In episode 7 of our Talking Real Estate with Peter and George video series, George Dube interviews Chetan Sehgal, BDO’s Forensic Disputes and Investigations Partner. They discuss fraud and how to protect your real estate business from potential losses.
George:
To our next installment if you will, with Talking Real Estate and George and Peter. Today as you can tell I’m hosting things I guess on my own here, but have a partner with me Chetan who will tie, I guess I’ve been more involved with the last few years on of course the real estate construction site. But, and while there’s many areas as I understand that Chetan gets involved with, I’m going to call him kind of our Forensic accounting leader if you will. But Chetan please introduce yourselves for our group.
Chetan Sehgal:
Wonderful. Thank you George for having me and thanks everyone for listening in. My name is Chetan Sehgal, I’m a partner in the Forensic disputes and investigations practice at BDO Canada. It is a Canadian practice but also we have a global practice in this space. Well, the primarily what my practice does is deal with assisting our clients when they’re dealing with financial loss. Either they have incurred a financial loss or they suspect their financial loss has occurred. And really to, they retain us to find out who, what and how was that financial loss occurred.
So it could be through perhaps fraud, it could be through a contractual dispute, it could be through a delay in construction perhaps. There’s some insurable event that’s taken place, a fire or flood, what have you. So there are many angles to this as to the forensic accounting umbrella is quite large. And we often work with, depending on the arena, we work with lawyers, we work with insurance companies, gestures brokers, we provide expert reports and write expert reports, and provide expert testimony in courts or in arbitration.
George:
All right. Excellent. So a little bit ago we were doing a workshop, and we were focused on the fraud side within the real estate construction industry. Why don’t we start there in terms of what would you kind of, I don’t want to say a typical day, but some of the typical work that you see with respect to what I’ll call the fraud side for that real estate investor, construction company, developers. But maybe you start even a little bit further back, and who is a fraudster? And what are typical scenarios that you see Chetan?
Chetan Sehgal:
For sure. Maybe we’ll first quickly talk about what is fraud, and how it occurs and what sort of environment is necessary for fraud to take place? We talk about fraud, it’s really having someone has an intent to deceive another individual or a business and financially benefit from that. There’s a different component to it legally, if you were to look at the legal definition of fraud. But essentially someone has lost money, and somebody else has benefited. For fraud to really take place there’s usually something referred to as the fraud triangle. So there has to be an opportunity for the fraud to take place, and there needs to be a motivation for fraud to take place for someone to actually commit fraud, and they have to be able to rationalize the fact that it’s okay to do it.
You can talk about opportunity as having weak control. You can talk about motivation as a lifestyle habits of individuals, and rationalizing and say, “You know I’m a good employee, long-term employee. The CEO gets paid 100 times than I do, and I put in the same number of hours.” Whatever it is you can rationalize these things, right? The types of fraud, so at a high level there’s three categories of frauds we usually deal with, is asset misappropriation type schemes in which employees may steal or misuse organization’s resources, either individually or colluding with outside parties.
There’s financial statement type fraud schemes that we deal with, where there’s a motivation or pressure to show financial results that may not be there either for bank purposes or for investor reasons, or what have you. Then, one we see quite a bit in the construction industry and the real estate industry is procurement type fraud, or when there’s a RFP. There’s a whole tendering process that there’s a concern over whether the process is fair or not. You see that a lot in the government contracts, but it’s really around the corruption type schemes, right? In which an employee may use his or her influence in a transaction that violates other duty to their employer by way of receiving kickbacks or having a conflict of interest in handing out contracts.
Most recently, you and I were chatting earlier. We’ve been dealing quite a bit in Ontario specifically. Infrastructure Ontario, if you were to put in a proposal to do work with them, they do require as part of their RFPs. An independent accounting firm to come in and provide a letter to anyone who is proposing to do work with them, to essentially look at their bidding practices and the conflict of interest type controls or policy and procedures they have in place before they would do work with you. If you don’t have that letter, you could get disqualified from working with the Infrastructure Ontario. That’s some of the stuff we’re seeing quite regularly these days.
