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Forensic Accounting and Fraud Check-Ups

Forensic Accounting and Fraud Check-Ups

[Tax Compliance]

Forensic accounting has been described as an “art and science” that investigates people and money. Forensic accountants are known for tracing funds (following the money), uncovering hidden assets and educating involved parties as to potential damages.

In simple words, a forensic accountant will hunt until the money is found, make sure that money is applied to the right place, discover if money and/or assets have been hidden, or if funds or assets have landed in the lap of unintended recipients.

This is why, (according to the Association of Certified Fraud Examiners - ACFE), forensic accountants are invaluable resources in the discovery and the resolution of the most common type of fraud – asset misappropriation. The ACFE also believes that close to 7 percent of an organization’s revenues can be lost to asset misappropriation. It has become a serious problem and a no-win situation for all involved.

In an asset misappropriation, the perpetrator steals or misuses an organization’s belongings and resources, usually without force, through trickery and deceit. Some examples are: stealing physical cash, performing fraudulent disbursements, inventory theft and misusage of assets (employees using company assets for their personal use).

The three circumstances in which most asset misappropriation occurs are:

  • Before the assets are recorded in the books/records of an entity (skimming).
  • While the assets are held in the entity (larceny).
  • During the process of purchasing goods and services (billing process, expense reimbursement and payroll frauds).

Asset misappropriation is usually detected through tips or complaints, internal controls, the perpetrator turning himself/herself in, or assessment of “red flags.”

Typically asset misappropriation will produce certain detectable symptoms. Inconsistencies and deviations in accounting, internal controls operations and behavior will produce “red flags”. Some examples are:

  • Missing, altered, or photocopied documents
  • Stale items on bank reconciliations
  • Increased or excessive past due accounts
  • Unexplained or confusing journal entries
  • Inaccuracies in the ledger accounts
  • Unexplained changes in financial statements
  • Internal control weaknesses
  • Lack of proper authorization on documents and records
  • Overrides of existing internal controls
  • Inadequate accounting system
  • Excessive number of checking accounts
  • Frequent change of bank accounts
  • Unexpected overdrafts or declines in cash balance
  • Frequent changes in legal counsel
  • Frequent changes in executive management and directors
  • High employee turnover in areas vulnerable to fraud
  • Continuous rollover of loans
  • A compensation program that is out of proportion to profits
  • Problems with government regulators

An entity confronting asset misappropriation should re-evaluate its internal controls. A qualified forensic accountant can recommend internal control systems that will help deter and prevent fraud schemes, and assist with establishing control environments, accounting systems, control activities, and monitoring.

Don’t be a victim of your own making. Forensic accountants are specialists in demand due to their experience in investigation, detection, and quantification of losses. Consult now.

Foodman CPAs and Advisors * 1201 Brickell Avenue * Suite 610 * Miami, Florida 33131 Tel (305)-365-1111 * *

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