Before immersing yourself in the complicated and at times convoluted world of forensic accounting, it’s important first, that you have a clear and comprehensive understanding of the concept of fraud – particularly financial fraud.
There is a symbiotic nexus that connects the two, with both paradigms playing off one another in order to define themselves. Simply put, in the absence of forensic accounting, fraud would likely go unnoticed, and without fraud, there would be no necessity for forensic accounting.
So, what is fraud?
Fraud, with respect to finance, is the misuse of one’s power, or malpractice as a result of one’s position, that facilitates personal enrichment (usually monetary) through the misapplication of another entity’s resources. Generally, this applies to appropriating an organisation’s assets in order to achieve self-betterment or an advanced personal position by way of ‘theft’ (though this definition becomes more complex when we begin to investigate the logistics of embezzlement and fraudulent accounting).
If we look at broader definitions of fraud, the main focal points that recur are all related to achieving personal enrichment by way of falsifying information or fabrication of some degree. This is the basic commonality that pervades when it comes to defining fraud – gain through deception and false pretences. Financial fraud follows the same pattern and often involves the creation of a ‘façade’, whereby an organisation’s accounts stipulate that a company is in good health, when it is far from it.
Typically, financial fraud won’t discriminate with respect to industry or business size. Generally, these factors will only have an impact on the magnitude of the fraud being committed, and the avenues that an individual who is defrauding a company is able to take. Whether it’s the payroll manipulation of a profitable family business or theft and embezzlement in a conglomerate limited company, fraud is rife in almost every denomination of business and finance.
The measures by which individuals are able to defraud companies are numerous, and the lengths some have gone to in notable cases are extensively complicated. The complexity required for a successful defraudment, however, does not seem to be a deterrent, with fraud one of the most commonplace offences occurring globally. Accounting for more than 30% of crimes experienced in England and Wales in 2018, fraud is the highest volume offence committed in these countries, and with growth only expected to rise in the following years, implementing proper countermeasures is now more important than ever. This is where Blackhawk Intelligence and forensic accounting processes can help.
What is forensic accounting?
Forensic accounting can assume many forms and incarnations, all of which go hand in hand with uncovering the paradigm that is fraud, and then preparing this evidence of fraud for court. In effect, this is the nature and purpose of forensic accounting – detecting and identifying fraud, mitigating its impact on the health of a company, illuminating its existence with evidential, admissible proof and bringing the individuals responsible for committing the fraud to justice.
There is a range of processes involved in forensic accounting, many of which pertain to the intricate and intuitive collection of data. From collating information about the financial dealings of a particular company outside of typical investigative routes (almost mimicking the way a detective would gather clues and evidence) to the specialist auditing procedures involved with locating fraud and financial irregularities in falsified, complex financial accounts, a forensic accountant needs a keen eye for detail and an innate ability to solve problems. While these processes will be explained at length throughout this article, first we must discuss the most difficult piece of information to ascertain for forensic accountants: the initial identification or detection of fraud.
In 2018, the ACFE’s annual study on the frequency of occupational fraud and abuse highlighted the United Kingdom as the highest grossing country in Western Europe for occupational fraud, which is defined as “fraud committed against an organisation by one of its own officers, directors or employees”. Over 1 in 4 cases of defraudment in Western Europe were committed in the UK, and 46% of all cases were detected via a whistle-blower’s ‘tip’ from within the organisation. It’s interesting to note that almost 50% of cases reported relied on the involvement of an individual within the company to make the fraud known, and with the median duration of these frauds averaging 24 months, in many circumstances, the damage was already done and the whistleblower almost too late.
Therefore, timeliness is of the utmost importance when it comes to effectively combatting financial fraud. If you do suspect that your company is or has been a victim of occupational fraud, and you don’t have a dedicated fraud hotline, then outsourcing your forensic accounting investigation to an external forensic accounting specialist such as Blackhawk Intelligence is the best thing you can do. Not only do we possess a expert team that can assist with the identification of fraud in circumstances where you have full access to your accounts and bookkeeping, but in the event that your accounts may be more difficult to ascertain, Blackhawk has a proven track record of using specialist methods for capturing, preserving, extracting and analysing your company’s financial information, and protecting its admissibility in court.
How can forensic accounting uncover fraud?
Forensic accounting is most commonly employed as a reactionary method for investigating and illuminating fraud within a company or corporation. There are a number of mechanisms by which forensic accountants are able to scrutinise companies, and typically, they follow strict procedural measures in order to ensure the validity and admissibility of any evidence that is collected throughout the duration of a financial examination, inspection or audit.
Not only is a forensic accountant required to be a specialist when it comes to financial accounting, reporting and auditing techniques, but they’re also required to be experts in disciplines such as business information and economic theory, as well as having an acute eye for identifying data discrepancies and inconsistencies. These are the skills required for a successful investigation and the discovery of fraud.
