When people hear the term “forensic science,” they usually think “CSI.” What comes to mind when you hear the term “forensic accounting”? Accounting is a technical area of expertise – and, similar to forensic scientists offering opinions about scientific matters, forensic accountants may be called on to serve as expert witnesses in commercial litigation. Here’s how these experts can help clients unearth hidden assets and liabilities, revenue, and expenses – and even help solve crimes.
How Forensic Accountants Can Help
If a client suspects that someone is stealing business assets or misrepresenting a company’s financial performance, it may be time to contact a forensic accountant. These experts specialize in conducting fraud audits and investigations to detect irregularities and troubling trends, looking for both telltale and subtle signs of white-collar crime.
Certified fraud examiners (CFEs) are specially trained in fraud discovery, recognition, documentation, and prevention. They are also generally knowledgeable about human behavioral factors and motivations that contribute to the commission of fraud, such as the ability to rationalize fraudulent conduct.
Often, forensic accountants are retained to detect misrepresentations of financial data or to locate missing funds. It’s important to investigate fraud suspicions as early as possible to help mitigate potential losses.
What to Expect
When you engage a forensic accountant, you can expect the expert to work closely with you and your client to tailor an investigation to the situation at hand. Depending on the type of fraud suspected, the investigation may be performed on a comprehensive, companywide or random, spot-check basis.
Forensic accountants will work to determine the scope of the fraud, including how long it has gone on and the parties involved. Investigations typically require extensive document review. In a case involving asset misappropriation, for example, experts might search for forged documents.
They also look for evidence of compliance – or noncompliance – with Generally Accepted Accounting Principles (GAAP). Of course, GAAP compliance doesn’t guarantee legitimate accounting, so an investigation might also focus on specific areas that wouldn’t necessarily be caught in an audit, such as the use of assets at the operational level. Are they being used as intended or for the benefit of an employee? Are all of the assets accounted for?
When working with a forensic accounting expert, beware of attorney-client privilege issues. Because accountants lack this protective privilege, they must work closely with you to determine their roles, and they need to be cautious about whom they interview. If, for example, plaintiffs’ attorneys become involved, these parties are likely to request any notes of interviews conducted by forensic experts.
When to Expand the Scope
Special investigations also can be effective in uncovering high-level financial fraud. A board usually receives its financial and operational information from a company’s highest executives. Investigations provide a method for the board to obtain access to deeper, more detailed information without going through the executive level of management. Instead, investigators can gather information directly from those in the trenches, using methods such as interviews, and immerse themselves in data and information unfiltered by top management. They then are able to communicate directly with the board.
Fraud investigations can be particularly useful to monitor the activities of top executives – even if only for policy lapses. Upper-management employees often are given greater latitude and may be tempted to bend the rules. When this occurs, it can influence the ethical environment of an entire company and encourage other employees to disregard policies or even commit fraud.
When to Call
As soon as the inkling of financial impropriety arises, consult a forensic accounting expert. His or her early involvement can help minimize fraud losses, preserve confidentiality and admissibility of evidence, and possibly even reduce your client’s overall litigation costs.