Did you know businesses lose an estimated 5% of their revenue to fraud yearly? According to data from AFCE, small businesses are more likely to experience fraud than larger organizations or government entities. When a business suspects possible fraud, it often hires a forensic accountant to investigate. In this article, we’ll look into how forensic accountants investigate.
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What Exactly Is Forensic Accounting, & How Does It Differ From Traditional Accounting Or Auditing?
Forensic accounting combines accounting, auditing and investigative skills. According to the experienced forensic accountants at Rocky Mountain Advisory, it’s different from traditional accounting, which focuses on routine financial records and compliance. Forensic accountants dig into the numbers to detect, trace and explain financial discrepancies, often with legal consequences in mind.
They investigate why the numbers don’t add up and who might be responsible. Their goal isn’t just accuracy; it’s exposure and evidence. Forensic accounting is often used in fraud investigations, tax evasion cases and litigation involving financial statement fraud.
What Are The Initial Steps A Forensic Accountant Takes When Starting An Investigation?
Every financial investigation starts with clarity and planning. The forensic accountant first seeks to understand the following:
- What exactly is being alleged?
- What is the scope of the suspected fraud investigation?
- Who are the key people involved?
- What records are available?
A forensic accountant can gather this information from stakeholders, such as business owners, legal counsel or internal auditors. From there, they create an investigative plan—a roadmap to follow during the inquiry. The plan consists of the types of evidence to be collected, the methods of analysis and the expected timeline.
The next step is to gather preliminary data, such as financial reports, emails, bank statements, invoices and internal documents. These initial materials help form hypotheses about what might have occurred and identify where to dig deeper.
What Are Some Of The Key Techniques & Procedures Used In A Forensic Accounting Investigation?
- Document review: Forensic accountants examine contracts, bank statements, payroll records and financial documents to look for inconsistencies or fraudulent transactions.
- Data analysis: They use specialized tools to collect, process and analyze financial data. Data analysis enables them to trace the money flow, detect irregular patterns and highlight outliers that may suggest fraud.
- Interviews: The forensic accountant will interview stakeholders such as employees, managers and internal auditors. The interview can help them gather context, uncover motives and validate (or contradict) the story told by the numbers.
- Asset tracing: They will follow funds or assets from when they were misappropriated or stolen to their destination. Asset tracing is a key step in the recovery process.
- Lifestyle audits: They will conduct background checks on everyone involved in the investigation, such as employees, managers, suppliers, auditors, etc. Background checks aim to assess their credibility and uncover any information that would help the investigation.
- Surveillance: They monitor the activities of people suspected of financial wrongdoing.
How Do Forensic Accountants Gather & Analyze Financial Evidence? What Tools & Technologies Do They Use?
The evidence gathered by forensic accountants must be thorough, accurate,and legally defensible. That’s why they employ advanced tools and technologies to streamline data collection, improve analysis and enhance the overall integrity of the financial investigation. They use tools such as:
- ScanWriter: Uses optical character recognition (OCR) to extract data from documents such as receipts, bank statements and invoices. It improves the speed and accuracy of financial data processing.
- CaseWare IDEA: Has advanced data visualization features like interactive charts and heat maps to simplify interpreting complex financial data.
- Nuix Investigate: Has advanced data analytics and case management tools.
- FraudFindr: Great for detecting fraudulent transactions and safeguarding digital evidence.
What Kind Of Reports Or Findings Do Forensic Accountants Typically Produce?
The outcome of a forensic accounting investigation is a detailed report that can be used for legal or corporate action. A report from the experienced forensic accountants at Rocky Mountain Advisory generally consists of the following:
- Summary of findings
- Chronology of events
- Documentation of financial anomalies or misconduct
- Supporting evidence (charts, spreadsheets, emails, etc.)
- Expert opinions on how the fraud occurred and recommendations to prevent recurrence
A forensic accountant may be required to testify as an expert witness and translate complex financial findings into terms a judge or jury can understand.
Who Hes Forensic Accountants, & In What Situations?
As a forensic accountant, you can be hired by different entities.
- Corporations can hire a forensic accountant to investigate internal theft, embezzlement or accounting fraud.
- Law firms can hire a forensic accountant to assist in litigation, divorce cases or disputes over damages.
- Insurance companies can hire a forensic accountant to validate or investigate claims.
- Government agencies, such as the IRS, FBI or SEC, can also hire a forensic accountant.
Conclusion
Forensic accounting is all about uncovering the truth behind financial discrepancies. Forensic accountants use their accounting, auditing and investigative skills to bring financial crime into the spotlight.
If you require the services of a forensic accountant, contact the experienced forensic accountants at Rocky Mountain Advisory. They have experience in handling complex investigations with precision and professionalism.
