How To Detect Fraud Using Forensic Accounting

How to determine whether or not a fraud has occurred –

• The law of the land can verify whether or not the act constitutes as fraud - this is often determined on an individual case basis and therefore the cases are embarked on by the regional or national court that the business’ operation jurisdiction would fall under.

Forensic accounting always uses this legal definition of fraud because this is the basis for deciding whether or not there has been a fraud.

• The auditor cannot verify what constitutes as a fraud - The accounting team isn't there to create judgments or verify if fraud has taken place – it’s role is merely to analyze and provide proof to the court of law, which finally makes the call on whether its fraud or not.

• Fraud needs intention - In all events, fraud cannot take place without intention and part of the forensic accounting team’s job is to find if there is enough evidence to show there has been an intentional effort to change, tweak or other how mishandle the information.

Process of forensic accounting to detect fraud –

Planning the investigation –

First, the investigation should be planned.

Forensic accounting needs the employment of forensic accountants, that have to be compelled to be employed from outside of the firm to make sure there is no partiality within the investigation.

Once the investigators are found and employed, the forensic accounting team will begin preparation for the investigation.

The team generally starts by laying out the objectives it wants to achieve. These are the how, what, where, when and why of the investigation, which I’ve already outlined above.

Forensic accounting will examine each objective and identify the various ways to achieve each objective, as well as how evidence can best be identified and gathered.

Then, the team will create a operating schedule and assign a suitable in-charge to parts of the investigation (in case a bigger team is needed).

Gathering proof –

The second a part of the investigation method is the hardest and time-consuming.

It is gathering proof to confute or prove the action of fraud.

The focus at this time is on guaranteeing that there's enough proof for the courts to make a call – the how, what, where, when and why are at the heart of this process, with each method and technique used to find information on these points.

Several techniques in forensic accounting can be used to gather this evidence.

Reporting the findings –

Once the forensic accounting team has gathered all the proof, they need to report the findings.

The report can be used to determine if legal action should be taken or if there is no evidence to suggest fraud has taken place.

The main function of the report is to summarize the evidence and to provide a conclusion about whether the deviation or loss of assets was due to fraud or not. It also discloses answers to core questions – how the fraud took place and when it is suspected to have happened, for example.

The report is also used to identify possible recommendations for strengthening the accounting practice in the business and prevent future frauds.

Dealing with potential court proceedings –

This step will technically be obsolete if the report doesn’t realize any proof to claim fraud.

However, if fraud remains suspected, the forensic accounting team needs to be ready for potential court proceedings.

Team members will in most cases need to be part of those proceedings and they are often called to testify and explain the evidence to the jury and judge.

The team of forensic accountants have to be able to provide evidence and present it in an accessible manner to the wide audience as the judge and the jury might not have specialized knowledge in the field of accounting and thus the evidence must be laid out in layman’s terms.

Forensic Accounting Techniques To Detect Fraud

Data mining with computers –

Data mining involves looking for trends, patterns, and anomalies in data relating to the business and its finances.

These include the digital accounting files available or files and data sets relating to products, suppliers, etc.

Reviewing all documents –

Of course, info isn’t always in digital format and forensic accountants need to use document reviewing methods to identify fraud. Reviewing physical documents may be tough for the forensic team as a result of they have to make sure they follow the proper legal procedures in accessing, storing and managing these files.

Conducting interviews –

Forensic accounting doesn’t have to rely solely on data. Talking to key parties like employees is another crucial technique used to help identify data.

For example, by interviewing the organization and the supplier, different stories of the invoicing procedure might come up and point to the system is fraudulent. Indeed, sometimes the fear of the investigation can make people talk and admit fraud – helping the forensic team to find the answers to the questions they might have.

References:

1. “If you want to engage in fraud and get away with it, you buy the government with political donations.” – Steven Magee (January 2013) – We are Mauna Kea (United Kingdom)

2. “Facts are threatening to those invested in fraud.” ― DaShanne Stokes (August 2012) – USA Today (The United States)