George:
We’re going far beyond what that typical accounting definition on, first year university we were worried about debits and credits, and it doesn’t sound like you deal with a lot of debits and credits.
Chetan Sehgal:
It’s interesting. I do have to call my accounting partners such as yourselves, if I do have a real accounting principles question. Because technically in court I wouldn’t be qualified as an accounting-
George:
True.
Chetan Sehgal:
… Expert, I’d be qualified as a loss quantification or an investigator type of a role. So it’s a quite interesting mix of the different fields of law investigations, accounting. It’s just adding that extra skepticism into the work I do.
George:
Sure. So, maybe you just expand a little bit for the small, medium sized and a real estate investor developer construction company. What are some of the things that they can do from a preventative perspective to… Well, I’ll just end it there and let you describe that. What can they do to help protect their businesses? Particularly if they’re looking to scale up, but I’m guessing and correct me if I’m wrong, even if they’re looking to hold steady, there’s I assume things that they should be trying to address?
Chetan Sehgal:
For sure. I think well, maybe I’ll start off with something which may help sort of help us scale is, what does a typical fraudster look like? And what are the red flags of a fraudster? And then we can talk about how to mitigate those risks from having those impact your business or a client’s businesses. So generally there’s a typical fraud especially in the smaller businesses, we have issues with segregation of duties. We have long-term employees who may be family or friends, they’d be working with us for a long time and they completely handle one angle of your business, let’s say accounting. And they build that trust over the years. What studies have shown that there are a typical fraud or someone who’s been with you for a long time.
And they have tenure, they have history with you, and they’ve gained the client’s trust. They have access to handle multiple areas of the business, so they can authorize, they can actually transact and deal with the bank let’s say, or have credit cards, or what have you. So they sort of unfettered access they have to your operations. Also to ensure the longer they’ve been with you the losses that you incur or business they incur, they tend to get larger because no one starts with committing a fraud of taking large sums of money. That you usually test the waters by doing a little bit at a time, and then it gets bigger. And usually it takes about four to five years to get caught, because that’s when they get a bit more… They get used to lifestyle. Money’s coming in, whether it be for lifestyle purposes, or helping someone in need and whatnot.
They get used to money and say no one’s missing it, and slowly, slowly it’s keeps going up. One of the things we find is, there is, it talked about the fraud triangle, the opportunity part. That’s really something we can control as accountants, as internal controls specialists within an organization from an operational effectiveness perspective. Studies show that there’s 10, 10, 80 rule. So what that means is, generally speaking if you’re talking about employee fraud, there’s about 10% of your employees will never steal from you. And I think, and then there’s this 10% of people who will steal at any opportunity. So you can think about that. There’s this 10% who you can have controls, no controls, doesn’t matter. The other 10, they’ll find a way to do it if they see the opportunity.
There’s this 80%, so we have 10, 10, many of the 80%, what you can control through controls, through internal controls, and get rid of the opportunity for them to commit fraud. And really as the organizations grow and they have the capacity to put in controls and maybe have segregation of duties, you want to be able to control that 80% by limiting the opportunity and cutting off the third parameter of the fraud triangle. So what can we be doing? We can be putting in systems in place if you are lucky enough to be able to hire more than one individual to sort of handle the accounting and banking and all that. You can have segregation of duties. And as you grow you want to be looking at as part of your internal control environment, look specifically for to do a fraud risk assessment. To have someone who knows what are the different ways the organization could be hit with fraud.
Whether it be internal or external. I know one of my partners from around cyber security perspective has discussed some of the issues around cyber security and external threats like that. But there’s things like social engineering in terms of gaining access to your information through your employees. So just providing training to your employees, getting someone like myself or other fraud experts to come in and just talk about fraud, what are the things to look for? What are some of the red flags? Some of the red flags we talk about include, are people living beyond their means of income? Are people in financial difficulty? Is there any sort of behavioral issues? Are they keeping everything to their chest? They don’t want any to share anything with you. They could be having family trouble, matrimonial issues. There’s many red flags. And just because there’s a red flag doesn’t mean there’s fraud-
George:
Sure.
