Is forensic accounting to catch possible losses worth it?

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Forensic Accounting

I understand that the biggest risks many companies face is from internal fraud. My company is growing rapidly and recently I have noticed some accounting inconsistencies. When does it make sense to invest in some forensic accounting?

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Proformative Advisor
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If you detect some inconsistencies, there are multiple steps you should take. Forensics accounting activities are last, if they make sense.

First remove the opportunities for "inconsistencies" to occur. Establish or alter your current policies and procedures to close opportunities for fraud.

Next dismiss the individual(s) that are behind the inconsistencies. Hopefully you are in an at will state.

Now consider what you are trying to achieve with the forensic accounting activities. This work is a specialty and may cost you. Forensic Accounting does not help "to catch possible losses," forensic accounting will only tell you what you lost, in preparation for litigation.

Good luck.

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Dear Anonymous - Forensic accounting may not be necessary, as Regis stated. Something you could do, if you chose to, is to hire a fraud examiner, although related to forensic accounting, a fraud examiner is normally less expensive to obtain.

Another option would be to find a recent Forensic Accounting/Fraud Examiner's textbook, review portions of it, there are multiple, helpful ideas on what to check for yourself. If you cannot find any indications of fraud doing your own research, and after doing what Regis suggested, the yes forensic accounting. May I also suggest going to http://www.acfe.com/ and seeing what the site recommends as resources.

Just remember a forensic audit will cost you. Specialty accounting functions are not cheap.

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As a forensic accountant, I agree you do not need to retain someone like me to review your accounting records for mere suspicions. However, many forensic accountants also perform internal control assessments. We evaluate accounting processes and recommend changes so that honest errors and dishonest acts are highly likely to be identified in the normal course of operations.

In a small organization where only 1-2 people are involved in the accounting process, my top recommendations are (1) an owner routinely reviews the bank statements, credit card statements and merchant service statements, either on-line or by having a duplicate copy sent to his/her home; and (2) an owner (or outside accountant) performs "surprise audits" periodically by looking at one area in depth. It is important that the accounting staff know about these oversight procedures. The vast majority of embezzlement in small to medium size businesses is an act of opportunity - these types of oversight procedures promote accountability and transparency and create the perception that a dishonest act is likely to be identified, which is an effective deterrent to fraud and embezzlement.

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My two cents:

In the times that I have done "forensic accounting" (rare, given I'm not an accountant, and thus the quotes) or it has been done for me, there has generally been a known problem. A history of bad controls, an incompetent (or absent) staff, a procedure that was broken....whatever. In all these situations, the payback on the time and $ invested was (give or take) 100x the investment. It is staggering what you can find.

Do you need a forensic accountant to do this? Not necessarily. You do need a known, professional third party to come in and review, advise and help you fix it up. To Denise's point, forensic accountants don't just track down Al Capone, they also are experts in building healthy systems, so (imho) they fit the mold of a "known, professional third-party".

*Need* arises if you have any suspicion that something beyond stupid/incompetent/lazy/oops has happened. If it gets to that level, then they aren't just a reasonable resource, but a necessary one. This level I've happily only uncovered once (note...the employee had no concept that what they were doing was stealing...really unfortunate all around), and we were able to handle it outside of court; if something does go to court, the FA's role is even more critical.

But, back to the second paragraph, just because you aren't necessarily going to court, doesn't mean that they aren't a good resource for your situation.

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Lots of really good suggestions. Quite simply, follow the cash. follow the cash in the door and out the door. That will tell you everything you need to know. Look for things like partial payments from Clients, agressively collect overdue invoices, ensure that credit card charges are supported by receipts that reflect an appropriate business purpose to back up the expense, review overdue accounts payable, review & substantiate reconciling items on bank reconcilements, validate all new employees added to payroll to ensure that all documentation is in order, and look for unusual activity in accruals and other liabilities.

Set up and track appropriate KPIs and other financial & operational ratios. If something is amiss, then chances are these basic metrics will also be inconsistent.

By performing some of these quick checks, you will know whether you need to have preofessionals perform additional forensic procedures.

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