Forensic Accounting Can Detect Suspicious Behavior

Author: Adrienne Schreier

For many companies, business slows down around the holidays. Encourage your clients to take advantage of this downtime to conduct a year end fraud sweep with the help of a forensic accounting expert.

Investigation prep

There are hundreds of ways to commit fraud, and the signs aren’t always obvious. A thorough, objective review performed by an expert can unveil suspicious losses that may indicate fraud. It also can identify internal control weaknesses that may leave a business vulnerable to fraud perpetrators.

Among the documents a fraud expert will examine are:

  • Bookkeeping records,
  • Invoices,
  • Bank statements,
  • Payments,
  • Journal entries, and
  • Financial reports.

Management can assist by ensuring easy access to records and personnel. It should pay attention to how long it takes employees to produce documents. If some records are missing, management needs to ask why and what steps employees took to find them. Documents that can’t be located are a red flag for fraud.

Down to business

Experts typically look for signs of doctored, forged or missing documents or anything that doesn’t “feel right.” For example, an unusual number of journal entries posted near the end of the fiscal year could be adjustments made to cover theft or misappropriation.

Adjustments to receivables and payables are possible signs that employees are misappropriating customer payments or engaging in billing schemes. Another red flag is out-of-balance books. An end-of-year inventory of merchandise or cash can bring missing assets to light.

Experts pay particular attention to payroll documents. Missing or otherwise unaccounted-for employees could indicate the presence of “ghost” employees. Management can help to expose such schemes — in which perpetrators pay nonexistent staff members — by personally handing out year-end paychecks or bonuses (or paper stubs if employees have their checks direct deposited). Any leftover checks merit further investigation.

Management should also observe employee behavior. Fraud perpetrators often avoid taking vacation or sick time for fear someone will uncover their activities in their absence. And thieves may seem irritable or defensive when asked to comply with an organized fraud sweep.

Dealing with suspicions

If something appears suspicious, businesses must be willing to confront it — and resist the temptation to explain away exceptions. Also, if an employee is caught, management shouldn’t assume that this employee is the only culprit. Unfortunately, fraud schemes often involve more than one person. And fraud can be committed by people outside the company or by a combination of employees and outsiders.

But warning signs don’t always lead to a thief. Accounting irregularities may be explained by genuine errors or an ill-designed process. Honest mistakes can be corrected and avoided in the future with better training, process improvements or the addition of more-effective controls.

If a company hasn’t already established a system for employees, vendors, customers and the public to report suspicious activities, it should do so. While not required of private companies as they are of public ones, confidential hotlines can cut fraud losses by approximately 50% per scheme, according to the Association of Certified Fraud Examiners.

Cleaning house

Year-end fraud sweeps enable businesses to close the books on the old year and welcome the new one with confidence. Although management can provide valuable information and assistance, it should hire an experienced fraud expert to conduct the actual review.

For any questions on forensic accounting or fraud detection, contact us here or give us a call at 716.847.2651.

Year end is an ideal time for businesses to tie off loose ends — and this includes assessing their fraud controls. A system that may have been effective five years ago when a restaurant chain had only one location or a company manufactured a single product may not meet the organization’s changing needs or address the risks associated with expansion.