Fraud costs U.S. businesses nearly $600 billion each year. While most business owners are aware of the problem, few imagine that they will fall victim to fraud. Unfortunately, many will.
To uncover the facts when clients suspect employee fraud, attorneys often call on the services of forensic auditors, or fraud examiners. The following are some of the most common questions about the work of these specially trained fraud-fighting accountants:
1. How do financial statement audits differ from forensic audits?
Many clients think that traditional financial statement audits should expose fraud. But financial statement audits aren’t designed for that. They test whether a company’s financial statements have been prepared in accordance with generally accepted accounting principles.
Forensic audits, on the other hand, are focused on exposing fraud and building a case against perpetrators. Unlike traditional audits, fraud investigations don’t follow a set of steps neatly laid out in advance. The fraud examiner adapts operations daily in response to developing circumstances.
2. What does a forensic auditor look for?
A forensic auditor’s job isn’t as glamorous as some other detective work. It typically involves grueling hours sifting through paperwork and preparing detailed spreadsheets.
But the expert knows where to look first, focusing attention on the most fraud-prone areas. Nearly 90% of all asset misappropriation schemes target the company’s cash account. Pension plans, off-balance-sheet accounts and unconsolidated entities are also vulnerable to financial shenanigans.
To identify other high-risk areas, the examiner analyzes the customer’s accounting records, looking for unusual entries or questionable changes in balances.
Strong internal checks and balances can prevent employee fraud, so the expert reviews the company’s internal controls for possible weaknesses. One effective control is segregation of duties so that no single employee is in charge of any financial transaction from start to finish.
Besides examining records, forensic auditors interview employees, not only to obtain financial data and other information about the company’s operations, but also to learn about employees’ personalities and behavior outside the workplace.
Individuals who live beyond their means — with lavish trips or expensive homes — are more inclined to commit fraud. Others who bear closer scrutiny are those with gambling or drug addictions and those expressing dissatisfaction with their workload or salary.
If the fraud examiner identifies employees with the opportunity and motive to commit fraud, the next step is to audit the financial status of the suspect. When the numbers don’t add up — when known income and expenses don’t explain a significant increase in personal net worth — it can indicate asset misappropriation.
3. What qualifications should a forensic auditor possess?
While auditing skills and a general accounting background are useful starting points, forensic auditing also requires an understanding of law, information systems, ethics and criminal psychology.
To acquire those skills, many accountants pursue advanced training — such as fraud seminars offered by the American Institute of Certified Public Accountants, the American College of Forensic Examiners and the Association of Certified Fraud Examiners. Experience enhances the skills acquired in study.
When choosing an expert, look for experience serving as a courtroom witness or teaching or writing about fraud. You can also request testimonials from past clients.
Other criteria to add to your checklist include creativity, good listening skills, discretion and strong communication skills. If you’ve never worked with a forensic accountant before, you might seek referrals from the client’s CPA or from other attorneys.
Uncovering facts about fraud
Financial experts skilled in forensic accounting can play an important role in uncovering the facts when business clients suspect employee fraud.
Forensic accountants’ services not only contribute to a thorough investigation but also help to ensure a strong courtroom presentation.