As technology grows smarter, and thieves employ more ingenious ways of embezzling money, companies have started to employ forensic accountants to identify and track the source of lost money. A forensic accountant investigates and documents financial frauds or inaccurate materially significant information.
The business of forensic accounting
In order to successfully identify instances of fraud, forensic accountants must have considerable degree of knowledge about the usage of information technology in accounting and auditing procedures. It’s through new technology, particularly server based systems, that much of the fraud is committed within larger corporations. Give the size of these corporations, there is rarely a single point of entry for adding to or extracting data, which makes committing an outright fraud much easier for a tech savy person.
While many forensic accountants are members of outside firms hired by companies, many others are employed as expert witnesses in criminal and civil cases. No matter who these accountants work for, a healthy sense of skepticism is required to perform a thorough examination of a company’s account books to determine if there is truly a discrepancy between actual profits and reported ones.
To be an effective forensic accountant, a person should have the following skills:
- Good grasp of the facts
- Willingness to engage with someone who challenges you
- Read between the lines
- Become intimately involved with the work
But not all investigations conducted by forensic accountants center on fraud. Many are civil cases involving contractual obligations, matrimonial issues or performing due diligence during mergers and acquisitions. In many of these cases, fraud or a lesser charge of omission is not suspected, but a thorough accounting of one’s business practices must be made in order to go ahead with a civil proceeding.
In other cases, forensic accounting is used to clear up past accusations of theft or fraud, as in the Post Office where thousands of sub postmasters were forced to pay back several thousands of dollars that they were accused of taking. The sub postmasters responded by registering an interest in an outside firm conducting a forensic accounting programme to prove that they money was not stolen or lost through omission by the sub postmasters.
For investors, a company wide manipulation of numbers can mean personal and professional disaster. A recent report by Stockpedia states that companies like SuperGroup have been manipulating numbers in order to attract more investors. While hiring forensic accountants to investigate even suspected fraud can get to the root of a problem, the perception of a company massaging its balance sheets can cause an economic crisis, as with SMB Offshore’s loss of 11.7% in the market after announcing the hiring of forensic accountants.
Employee fraud has become the most common form of fraud in the UK, as in the case of Alfred McAlpine, when accountants discovered that a group of managers had defrauded their Gwynedd, North Wales quarrying business of over 23 million Euros.
Before the global recession, in 2007, businesses across the UK reported a 40% increase in fraud over the previous year. As the economy weakened, and fewer and fewer businesses saw actual profits, many started to report false earnings as a way to appear to be in better financial state even as they floundered. By 2011, fraud in the UK climbed to over 1.1 billion Euros, with half of that fraud being committed in the private sector.
Many experts warn that fraud is more likely to happen in a company that does not promote a “anti-fraud” culture where whistleblowers are comfortable coming forward. While the Anti-bribery Act in the UK has lead to companies setting up processes to help discover fraud and even omissions in reporting, legislation like the Dodd-Frank Act in the U.S. was much more effective in impacting workers’ activities.
While forensic activity often begins much after fraudulent activities have begun, a whistle blower can give companies notice of unethical behavior once it is first detected internally. The U.K is still doubtful that regulators have the resources to compensate whistle blowers for lost income due to coming forward, which means that within the UK, whistle blowers will not get the same encouragement to come forward and aid with investigations.
The impact of fraud can be local, causing the collapse of a large employer to negatively affect the surrounding economy. We saw this in the case of Enron, when the company’s collapse led to the end of employee’s pensions. But as companies and partnerships continue to become more global, the loss to a company after the fraud is unearthed can affect a much larger range of countries, subcontractors, customers and stockholders.
As the economy continues to lag, fraud is on the increase in many companies. So this is the desire to unearth corruption by finding the source and finding ways to stop it.
This is the Guest Post Written by Lisa Jolan. A writer , blogger and marketing executive. Writing on Financial Matters Like Fraud, Taxes and debt crisis are her most favourite topic. You can connect with her on twitter @LisaJolan