At the heart of every financial investigation is a trail of money. And in many cases those trails are complex. They involve multiple bank accounts and thousands of transactions that are intertwined. This voluminous financial data must be culled, analyzed, and presented in a way that proves the case, and therein lies the difficulty.
For the last forty years, investigators have relied primarily on manual processes to evaluate financial evidence. They compared accounting data to source documents, ultimately trying to prove the source and use of funds.
But this gets complicated in large cases because of the number of involved people and bank accounts. The process of understanding and organizing the flow of funds is complex, and it can take months before the parties to a case know exactly what happened to the money.
Over the last decade, advances have been made with technology to help fraud investigators analyze large volumes of financial data much faster, more efficiently, and more accurately than they can using only traditional investigative techniques.
Doing Things the Old Way
In any forensic accounting engagement, examining source documents is critical to finding out what really happened with the money. For example, bank documents like statements and canceled checks will tell us exactly where the money went. Accounting records can be manipulated, but unless someone is very clever and has serious connections within a bank, the bank documents ultimately tell the truth.
In most fraud cases, multiple years often need to be examined. This means thousands of transactions need to be sorted, matched, and evaluated. It can take hundreds of hours to do this using traditional techniques, which involve a manual process of examining the evidence.
To cut down on the work, forensic accountants might “scope” the transactions, meaning they will select a dollar figure and only examine the transactions larger than that amount. Sometimes they assume that smaller transactions are immaterial to the investigation. Time and efforts are usually focused on the larger transactions.
Unfortunately, the process of scoping leaves valuable evidence unexamined. Who is to say that a $100 transaction may not hold the key to an investigation? Ignoring smaller transactions is unwise, particularly when dealing with a sophisticated fraudster who knows that smaller transactions are less likely to be examined by investigators.
A completely manual investigation process leaves a lot of room for human error. Investigators could miss an important transaction or make a mistake when entering data into a database or spreadsheet used to log transactions of interest.
There are a variety of software packages available to extract data from financial documents such as bank statements. They use optical character recognition (OCR) to get the data off the statements and artificial intelligence (AI) to place the data into a database.
This eliminates the data entry work and the investigator is able to analyze all the data, rather than select items. Data entry errors are eliminate, and many of the software packages reconcile the numbers to ensure accuracy. The forensic accountant can quickly map the flow of funds, search for transaction patterns, create charts and graphs that show entities and transactions of interest, create customized reports, and much more.
This process can be used in many types of cases such as money laundering, financial statement fraud, securities fraud, health care fraud, investment fraud, and Ponzi schemes. In civil or criminal cases involving high volumes of financial transactions, it makes sense to work with a financial investigator who uses these software tools to find answers faster, more accurately, and with greater efficiency. The investigation can be more thorough, yet can be completed in a fraction of the time a traditional investigation would take.