Commentary on fraud, scams, scandals, and court cases.

Follow the Money, Find the Fraud

Forensic accounting existed quietly for a long time before the general public started to become aware of it. Twenty years ago when the frauds of Enron, WorldCom, and Tyco became big news, the work of forensic accountants was finally given the spotlight. It has been a slow evolution, but the general public is becoming more and more informed about what we do.

Would it surprise you to know that many of the techniques used by forensic accountants to investigate fraud and analyze the numbers are the same today as they were decades ago?

Computers have made things easier, as we can track, sort, and manipulate data faster. While software solutions for analyzing data, managing documents, and following the money are being used in investigations, they’re not being used to their full potential. This is obviously a missed opportunity for clients.

Old Fashioned Investigations
The old way of investigating fraud – the one that requires manual data analysis – is tried and true. Examining source documents is critical to finding out what really happened with the money. There is no substitute for the judgment, skepticism, and investigative intuition of a seasoned forensic accountant.

There are two major problems, however, with relying solely on traditional investigative methods. First, it is incredibly time-consuming to sort through mounds of documents, cull the paper for important numbers, and manually compare and reconcile data. There is only so much work one person can do and when faced with hundreds of bankers boxes full of documents, an investigation can easily take several months.

The second problem with using only traditional forensic accounting techniques is the possibility of overlooking important data and inaccuracy in data entry. The more documents related to an investigation, the greater the chance for human error in examining things.

The sheer volume of data in cases causes forensic accountants to sample the data. Judgment calls will be made about what items to examine, often with a dollar figure as a cut-off point. Unfortunately, examining only some of the transactions leaves room for error. Sometimes a very small transaction can offer a hint about a fraud, and there is always a risk that a detail will be missed when sampling.

It would shock you to know how much manual data entry forensic accountants do, even at larger firms. It is not uncommon for young staff to sit in front of a computer screen hand keying data into a spreadsheet or a database.  The two main problems with manual data entry are the time it takes to do the work and the risk of errors.

Investigative Innovations
Accountants have never been quick to accept change. They rely on techniques and methods they’ve been using for years and eye innovations suspiciously. Investigative software has been slow to catch on, but it is becoming more mainstream. Software that helps manage the investigations (the facts, documents, people, etc) is widely used. Software that performs data analytics is also pretty common. This type of software looks for anomalies in data to find areas where fraud may lie.

The kind of software that is slowly gathering steam is that which can take data from documents and put it into a database that is optimized for financial investigations.  That sounds easy, doesn’t it? You simply use OCR (optical character recognition) to get the data off bank statements or other financial documents. If only it were that easy!

One huge problem is the myriad of formats for bank and credit card statements. How does the software know where information is and what a number represents? The other big problem is accuracy. Does the software recognize the numbers and letters correctly?

With the right software, of course, the data will be recognized in various formats and the numbers will be reconciled for accuracy.

From there, the data can be analyzed. A flow of funds can be mapped, searches can be done for transaction patterns, charts and graphs can be created, and ultimately the forensic accountant can do a comprehensive report on the numbers. By taking advantage of technology, the data instantly becomes more valuable and usable for the fraud investigator, who can then dig deeper into the transactions and the flow of money.

Hire the Right Investigator
Ultimately, the goal of a fraud investigation is determining how the fraud occurred, who did it, how it was concealed, and how much money has been lost. A forensic accountant using investigation software can find those answers faster, more accurately, and with greater efficiency. The investigation will be more thorough, yet will take much less time than it would without the software.

It makes no sense to be satisfied with only traditional financial investigative techniques when there are state-of-the-art software options to assist the forensic accountant. Of course, making use of such software requires a competent investigator who not only knows how to use the software, but also knows how to further investigate any issue that may arise.

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