Forensic Accounting May Prevent Another Madoff-type Scandal

Suspicions about Bernie Madoff's scheme surfaced years before he was charged.

The infamous Bernie Madoff's creative bookkeeping had been flagged by forensic accountants years before the whole Ponzi scheme crumbled, and one certified fraud investigator warns that similar fraudulent practices can still happen today.

In an interview with Portfolio.com, Harry Markopolos warns that many companies and entrepreneurs may be tempted to exaggerate returns or doctor financial records in order to encourage funding or drive up an IPO valuation. With that in mind, investors should consider their picks carefully, and may even want to bring in a forensic accountant to make sure everything adds up.

"Remain honest and insist that corporate officers managing the company pre-IPO maintain an honest set of books. The opportunity for fraud within companies exists because internal controls are weak and insufficient to stop it," Markopolos advised. He said a major red flag is unvarying performance and consistent numbers, particularly if the company maintains positive growth in the environment of a varying economy.

Forensic accounting has its worth in rooting out fraud and preventing a big scandal, but it can also be useful when trying to pick up pieces after the damage has been done. According to U.K. company Forensic Accounting Services, it may be useful for government agencies and insurance companies that are trying to sort out legitimate loss claims from the fraudulent ones in the wake of the London riots.