Chetan Sehgal:
But it just sort of, you have to be alert and say, “Okay, why?” Question a bit more why something is happening? Yeah, so it’s really about being a bit more vigilant in your day-to-day activities.
George:
Okay. And maybe people know this, but just to confirm, maybe, could you just give us a quick definition of what segregation of duties means? What are we talking about there?
Chetan Sehgal:
Yeah. So segregation of duties really means, so for example, if we’re talking at a small business level, you’ll have one accountant or one individual responsible to put in your customer orders, and also deal with your suppliers to pay the invoices. So they’re in charge of receiving money, approving money going out, and also then dealing with the bank to go and put money in and take money out. So they have sort of this unfettered control or access to cash if you will, and the ability to approve transactions. So what happens as you grow, as companies grow and accounting departments let’s say grow and procurement departments come into play, the different responsibilities get divided into more controllable chunks. Somebody can not commit fraud without having to collude with another individual. Does that help George?
George:
Yeah. I was more concerned again, as we ban tie around and talk about some of these things. Sometimes we dip into accounting terminology perhaps-
Chetan Sehgal:
Yep, for sure.
George:
… That helps. Now, earlier you had mentioned something about getting involved with insurance claims, and so could you describe what you and your team do in such an instance?
Chetan Sehgal:
For sure. Financial loss could be incurred through an event that may be covered by your insurance. And it’s always a good reminder to go back and check your insurance policies, to make sure you have sufficient coverage for all sorts of events that could be insured. One example quickly I’ll mention is last year, a lot of our clients were looking for insurance coverage on COVID-19 losses. I’m involved certainly with various cases where clients think they have coverage, and they’re actually going through a litigation process now to fight coverage with insurance companies. But then there were some businesses that did have insurance. So it’s about understanding what sort of insurance coverage you have. But what we do at BDO and as part of the forensic accounting team is again, we’re experts at quantifying losses, and this just per the insurance side it just provides another spin to it.
So we assist our clients while they focus on recovering from a fire or flood or COVID-19, whatever it may be, they focus on the operations. We bring in our expertise on dealing with the insurance company, dealing with the adjusters, the brokers on how to put forward insurance claim in the most efficient way possible. Knowing sort of what the insurance company is expecting, and to try to minimize the sort of that the back and forth if you will, and then save time from that perspective. So we not only quantify the losses, we’ll sort of deal with actually talking to the insurance company and tracking with them, and working through what they require for your claim to be settled as quickly as possible.
George:
Excellent. So having kind of BDO’s strength and to be able to judge in part, what would normal be in those situations is something most people won’t have that expertise to bring to the table that you do.
Chetan Sehgal:
They won’t have the expertise, and yeah, if you think about like from our client’s perspective, a business perspective, they may face an insurable event once or twice every few years if not more or quite certain honestly less. Whereas we’re dealing with that on a day in day out basis, and we know exactly what the process looks like, what the information is required to quantify. We have our models put together, and we know how to interact with the insurance company to make the post most efficient as possible.
And one thing I will and sorry to say is, many a times our clients take on that responsibility themselves to quantify and deal with the insurance company, but majority of the insurance policies actually provide for professional fee coverage for a claim consultants like ourselves to assist the client. It’s sort of a win-win situation where the client can focus on recovering from the incident that has occurred, while we focus on helping them get their money back.
George:
Excellent. It sounds like, and I’m sure there’s other areas that you’re dealing with, but clearly we’ve just talked about the insurance side. If a client had some type of, I’ll call it a forensic event in the sense of that they think they’ve had some monyes or assets stolen, they may or may not know I guess, I don’t know if they always know, or if they have a suspicion and you and your team jump into that situation. And then on the preventative side, am I missing something? Are there other areas that you and your team can provide value to BDO clients?
