Forensic Accounting

The very thought of Forensics brings the mind to images of Sherlock Holmes, a long trench coat tied at the waist and a spy glass looking around corners, in boxes, under cabinets and behind desks. It sounds ominous and suspenseful. What and where the clues to determine what are is missing and who is the felon?

In reality, forensic accounting should be an integral part of every day's operations in a Finance Department that has been properly developed and positioned for the control of all the business assets. Controls are put into place and personnel doing their job responsibility and being held accountable with wave the red flag when the paperwork gets out of order. There should be no intimidation factors that would prohibit this from occurring naturally.

Consider the store manger that has purchasing authority, maintains the inventory, approves the purchase orders, bills customers and handles the cash drawer. These are valuable assets which can slip through ones fingertips if not properly accounting for in the business office. This manager decides he can call his regular trucking company and have them run over to a routine city but this time they pick up his mom and all her furniture and move her to his town. He might even have a friend there and just casually suggest to help the invoice look routine. What could cause the accounting clerk to recognize this erroneous transaction?

• Invoice from the trucking company should indicate ship from and ship to.
• Invoice from the trucking company should indicate purchase or sales order number to match with a vendor purchase or a customer shipment.
• Signature could look suspicious. Bill of lading not available or review of weights, dates, Items, numbers, etc. look out of line.

This same manager might casually sell some small ticket items to their friends for cash under the table. This could be readily identifiable through regular cycle counts, periodic inventories, monitoring of serial numbers.

What if cash comes up short every now and then? Cash should be balanced daily and any shortages clearly explained.

What if customer has a large return shortly after an inventory count or maybe indicates an order was not received. The accounting staff should immediately do a random cycle count to confirm inventory accuracy.

In short, accounting is very well versed in controlling company assets if the proper procedures are followed and controls are in place to confirm all check points for accuracy and proper approvals. The real issues that bring in the higher skilled Forensic Team are when the controls are either not in place, not complete, lacking in compliance or just plain ignored. Management is often completely guilty as rules are ignored by themselves, certain persons are seen as infallible or indispensible, or employees are intimated to speak up.

What if the perpetrator resides in the accounting department? Again, with proper documentation controls, levels of approvals, segregation of duties, timely filing and reporting of financial results any misappropriation of funds or assets will show their reduced value in the normal processing of daily results.

Accounting is not math facts as many people like to think. Accounting is a science much like engineering or architecture. Accounting is a Financial Structure that should be built with strong components such as controls, positioned on a strong foundation of accuracy with the delicate weaving of interior designs that do not spring leaks or cause electrical outages.

Management can provide for and expect this strength if the Accounting guidelines are installed properly, monitored constantly and consistently and any mishaps are understood and re-engineered for future compliance. Management should receive financial results on a timely basis, understand their meaning and question values not understood. Key Metrics should be monitored and watched carefully. Management should follow all guidelines and procedures as any other person within the organization.

Management can be the small business owner overseeing his personnel or the Board of Directors who monitor the Management staff. In either case, both should know what the results and financial picture should resemble and any deviations should be explained. With timely information and a close watch and understanding of the business at hand, the need for outsourced Forensic work should remain at a minimum.

As a B2B CFO®, we are each seasoned in understanding the building blocks necessary to provide a safe accounting department that can indicate improprieties as they occur. We can also quickly recognize when businesses do not have these fundamental components in place. Each and every business should safeguard against the threat of theft by utilizing a CFO to properly build and maintain a strong accounting foundation. If an incident does occur, we can locate the breakdown, determine the damages, document the trail of improprieties and ultimately rebuild the structure for proper compliance.