THE FRAUD FILES: From chaos to clarity in financial investigations

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Financial investigations have one common problem: Large volumes of data and documentation that need to be examined.

Cases such as corporate embezzlement, securities fraud, Ponzi schemes and white-collar crime often have lots of financial documentation that needs to be analyzed by a forensic accountant.

Many of these types of cases involve moving money around rapidly between multiple bank and brokerage accounts to disguise the true sources and uses of funds. The long trail of financial documentation needs to be examined by a forensic accountant and the data must be pieced together to form a winning strategy.

In larger cases, progress is often slowed while the financial documentation is reviewed. Not only must the financial expert organize and examine the documents, the data must be converted to a usable format so the flow of funds can be traced, connections between people and transactions can be found, and the results can be quantified. Much of this work is labor intensive, with forensic accountants manually entering data into spreadsheets or databases. Manual examination of documents and data is both time-consuming and prone to error, and is not the best route to high quality results.

When the mountain of financial documentation grows too large, however, forensic accountants find a way to limit the work that must be done. They often use a technique called “scoping” or “sampling” in which they select a threshold below which no transactions are examined.

For example, the investigator may decide that transactions under $1,000 are insignificant to the investigation, and therefore will not be examined. Alternatively, the forensic accountant might choose to limit the amount of work by examining only certain types of transactions or transactions involving certain parties.

There is an obvious problem with scoping or sampling transactions, in that important information may be overlooked. The thresholds are usually arbitrary, and there is always a reasonable chance that a small transaction could provide valuable information to the investigator. A small transaction can point to a previously unknown bank account, person, or entity, and the investigator who uses sampling runs the risk of missing this clue.

Sampling can’t always be avoided when using traditional investigative techniques, however. When there is a large volume of financial data to be examined and tabulated, and the forensic accounting team is limited in terms of people, time, or money, they are often forced to make difficult choices about which transactions to examine.

So, how can investigators avoid the sampling trap when there is a large amount of data? What is the solution to the problem of the investigative bottleneck created by financial documentation?

It is the intelligent use of technology. Specialized software can extract information from databases, electronic images, or paper documents (even those of questionable quality), examining all transactions and eliminating the manual labor burden.

The data is then reconciled to guarantee accuracy, analytics are applied to isolate anomalies or transactions of interest and the forensic accountant can immediately get down to the business of investigating. The process is more thorough, more accurate and faster.

With the technology eliminating manual examination of documents and data entry, the forensic accountant can quickly begin the real work of:

• Examining and mapping the flow of funds
• Identifying transaction patterns
• Applying advanced analytics to detect anomalies in data
• Extracting transactions of interest and easily examining supporting documentation
• Identifying co-conspirators, hidden assets, and additional financial accounts
• Proving or disproving investigative theories
• Detecting and proving the elements of a fraud
• Creating understandable charts and graphs to demonstrate the financial details

Paradigm shift

Using sophisticated software to do much of the routine work in financial investigations represents a major paradigm shift for forensic accountants and their clients.

There is no longer a need to spend hundreds of billable hours manually examining documentation, entering transactions into a database and checking for accuracy. This “busy work” and the accompanying bottleneck in an investigation are virtually eliminated in favor of the more accurate data capture and reconciliation done by specialized software.

Tens of thousands of pages of financial documentation may seem chaotic, but with the proper tools, forensic accountants can bring clarity to the pages. They can investigate faster and more thoroughly, and the clients benefit from faster answers.

Cases focused on financial matters can be pursued more quickly and more certainly, as counsel is able to make informed decisions faster. Technology will never completely replace a forensic accountant, as a sharp investigator is needed to understand the data, make it meaningful and identify the smoking gun. But the forensic accountant can get to the real business of investigating with the help of computers and the right software. The result is a better work product, free from arbitrary sampling and data input errors, in a much shorter timeframe.

Tracy L. Coenen, CPA, CFF, is the president of Sequence Inc., a forensic accounting firm with offices in Milwaukee and Chicago. She can be reached at 414.727.2361 or [email protected].