In the first of a series of four articles, we examine the critical work of forensic accountants in the financial-services field.
In an ideal world systems and checks are in place to keep things ticking over properly in business. Risks are assessed and the people employed are trusted to carry out their responsibilities. But we all know that the day-to-day reality of operating a business can be complicated and in the daily “busyness” of getting everything done, some aspects may be overlooked. What happens when things don’t add up? When you get a call from a supplier saying they haven’t been paid for six months and the bank statement shows they have?
What is forensic accounting?
In its simplest form, forensic accounting investigates different possible fraud scenarios, like the examples above, with the objective of finding out what happened, how it happened, and what can be done to remedy the situation. Additionally, a forensic accountant can also conduct a business valuation, specifically when businesses are for sale and prospective buyers want to know if the asking price is worth it. Essentially, it’s a specialist field of accounting that’s about solving problems and reducing risk so that the businesses can be more profitable. When might your business need these specialist services?
Forensic accounting examples
While accounting services are focused on balancing the books, forensic accounting investigates the “how and why” when the books don’t balance. In larger companies that employ more than 500 employees and have many business processes, it becomes easier to hide fraudulent activities than in smaller companies where everyone knows each other. These activities can go undetected for some time and can result in major financial losses. Digging down to find the problem and a solution takes specialist investigative and forensic accounting expertise.
Grid Forensic Accounting, which has been operating in this specialist field since 2014, draws attention to a typical example, i.e. the ghost employee – someone who doesn’t exist and doesn’t actually work for the company but who is being paid as a salaried employee. Funds are diverted from the business to a private account under the guise of a salary and no-one is any the wiser because the accounts department assumes they are a legitimate employee. A forensic accountant can help to implement checks to verify personnel details, knows what to look for to identify possible ghost employees and trace how the fraudulent activity could have been initiated. The process helps to not only solve the current problem, but also close any system loopholes that could expose the business to similar risks in the future.
Physical theft of money or company assets is often difficult to prove and, once again, knowing the methodologies that fraudsters and thieves use to cover their tracks can assist greatly in solving the cases of missing assets. Putting verification and tracking processes in place can help prevent theft from occurring again in the future.
When forensic accounting is not solving problems, its mandate is to asses and reduce risk for businesses. This may involve conducting due diligence on a particular business (which could be a potential supplier, joint-venture partner or client), on real estate, commercial property or for asset acquisition. Grid Forensic Accounting advises that knowing the actual financial health and history of a business or property is critical as this can have a major impact on the outcome of a particular venture or the future success of a business. It may also reduce or avert any legal implications in the long run.
How forensic accounting works
Depending on the scope of work required by a client, forensic accounting investigations or evaluations can involve either:
• a simple assessment with an executive summary, or
• a more detailed report with particulars of the process, findings and recommendations.
Typically, the scope is relative to the potential business value or risk involved, says Grid Forensic Accounting, and is assessed on a case-by-case basis. Investigations may be conducted on site, if there are specific documents or assets to be assessed, or the evaluation may take place remotely using online systems to conduct research and make assessments.
Forensic accounting teams may call on the expertise of those in various fields, for example legal, operations management, financial auditing, payroll expertise or industry-specific roles. The mandate is always to solve the problem and identify possible future risks so that systems and checks can be put in place to mitigate them.
The value to non-profit organisations
Risk assessment is not only relevant to businesses. Preventing fraud and the misappropriation of funds is a high priority for many non-profit organisations (NPOs). Their livelihood depends on it. Of particular relevance to NPOs is putting proper checks and balances in place to ensure diligent and appropriate use of the funds and resources that come into the organisation. Donors want to know that their contributions are going to be properly managed and reach the people they’re intended to help. Having the right processes in place, where there is transparency and accountability, goes a long way to ensuring donors will continue to support a particular cause.
Forensic accounting is a specialist service that can assist both businesses, individuals and NPOs in critical times, helping to identify and mitigate potential risks, and propose solutions to ensure future success. Forensic accountants are also qualified to testify in court and can play an integral role in dispute-resolution negotiations.
Grid Forensic Accounting is determined to solve. We work closely with our clients to reach solutions timeously. For a full list of services, please visit gridfa.com or to book an obligation-free consultation, click here to instruct us.