Pushing for knowledge on forensic accounting

What is forensic accounting?

A science (i.e., a department of systemised knowledge) dealing with the application of accounting facts gathered through auditing methods and procedures to resolve legal problems.

Forensic accounting is much different from traditional auditing. Forensic accounting is a specialty requiring the integration of investigative, accounting and auditing skills.

The forensic accountant looks at documents and financial and other data in a critical manner in order to draw conclusions and calculate values and to identify irregular patterns and/or suspicious transactions.

Differences between traditional auditor and forensic auditor

1. A very obvious and discrete key difference which one can identify between a traditional auditor vs. a forensic accountant is that the former is someone who checks the math accuracy in the accounting department while the latter is someone whom are looking behind these financial numbers find out what’s not quite right.

2. The second differentiation is the “investigative intuition”. Intuition refers to the gut instinct which one may have to guide you to the appropriate direction as of where your investigation should start from. This is not text book earned, but rather something which can be earned through massive experiences. Most of the time, no investigation intuition is found nor required in the traditional accounting scope.

Fraud in the Cultural Council, Dept. of Cultural Affairs

In a particular situation when I was a very young accountant attached to the Department of Cultural Affairs under the Ministry of Cultural affairs, a fraud for a fairly large sum of money had taken place just before I joined the institution.

The Director of Cultural Affairs, with the authority of the then Secretary of the Ministry (the late Nalin Ratnayake) had initial plans to hand the investigation to a well-established accounting body, which was going to take about eight months.

I took over this assignment as my first major task since assuming duties. I engaged the assistance of three persons from the accounts section and administration section. To my amazement, I realised that the perpetrator had also removed the manual cash book.

There was no computerised accounting at the time (1979). I therefore adopted a single entry approach mixed with investigative accounting structuring. I successfully completed the task in three months and received a special commendation from the Auditor-General’s Department.

Investigative accounting is ‘clinical’ by nature and one needs to be highly systematic and methodical in moving forward and collecting data. Unbiased processing of data collected will help you get useful information. With regard to this case, I used testimonial and documentary evidence to my advantage.

3. Traditional auditing is a process of auditing others’ work to determine if they have followed the documented official policies, procedures and practices of the company. The determination is based on evidence. It is a matter of fact and not merely a matter of opinion. This kind of audits is required by financial intermediaries and the government depending on circumstances.

4. Traditional auditing focus on error identification and prevention. Prevention is the result of an effective internal control system. The auditor reviews the effectiveness of the internal control system by sampling transactions of some agreeable percentage. Materiality is the accounting way of designating the importance of a transaction or an event.

5. Traditional auditors use statistics to determine the probability that material errors will or will not be identified and the possibility of its happening. This is a concern since only a sample of transactions and events will be reviewed. The system of internal control is evaluated. It is argued that if the internal control system is deemed to be highly effective, then material errors are not probable.

6. Traditional auditors typically adhere to the generally accepted accounting and auditing standards. External auditors are typically reviewing whether an organisation is following laid down accounting principles.

7. Instead, forensic accountants use physical evidence, testimonial evidence, documentary evidence and demonstrative evidence to help identifying suspect and culprits.

8. For forensic accounting, any type of evidence can be used as information, be it documentary paper, a computer video or audio. However, it requires an expert to interpret the evidence and present it. Demonstrative evidence is not actual evidence. It is just an aid to understanding just like a model of a body part or pictures or other devices are used to help clarify the facts.

9. Forensic accountant is often asked to serve as an expert witness for a lawsuit or criminal case in a court, the forensic accountant needs to have applied reliable principles and methods to sufficient facts or data. The expert witness is a recognised specialist relative to the principles and methods applied to the sufficient facts or data.

10. A forensic accountant typically need to possess the expertise and skills in these 2 fields: private investigator and accounting are what is specifically required to be a great forensic accountant. On the other hand, there is no such requirement in the traditional accounting space.

Benefits of forensic accounting

The benefits from forensic accounting studies are numerous. Fraud either by companies or employees is the most frequent circumstance requiring such expertise. Forensic accounting is becoming a cornerstone in safeguarding corporate assets and business interests in an ever-changing environment.

Evolving technologies provide expanding opportunities for perpetrating and concealing fraud. ID theft has become one of the most chronic problems for both companies and individuals to overcome. To deter fraud in this environment, the investigative techniques must continue to evolve to counter these opportunities.

Forensic accounting is now recognised as an integral part in litigation and investigating. A forensic professional is able to quantify the damage sustained by parties involved in legal disputes and can assist in solving disputes, before they even reach the courtroom. If the dispute does reach the courtroom the forensic accountant is an expert in the field and can testify.

The principle process in the corporate environment consists of prevention and detection. Prevention of fraud is the most central concept in the field of forensic accounting. It is vital for a company to protect against certain situations that could damage or destroy corporate assets or business opportunities.

Prevention is an ongoing process that every company needs to take to preserve and maintain a successful business. The prevention process involves performing internal control evaluations and then developing a solid internal control structure custom fit for your business and industry. Policies and procedures are well documented to provide effective training on fraud awareness and future preventive techniques.

Another foundation of forensic accounting is the detection of fraud. It is common that businesses are run successfully without ever realising that their full potential will never be reached. This can happen because certain measures have not been taken to detect issues or instances that encumber a company’s full capability. It is irrelevant what level of maturity your company is in, fraud exists at all stages.

The prevention and detection of fraud is a continuous on-going process used by companies through the use of forensic expert.

Prevent business fraud

Fraud can be one of your biggest worries when you run a business. Read the following advice to help prevent your business from becoming a victim of fraud.

Control who has access to equipment, documents and computers to prevent any unauthorised use.

Train your staff in your security systems and your disciplinary policies and procedures.

Where possible, divide duties between staff so any irregularities will be spotted. Introduce appropriate supervisory and monitoring controls. Random spot checks are effective at preventing fraud.

Take steps to tackle credit card fraud. Routinely check the dates credit and debit cards are valid from and to, phone for authorisation where appropriate, check the card and its signature strip for signs of alteration, check the signature you’re given against the one on the card and check the number on the card matches the number on the till printout.

If you accept credit card payments without seeing the actual card, ask your bank about ways to help reduce the risks of fraud.

Beware of suppliers and customers offering unrealistically low prices or high payments. Remember, if a deal looks too good to be true, it probably is.

(The writer is the Managing Director & CEO, McQuire Rens & Jones (Pvt) Ltd. He has held Regional Responsibilities of two Multinational Companies of which one, Smithkline Beecham International, was a Fortune 500 company before merging to become GSK. He carries out consultancy assignments and management training in Dubai, India, Maldives, Singapore, Malaysia, Indonesia and Bangladesh. Nalin has been consultant to assignments in the CEB, Airport & Aviation Services and setting up the PUCSL. He is a much sought-after business consultant and corporate management trainer in Sri Lanka. He has won special commendation from the UN Headquarters in New York for his record speed in re-profiling and re-structuring the UNDP. He has lead consultancy assignments for the World Bank and the ADB. Nalin is an executive coach to top teams of several multinational and blue chip companies. He is a Director on the Board of Entrust Securities Plc.)