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Inside Man: Is it Time to Bring in Forensic Accountants?

Forensic accountants may be able to uncover concealed financial abuse.

U.S. companies, finding a weakened economy and skittish customers at home, are attempting to branch out from their tried-and-true investments and market and seek new opportunities in emerging economies. But as the Journal of Accountancy points out, they may be exposing themselves to additional risks.

International trade is becoming increasingly common, with shared currencies and technologies facilitating the process. However, changes in currency valuation, bureaucratic problems and cultural differences are just a few of the issues that can complicate overseas operations, and may leave a company open to fraud or corruption.

With far-reaching regulations - such as the Foreign Corrupt Practices Act and the U.K. Bribery Act 2010 - and the rampant corruption that often exists in emerging economies, corporations need to proceed with caution when negotiating any international deal, the news source says. A lack of transparency is another threat that companies must manage, and they should seek to gain greater visibility into the financial reporting practices of any business partners or agents that they team up with.

"In their home countries, large multinationals have very stringent reporting guidelines, and they may be fearful of being unable to meet these standards when working in new countries if transparency is minimal," the source notes.

One way to ensure a business' ventures are not vulnerable to or sullied by fraud - or to recoup losses if abuse occurs - is with the use of a forensic accountant. Their services can be applied as support of litigation or as part of an investigation to uncover potential wrongdoing, according to ForensicAccounting.com.

As the Journal of Accountancy outlines, other steps that multinationals can take include adding variety to investments, and they can hedge some of the risks of working in an emerging market if they diversify their portfolios and spread them out in several countries.

"An adverse government action or widespread labor problems in one country can be devastating if that country houses the firm’s only emerging market investment," the source says. "But if investments are spread across a number of countries, with their own distinct governments, cultures and business climates, problems caused in one location are less likely to jeopardize the whole enterprise."

Be sure to do your due diligence when embarking on a new venture, the Journal advises. Have accountants and others within the organization do research into the costs of doing business, as well as the potential for government interference or inefficiencies.

The implications of conducting an internal investigation

The threats to a corporation's credibility and compliance with government regulations can also come from inside. If a board suspects inappropriate or corrupt practices within the organization, it may decide to bring in forensic accountants who can determine whether wrongdoing occurred.

As Doug Farrow of audit, tax and advisory firm KPMG outlines for Board Member magazine, companies should establish an independent committee that is wholly charged with running the investigation, and should hire forensic accountants to parse through any financial or accounting problems.

"Companies often encounter difficulties when balancing the pros and cons of launching an investigation and determining whether to proceed," Farrow says. "However, taking a measured approach by considering the issues outlined above can help audit committees manage the stress and the process."

The sweeping Dodd-Frank Wall Street Reform and Consumer Protection Act also has a number of implications for how businesses run internal investigations and act on the findings, and has made internal reviews a more pressing issue, according to Property Casualty 360.

Paul Ferrillo writes for the source that internal investigations that are well-run are usually enough to prove to regulators that a company has worked to root out any wrongdoing and correct it. While these investigations can prove quite costly, there is now directors and officers liability insurance that can help companies defray the expenses of corporate investigations.