Forensic accountants get it. They know they can be unpopular.

They know that hiring them ahead of time costs money and will eat away at profit margins. And they know that after the fact, after a fraud, they can also be unpopular, as fixing the problem can be expensive and very public.

“The people up here are the last people you want to see,” conceded Gerry Bouwman, global strategy and development partner, MDD Forensic Accountants, speaking at the CSI Captive: Uncovering Fraud with Forensic Claims Analysis session at the 2023 Bermuda Captive Conference.

The conference last week was held at the Hamilton Princess Hotel & Beach Club.

The panellists argued that captive insurers should get to know forensic accountants and get to know them early. It is far better to find fraud before it happens, as the losses are often impossible to recover, and reputational damage can be avoided if fraud is dealt with internally.

“The way to avoid uncomfortable questions on the stand is to ask uncomfortable questions in the boardroom,” said Kyle Masters, a Bermuda partner at Carey Olsen.

Soft fraud is the most prevalent type of fraud at captives, according to panel participants. The problems have more to do with overbilling, padding and claims fraud than simply stealing money, directly.

They note that companies of all sizes can be hit, and that it is a myth that a company can be too small or too big to be affected.

Typically, it takes 14 months to detect a fraud. Most is found by whistleblowers.

Of the fraud detected, 43 per cent is found as a result of tips, 15 per cent as a result of internal audit and 12 per cent as a result of management review.

Janis Hagenbucher, managing director, Crawford Forensic Accounting Services, noted: “You are looking for any patterns, trends or anomalies. You want to find those trends before something happens.

“Having those mechanisms in place are super important. Tips, audit and management review are 70 per cent of how frauds are detected.”

Of the frauds detected, 41 per cent are perpetrated by employees, and their average take was $60,000, according to Association of Fraud Examiners data presented during the conference.

Managers were the fraudsters in 25 per cent of the cases, and took on average $150,000, and in 20 per cent of the cases, it was owners or executives, where the average take is $600,000.

Of the fraudsters, 72 per cent were men, who took on average 40 per cent more than women.

A number of signs are indicators of possible fraud. These include employees and managers living beyond their means, having financial difficulties and developing unusually close associations with vendors and customers.

Defensiveness, a wheeler-dealer attitude, family problems, addiction issues, complaining about pay and refusing to take vacation are also red flags.

Solutions are generally simple. These include segregation of duties — the person handling banking should not be doing accounts receivables — physical controls, rotation of duties, whistleblower mechanisms in place, anti-fraud training and vendor and supplier verification.

“If people know checks and balances are in place, they are less likely to push the envelope,” said Ms Hagenbucher.

A case study was offered up by Christopher Wilkie, international executive general adjuster and cyber incident manager at Crawford Global Technical Services.

In the example, a parent company’s construction management team used a Miami fire, smoke and water damage claim to remodel office space in a way that far exceeded the scope of the damage.

They were trying to use the claim to completely reconfigure the workspace and getting the captive to pay, in a way that suggests possible padding.