Chetan Sehgal:
Yeah, for sure. So certainly on the reactive and many a times clients come to us with a specific suspicion, or that they’ve done some investigation internally too. And they have a pretty strong suspicion something is going on and they want us to expand that, and do it in a way that would be sort of standard procedures and paper it up properly, and then determine whether to deal with the insurance route from a fidelity claim perspective, or go the criminal route and report that to the police and provide our sort of the investigative report. That’s on the reactive end, and then on the preventative end certainly, like a lot of many a times as we finish our investigation, there’s the number one ask from the company is, I know, how can we prevent this in the future? What have you learned from this?
And what do you suggest going forward as tightening the internal controls? Do we need to do a further sort of look-see to ensure there are no other risks, or exposure we have to fraud? We all often work with our preventative side of BDO’s teams, our risk advisory services to do fraud risk assessments, and other sort of internal control testing to see that that specific risk is covered, and sort of the overall arching you’re most prevailing fraud, I guess risks of the day are being minimized. The rest of those are being minimized
George:
Excellent. Anything, well, actually, is there a lower threshold for somebody that they should approach you? In other words, is there somebody that’s too small, what would be kind of a sweet spot for you in terms of where you find you can really start to add some value to client situations?
Chetan Sehgal:
I think the issue with identifying a sweet spot is, we’re looking for something we don’t know, and the client doesn’t know if something may exist or what the quantum of that might be. So many a times it’s somebody may come to say, oh, we suspect something’s going on. Maybe we’ve lost about $50,000, but we think it could be as high as half a million dollars. Sometimes it’s hard to see, and they’ll ask us what does it take to actually investigate then quantify that? So we’ll give them an idea, the issue becomes, well, if it’s only 50,000, I mean, I want to spend 10, 15, $20,000 to start an investigation. But the risk in the back of their mind is, well, what if there’s more? And through this exercise we can identify holes as well, and the sort of that preventative aspect to it again.
Typically, we’ll probably deal with losses starting anywhere from $300,000 up to hundreds of millions of dollars. We work with small businesses, medium sized businesses and multinational organizations. And again, depending on the service business, whether it be business interruption claims for insurance, or fraud investigations, or what have you. It really depends but is more factual, it’s more fact oriented as to the decision of whether you want to investigate or not, versus you may think, well, I may have an exposure here, but I don’t have time to deal with this, can someone just come in and do a fraud assessment, or just look at our internal controls to make sure it doesn’t happen again, because I don’t have to deal with it.
And sometimes that’s a right approach. Many a times you’ll actually find that the, actually this is a good point, the smaller businesses, the medium sized businesses they want to focus on making money. They don’t necessarily want to deal with the police and the criminal system to have the individuals being put away, because that takes a lot of time and effort, emotional and financially to go through that process. So we find a lot of when fraud does occur within those businesses individuals deal with it, they may take a haircut and sort of move on. But they want to know what it is, and it doesn’t happen again. Whereas when we’re dealing with larger organizations, whether it’s government or tax dollars involved, they have strict policies around what to do in that situation. So they most likely that’s when you go getting involved with the police, the insurance company and all of that, to see it all the way through.
George:
Okay. How can clients get ahold of you, or if somebody’s looking to become a client? How should they best get ahold of you Chetan?
Chetan Sehgal:
My information is available, Google my name much, it’s Chetan Sehgal. Usually one or two top people show up on the Google results. But yeah, my profile is on videos, website, and also I’m on LinkedIn. My phone number is (416) 775-7812. If anybody wants to call me directly.
George:
Yeah, and I’m sure we’ll have your contact information we’re posting on the website, and people are certainly welcome to shoot me a message. And I’m happy to introduce and go from there. Any parting words before we sign off?
Chetan Sehgal:
I think the key takeaways would be just being vigilant, and paying attention to what’s happening in your business. Following, putting in the proper controls in place can go a long way, and don’t be complacent.
George:
Awesome. Thank you so much for sharing your time and expertise with us Chetan.
Chetan Sehgal:
Thanks again George for having me.
To contact Peter or George you can email pcuttini@bdo.ca or gdube@bdo.ca. To contact Chetan, please email csehgal@bdo.ca.
Tags: fraud
