Accounting for fraud in Back to the Future
By Nitin Bhojraj, Quinlan Instructor
Most auditing and forensic accounting courses feature class time devoted to examining cases like Enron, Bernie Madoff, etc. However, there is one fraud that I have been studying for over 25 years which is rarely featured in class discussions. Perhaps the reason behind this is that, as of the publication of this article, it theoretically has not even occurred yet.
In the classic film Back to the Future II, we see a glimpse into Marty McFly’s future, when on October 21, 2015, he faces an ethical dilemma.
His co-worker, Douglass Needles, applies some verbal pressure and promises of wealth if Marty participates in an illegal transaction. Sure enough, Marty gets caught by his supervisor and immediately gets fired. Despite occurring in a fictional universe, this fraud is one that new accounting graduates can apply to their first few years of real world experience.
While it is important for recent accounting graduates to study what went wrong at Enron and with Bernie Madoff, it is unlikely that they will need to verify the existence of special purpose entities, or analyze the ratio of options used to the worldwide availability of those options in a $50 billion hedge fund scheme. Many individuals with years of experience in forensic accounting have never even done this type of work.
Handling Forceful Pressure
What everyone has likely faced, especially early in their careers, is some type of forceful pressure. In the previous example, Marty is coerced into participating in the illegal transaction. A beginner municipal auditor may be told by a manager to ignore cost overruns for the construction of a new clock tower to keep local politicians happy. The inexperienced tax preparer may be instructed by a dominant boss to declare a certain amount of gambling winnings, even though he or she knows that the client must have won more.
All of these are pressures, in some way, shape or form, that a new accounting graduate are much more likely to face, as compared to the Enron-type scandals. Pressures like this are not easy to handle, especially for a new graduate who may have tons of student debt and does not want to go through another round of a months long job search. But what decision would a new graduate make when it turns out that complacency or participation will lead to committing a fraudulent act, and what happens when that fraud is ultimately discovered?
All too often, when we see news stories related to corporate misdeeds, it seems like companies do their best to protect those in the highest echelons of the company structure while placing blame on those at the very bottom. If a company is going to spend thousands of dollars on legal representation, it only makes sense that those lawyers will defend those at the managerial level, and not the first year employees who inadvertently got caught up in something. After all, how often does an intern get blamed for some type of financial malfeasance that must have involved some type of managerial approval?
So what should young people in these situations do to protect themselves? Unfortunately, like many things in life there is no one size fits all checklist, as each situation will involve a unique set of facts. Their first instinct may be to run out of there at 88 miles per hour. In some cases, this may be the correct course of action. On the flip side, perhaps no action is required at all.
Before choosing either of these alternatives, or something in between, the individual needs to take time to assess as much information as possible. Maybe he or she should ponder the following questions:
- Who are the potentially affected parties involved?
- What are the dollar amounts involved, if any?
- Are there any laws, standards, or codes of conduct that are being broken if I choose a certain course of actions?
- Is this course of action ethical, both in fact and appearance?
- Has this happened before, either at the same company or elsewhere? If so, what were the results and can I speak with someone who was involved?
- Would I feel comfortable telling this to my mother, my father, or even my Uncle Joey?
These questions are not an exhaustive list, but more of a starting point. In some cases, the individual may not be able to come up with all the answers. That is okay. If that happens, then it is important for the individual to seek advice from another individual, such as a trustworthy person within the company, an independent third party, or even an attorney. As scary as attorney fees may seem to a recent accounting graduate, an hour-long meeting may cost you years of fees, stress, and heartache if it turns out they had any type of role within a fraud.
Upon collecting all possible information, from asking the above questions and seeking the advice of others, it is important to weigh and reflect upon all possible outcomes. What repercussions will be faced with each alternative? Will one course of action result in getting his or her name published in the local paper with the word “commended,” while the other course of action result in the same picture in the same paper next to the word “committed”? Assimilating all this knowledge will hopefully result in a well thought out decision that is best for all parties involved.
Finally, no matter what course of action the individual chooses, it is important to document anything and everything. Like many things in the accounting world, it is good to have the mindset that every assertion made needs to be supported, especially if it could potentially come up in a courtroom setting. If there was an e-mail where a supervisor attempts to apply pressure, then save a printed copy. If there was a conversation where a seemingly unethical course of action was suggested, document it by writing the date, time, location, people present, and what was said.
However, if things have reached this point that it appears necessary to document such things, consult with an attorney to verify that keeping records of this information does not violate any laws. Furthermore, if the documentation may be needed in litigation, ensure that steps are taken so it is admissible in court.
Unfortunately, taking advantage of the naiveté of new employees is nothing new. It happened in 1885, just like it happens in 2015. If you are new to the workforce and find yourself at an ethical crossroads, remember that unlike Marty McFly, you cannot go back in time to change your future.
When Nitin Bhojraj, CPA, CFE, is not teaching Forensic Accounting and Fraud examination at the Loyola University Chicago Quinlan School of Business or for the Becker CPA Review, he enjoys hover boarding over water.