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Keep the "Wolves of Embezzlement" Away From Your Merger

April 25, 2017

The economy may still be volatile, and that desire to expand your business or to become a first time business owner is overwhelming your thoughts. Now is the time to make that dream come true. You have hired a good mergers and acquisitions (M&A) attorney, identified a business to invest in and you have chosen a company to perform your due diligence work. Everything seems to be on the right path…but, maybe not.

Over the years, I have heard many stories that follow this same path until an issue comes to light that very few people even think of. It has to do with one word: embezzlement. If money was stolen from the company before it was purchased, there is one way to make a sound estimate of how much was actually taken. A forensic accountant can conduct a fraud examination before the due diligence work even starts.

Why should a forensic examination be completed?
Let’s say an individual invested several million dollars into a business that a due diligence examination showed was on sound financial ground. The ability for the company to turn a good profit was unlimited. The sale was finalized and the new CEO took over. Everything was running smoothly and the profits appeared to be flowing.

All of a sudden, the bottom fell out. The company’s long-time bookkeeper went on vacation. In order to keep a good eye on the company’s finances, the CEO started doing the bookkeeping himself. After a few days, the CEO realized that something was wrong with the bank accounts. He reviewed the bank statements, but could not understand why they did not balance.

A while back, the CEO had seen a presentation on the capabilities of a forensic accountant and knew who he had to call. A fraud examination was initiated and, in a short time, determined the “trusted” bookkeeper had been embezzling money from the company for years, and the loss was well into the six-figure range.

This loss directly affected the profitability of the company and its new owner. The new owner contacted the former owners to discuss this matter, and their response was predictable: “Sounds like your problem, not ours!”

The new CEO took the issue to a civil court in an attempt to recover what he felt were lost profits due to the previous owners not uncovering this embezzlement prior to the sale.

How Common is Fraud?
No one trying to build a business should have to worry about company losses due to an internal theft. The Association of Certified Fraud Examiners (ACFE) conducts a national fraud survey every two years, and they show that 75 percent of all businesses are affected by fraud and it takes an average of 24 months for an average fraud to be uncovered. On a good day, 60 percent of the company’s employees are stealing from them.

It is not uncommon for a company executive to believe there is no need for an internal control review, or a full fraud examination, because they have “trusted” employees and no one would steal from them. As former President Ronald Reagan used to say, “Trust, but verify!”  Make sure that every dime that belongs to the company is going to the right people.

Who Commits Fraud?
Individuals who are under heavy financial pressures may do things they normally would not do, in order to make the pressures go away. But when the pressures never truly go away, the individual must keep “borrowing” money to keep the “wolves from their door.” Or, worst case scenario, the individual begins to enjoy the thrill of the theft, and keeps it up to simply see if he/she can get away with it.

A fraud examination is like having a home inspection for the home you are about to buy. You want to make sure there are no major problems prior to closing. The same goes with the purchase of a business. Make sure you have a fraud examination conducted on a business before you purchase it and sign on the dotted line. This way, you can learn about any major problems that already exist and hopefully prevent any unforeseen embezzlement issues.