The structural process by which many of our forensic accounting investigations develops can be summarised as follows:
Identifying – Often considered the most difficult task for forensic accountants, without guidance or an initial tip-off, our services can often be rendered moot. When an individual enlists our services and suspects that their company is potentially being defrauded, however, we begin consolidating an investigation to identify the existence of fraud and the culprits involved. This is one of the most important aspects of forensic accountancy – it’s here that the entire investigation hinges.
Capturing – Once an identification has been made and there is confirmation that fraud has been committed (in any way, shape or form), forensic accountants then develop a system for capturing, collecting and containing evidence of the defraudment. This may mean accessing a company’s accounts, locating any financial discrepancies or anomalies and then deciding on the best practices for extracting this information further down the line.
Presenting – Once the data has been captured, it needs to be consolidated and formatted in a way that is presentable to the courts or other advisory bodies. What this means is that the data we collate and collect needs to be organised strictly and procedurally to maintain its integrity and ensure its admissibility when being presented to these entities.
Preserving – Perhaps the most critical aspect of the forensic accounting process, without the preservation of evidence, ie. ensuring that any information or data that will be extracted is legally obtained and therefore admissible in court, the entire investigative skeleton collapses. Here, a forensic accountant must refer to any legislative statutes that outline the ways evidence can be collected and collated – it’s not until we have a game plan for preserving the evidence that we will go about the following steps.
Extracting – Once fraud has been identified, information and data collected and the relevant statutes consulted to ensure the admissibility of this information and data, a forensic accountant can go about extracting the evidence for further analysis and potentially, for submissions to court in the event that legal avenues are pursued.
Analysing – Finally, confirmation is made through in-depth auditing and financial analysis that a fraud has actually been committed, including the individuals responsible for committing the offence, and whether the client (be it a director who has been defrauded or an entire corporation) wants to exercise their legal rights and pursue the offender in court.
While this is just a rudimentary overview of the general paths by which forensic accountants may conduct a routine investigation, there exist a number of factors that may influence the process, including difficulties with accessing accounts and a plethora of other variables. Therefore problem solving and a broad understanding of financial data and information systems are so important for a successful forensic accountant. If you suspect that you’ve been a victim of financial fraud, or have a query relating to your company’s accounts, Blackhawk Intelligence’s specialist forensic accountants are able to assist.
How can forensic accounting prevent fraud?
While forensic accounting represents an effective reactionary and investigative measure for companies suspecting fraud, it can also be implemented as a proactive deterrent in circumstances where companies want to ensure their financial security and safeguard their business from possible internal, occupational defraudment.
By enlisting the services of a forensic accountancy firm such as Blackhawk Intelligence, an organisation can secure its internal financial controls, identify any potential areas of weakness as well as performing necessary due diligence when it comes to background checks on its finance and accounting staff. Moreover, an insight into the factors that generally motivate fraud, ie. personal circumstances, opportunity and rationalisation, can help better prepare an organisation for deterring its employees and better controlling its financial and fiscal security.
Liaising with a forensic accountancy specialist is also advisable in circumstances where larger corporations, or companies that deal with high volumes of currency, want to ensure that they are covered in the event of defraudment. This may mean being put in touch with a specialist insurance firm that can provide a comprehensive plan for the recovery of assets that will facilitate both a swift and cost-effective resolution for the client.
In conjunction with this, forensic accountants who also specialise in business intelligence can devise sound strategic planning and introduce complex controls designed to safeguard and protect the security of specific businesses. Whether it be mitigating the effects of potential negligence or ensuring that the structure of your financial accounting processes and systems are air-tight, Blackhawk Intelligence is able to assist regardless of your industry or intentions.
What does a day in the life of a forensic accountant look like?
When they’re not on assignment, a day in the life of a forensic accountant generally consists of chasing up leads and liaising with existing clients regarding their pending investigations and the status of assignments. When they’re in the field, however, things become much more interesting.
For a forensic accountant, their primary objective is to uncover fraud and manufacture evidence of this in preparation for court. The means by which they go about doing this can vary incredibly, and as mentioned above, oftentimes it involves some superior sleuth work. While we’re unable to disclose names due to client confidentiality, our case studies show in depth, the processes by which our accountants are able to investigate and uncover fraud, as well as finding admissible evidence and verifying the innocence of our clients.
Whether this is creating a paper trail of information and data in conversation with banking administrators when trying to find out who a company was that seemingly ‘evaporated’ with a large investment from one of our clients, or by investigating whether necessary due diligence has been carried out with respect to the legitimacy of the financial officers involved in a large scale corporate operation, our forensic accountants are tasked with locating the facts, analysing them and then turning them into evidence.