are an officer or board member, notify your own insurer. "If you have oversight responsibilities, a fraud investigation can raise issues. Notifying your insurer may be required to preserve available coverage. Do not forget to notify homeowners and umbrella carriers, which sometimes provide coverage for volunteer board service on not-for-profit corporations."

  • Seek injunctive relief. "Even before the legal outcome is final, courts can order relief -- requiring the end of the fraudulent activity or the return of funds. But again, time is of the essence. Delay reduces the likelihood that the courts will order injunctive relief."

  • Develop a corrective plan. "Once the fraud is detected and contained, you will want to take steps to ensure that it doesn't happen again. Your attorney can assist you in the development of an action plan to strengthen internal controls and reduce the risk that the fraud will be repeated."

Forensic accountants and legal counsel working together can and should play a central role in a fraud investigation, Ms. Sawhney says: "Forensic accountants are skilled in detecting schemes, preserving evidence, and developing a case that attorneys can present in court. A forensic accountant should be engaged early and should be involved in all key decisions of the investigative team. Legal counsel can develop a plan to mitigate damages, preserve legal rights, and comply with regulatory and governance requirements."

For more information, or to arrange an interview or bylined article, contact Katarina Wenk-Bodenmiller of Sommerfield Communications at (212) 255-8386 or

About Marks Paneth & Shron LLP

Marks Paneth & Shron LLP is an accounting firm with nearly 475 people, of whom approximately 60 are partners and principals. The firm provides businesses with a full range of auditing, accounting, tax, consulting, bankruptcy and restructuring services as well as litigation and corporate financial advisory services to domestic and international clients. The firm also specializes in providing tax advisory and consulting for high-net-worth individuals and their families, as well as a wide range of services for international, real estate, media, entertainment, nonprofit, professional and financial services and energy clients. The firm has a strong track record supporting emerging growth companies, entrepreneurs, business owners and investors as they navigate the business life cycle.

The firm's subsidiary, Tailored Technologies, LLC, provides information technology consulting services. In addition, its membership in Morison International, a leading international association for independent business advisers, financial consulting and accounting firms, facilitates service delivery to clients throughout the United States and around the world. Marks Paneth & Shron LLP, whose origins date back to 1907, is the 30th largest firm in the nation and the 13th largest in the New York area. In addition, readers of the New York Law Journal rank MP&S as one of the area's top forensic accounting firms.

Its headquarters are in Manhattan. Additional offices are in Westchester, Long Island and the Cayman Islands. For more information, please visit

About Sareena Malik Sawhney, MBA, CFE, CFFA

Sareena M. Sawhney, MBA, CFE, CFFA, is a Director in the Litigation and Corporate Financial Advisory Services Group at Marks Paneth & Shron LLP. She has more than 10 years of litigation experience. Ms. Sawhney focuses on providing services in the areas of complex fraud investigations and forensic accounting examinations as well as services related to commercial litigation and comprehensive damage analyses.

Her experience includes conducting complex fraud investigations, including white collar crimes and forensic accounting examinations. She has served as a testifying expert witness and has worked with counsel to develop case strategies.. Ms. Sawhney has earned the designations of Certified Fraud Examiner (CFE) and Certified Forensic Financial Analyst (CFFA). She is a member of the Association of Certified Fraud Examiners and the National Association of Certified Valuation Analysts.

About Iseman, Cunningham, Riester & Hyde, LLP

Iseman, Cunningham, Riester & Hyde, LLP is a seasoned team of transactional and trial lawyers committed to serving clients with effective, efficient legal representation. Our attorneys provide the same service we would expect if we were the client. We combine the broad perspective of generalists with skill in our respective fields. Although we prefer cooperation, we are ready to aggressively represent your interests in court.

Iseman Cunningham Riester & Hyde offers statewide services from two locations, Albany, New York and Poughkeepsie New York. For more information, please visit

About James P. Lagios, Esq.

James P. Lagios, Esq. is a Partner at Iseman, Cunningham, Riester & Hyde, LLP. Jim maintains a general practice of law with emphasis in the areas of professional liability, business transactions, commercial disputes, and debtor/creditor rights.

Jim has represented professionals accused of negligence, fraud and breach of fiduciary duty and parties that have been the victim of such conduct.

Jim has experience with asset purchase transactions, both inside and outside of bankruptcy proceedings, and with litigation growing out of troubled transactions.

After graduating from Albany Law School of Union University, Jim practiced with the New York City law firm of Shearman & Sterling in the firm's Bank Finance and Bankruptcy Department. He was subsequently appointed to the position of confidential law clerk to the Honorable Albert M. Rosenblatt, Associate Judge of the New York State Court of Appeals.

Jim is a member of the New York State Bar Association; Capital District and Mid-Hudson Bankruptcy Bar Associations; American Health Lawyers Association; Historical Society of the Courts of New York State; and Professional Liability Underwriting Society (PLUS).

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