At a recent gathering of bookkeepers and accounting professionals, one attendee pulled me aside to solicit my advice on a dilemma she is facing: what to do about a former client who is paying staff under the table. My immediate advice: resign the position. She said she had already resigned, but she was being contacted by the staff, who were asking her if she could do anything to help them receive legitimate pay, so they could build their Social Security and Medicare.
This conversation has lingered on my mind for several reasons. First, why do we often feel compelled to address these issues in whispers in back rooms? My colleague did not feel comfortable bringing this topic to our entire group. Perhaps she was uncomfortable because she is new to our group, and not familiar with our open discussion policy. But I’m guessing that her discomfort arises more from the fact that she simply does not know what to do, if anything, and is fearful of getting involved in a whistleblower-type of situation with unknown consequences involving her time and resources.
This situation raises many questions in my mind:
• As a bookkeeping professional, what do we do when we observe fraud?
• How do we inform our clients that their activities, or that of their staff, are fraudulent?
• How do we protect ourselves from being party to the fraud?
• What do we do when a client refuses to curtail their fraudulent behavior?
• Are we obligated, morally or legally, to report fraudulent activity to the authorities?
• How fraudulent does the activity need to be before we consider whether or not to report it?
To get some answers, I contacted Janet McHard CFE, CPA, MAFF, CFF, a member of the faculty at the ACFE, Association of Certified Fraud Examiners and President of the firm McHard Accounting Consulting, LLC in Albuquerque, NM.
Janet provided sage advice based on her years of industry experience. Here are some of her responses to our questions above.
Question: As a bookkeeping professional, what do we do when we observe fraud?
Answer: If we observe or detect fraud at our client’s businesses, perpetrated either by the business owner or by staff, Janet reminds us that most Certified Public Accountants must preserve client confidentiality. However, this may not be true for bookkeepers, who for the most part, are not state-licensed. According to Janet, “As professionals, we all have our code of ethics; that’s the first place to go to look to determine what you’re obligated to do or report.”
Both of the U.S.-based professional bookkeeper organizations, the AIPB (American Institute of Professional Bookkeepers) and the NACPB (National Association of Certified Public Bookkeepers) have Codes of Ethics to which their certified members pledge to subscribe.
What do you do if you are not state licensed and/or are not a member of a professional association? You can ask yourself, “does my firm have a Code of Ethics?” If you are Sole Proprietor, do you have or have you considered writing your own Code of Ethics? This could be something you post on your website, or use as an Attachment to your Service Agreement. If you are not using a Service Agreement, well, that’s for another article. If you do not have a Code of Ethics, Google “Code of Ethics” to read some samples to help you start developing your own code. Tailor the wording to suit your own style. This can be a point of distinction between you and other service providers. Out of curiosity, I Googled accounting firms in my town, and randomly looked at five different websites; not one of them had a professional Code of Ethics on their website.
Action: Consider adding a Code of Ethics to your website or Service Agreement, or a link to your profession’s Code of Ethics.
Question: How do we inform our clients that their activities are fraudulent?
Answer: Simplest answer? Tell them. Be clear and concise, yet diplomatic. You don’t have to accuse them outright of fraudulent behavior, but you can tell them you have observed fraudulent practices and outline what they are. Then document, document, document. Write down what you found and when you found it. Write down who you told, and when. Write down their response. Write it down now.
Janet advises, “Contemporaneous evidence is important. The professional is stuck between a rock and a hard place: once you acknowledge that fraud has occurred, you can be named a party. Best evidence is always what is generated at the time it happens, not trying to recollect and document at a later date what happened. Email the client; have an Engagement Termination letter stating when/why you terminated. But be careful, as anything you write will probably be discovered. However, if you have to try to remember what was said three years later, you will have documentation of what was said, to whom, and when.”
Janet also cautions to keep in mind that while the bookkeeping /accounting professional must keep a vigilant eye to either advertent or inadvertent fraudulent activity, and notify the business owner of the signs of potential fraud, only a jury can determine if fraud has occurred, by pronouncing guilt or innocence.
Action Summary: Document what you discovered, who you told and when, and how they responded.
Question: How do we protect ourselves from being party to the fraud?
Answer: Consult an attorney. Janet noted, “If you have uncovered fraud, you must determine if any criminal issues will accrue to the accounting professional. We’ve seen in our practice that the business owner can be indicted, and the bookkeeper can be indicted too. At the time any professional realizes they are involved in a situation that can lead to a criminal investigation, a) return to the professional code of ethics, and b) call own attorney.”
What kind of attorney? A General Counsel may be able to help; otherwise you will need a criminal defense attorney. A criminal defense attorney, one who specializes in white collar crime, can help walk through your professional obligations, point out your areas of exposure, and advise on next steps.
Action Summary: Consult an attorney.
Question: What do we do when a client refuses to curtail their fraudulent behavior?
Answer: You can resign the position. This removes you from the scene of the crime, so to speak, and may satisfy your personal code of ethics. You may have already decided to resign as soon as you discovered the fraudulent behavior(s).
Action Summary: Resign the position.
Question: Are we obligated, morally or legally, to report fraudulent activity to the authorities?
Answer: This is a thorny question. Legally, as noted above, you may be bound by client confidentiality. Some infractions may require notifying legal authorities. Not sure which way to turn? Janet pointed out some considerations:
What is the nature of the organization? Is it a non-profit receiving federal funding? Is it a publicly traded company? A government entity? You must consider the nature or source of the money you are dealing with. Is this something with federal or public oversight which might trigger, “I have to breach my client confidentiality and report this?”
If you do decide to report, do you want to report anonymously? Anonymous reporting is still a breach of client confidentiality, so you will need to discuss it with your attorney first. And Janet also recommends consulting a criminal defense attorney, as noted above.
Action Summary: Consult an attorney.
Question: How fraudulent does the activity need to be before we consider whether or not to report it? For example, where do we draw the line between letting a client slide for charging all their restaurant meals to the business (whether or not they are business-related), versus paying staff under the table?
Answer: See all of the questions and answers above. Only you can decide if you observed fraud, or if you think you observed fraud. Only you can decide if what you observed violates your professional or personal code of ethics. Only you can decide whether or not to tell the business owner, or to resign, or to report to the authorities. Only you can decide if you need to consult an attorney.
Action Summary: Use your judgement; consult an attorney.
Summary
There are many issues wrapped up in fraud, fraud detection, and fraud reporting. You will want to protect yourself, so consider your code of ethics, engagement termination, documenting what you saw, and consulting an attorney. Also keep in mind, if you carry a policy such as Errors and Omissions, you may need to report the incident to your insurer. If you don’t carry insurance, well, that’s a topic for another post!
Bonus Feature
Check out this link to an article co-authored by Janet McHard regarding the implementation and use of anonymous tip hotlines. While you or your firm may be too small to consider a hotline, the article still raises some interesting issues and results you may not have expected.