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When you hear the term forensic accounting, images of perpetrators in handcuffs and espionage may come to mind. In reality, it’s not always a CSI moment. Forensic accounting is not only important when taking steps to prevent crime, it’s also vital among day-to-day operations and decision-making within your business.
The Forensic Accounting Academy defines forensic accounting as “the art and science of investigating people and money”. While forensic activities imply the investigation of a crime, many of these methods and techniques should be a part of normal routine oversight, such as analyzing financial statements, reviewing an irregularity, or even when considering significant bids or contracts.
Forensic accounting allows us to identify any deviation from expected results, whether it’s a product of a crime or a less devious mistake. However, when fraud is the culprit, keep some of the facts from the Association of Certified Fraud Examiners’ 2016 global fraud study in mind:
1. In 83% of cases, asset misappropriation was the most common form of occupational fraud. However, it caused the smallest median loss of $125,000.
2. Organizations of different sizes have different fraud risks. Corruption was more prevalent in larger organizations, while check tampering, skimming, payroll and cash larceny schemes were twice as common in small organizations. This is where we recommend our clients have policies and controls in place to minimize risk.
3. Likely your biggest risk is your check register and the controls you put around those procedures. Among forms of asset misappropriation, billing and check tampering schemes posed the greatest risk based upon their relative frequency and median loss.
4. The most common detection method was tips. Organizations with reporting hotlines were much more likely to detect fraud. Even if your company isn’t large enough to have a hotline, most tips will come from within your business. Build relationships with your employees to ensure that they will feel empowered and supported to contact you with any concerns.
5. When active detection methods identified tips, such as surveillance and monitoring or account reconciliation, median loss was lower than when schemes were detected by passive methods or accidental discovery.
6. Fraud perpetrators tended to display behavioral warning signs when they were engaged in their crimes. The most common flags were living beyond their means, financial difficulties, unusually close association with a vendor or customer, excessive control issues and recent divorce or family problems.
7. External audits of financial statements were the most commonly implemented anti-fraud control; nearly 82% of the organizations in the study underwent independent audits. An audit, however, looks at documentation and not controls. It is most often the lack of controls and procedures that enable fraud to take place.
Each organization is unique in its processes, employees and risk exposures. But understanding the activities and systems within your own business helps protect you from internal threats and mistakes. Forensic accounting also gives you the opportunity to implement routine reviews and processes that help your business run smoother. If you would like to learn more about controls and other forensic accounting practices, please contact Cray Kaiser today.