bonus: 11 examples of “control culture” services.
trained forensic professionals investigate accounting and financial transactions that are, or will become, subject to legal proceedings. it is an early step in a potential war, and many times it is the first shot.
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attorneys and c-level executives are often not familiar with forensic techniques and see them as a means to quantify a loss. financial forensics also provides a means to deter and detect fraud. today, i share my views on the value of forensic techniques used to deter fraud and encourage cvas to consider attending the cti’s forensic accounting academy™ or fraud risk management courses offered through the maff programs.
as for forensics, the process used involves identifying, gathering, analyzing and investigating transactions in a manner where the results can be clearly explained and documented. guesswork and assumptions are not part of the process, but inquisitiveness is essential in charting the path of what needs to be done. opinions are presented as an end product or result of the work. the engagement process needs to be free of bias; this means we refrain from supposing or leaning. the forensic report or result is a factual and expert presentation of financial and economic issues and possible quantifications of claims or damages that flow from the investigator’s procedures.
some areas where forensic professionals are engaged are:
- marital disputes
- business partnership disagreements
- commercial litigation
- loss damages such as from a fire or flood
- breach of contracts
- royalty and license payments
- bankruptcy and pre-filing issues
- suspected employee theft
- falsification of financial reports
- insurance fraud
- merger and acquisition due diligence
- preliminary top side reviews
the genesis of the process is adversity. yet, some of the conclusions reached can provide tangible benefits by recommendations of corrective measures that can be implemented to reduce risks of future losses or a tightening of controls. in fact, some engagements are not litigation-based, but rather are for the purpose of risk containment by reviewing a company’s processes and procedures to make sure they are being followed, and to provide an oversight that they are appropriate for the company and its personnel.
by way of example, in one day’s newspaper there were three articles about glaring frauds or stupid errors. it seems bank of america made a $4 billion error overstating its capital; another was about contractors who were sentenced to 20 years in jail for fixing time records with the city of new york; and the third was the federal government looking to bring in new people to run the health care websites because of the immobilized sites when they were getting started.
from my way of thinking, all of these could have been avoided with proper procedures, controls, reporting and oversight, and with someone in charge of this. when no one cares, cracks are opened, and possibly otherwise honest people do things they shouldn’t, or people just get sloppy and do not pay attention to what they are supposed to be accomplishing.
when many misstatements are uncovered, forensic accountants or those trained in forensic techniques (not necessarily accountants) become the “tabulators” of the enormity of the system failures. i suggest that forensic professionals be called in early to create the systems that will make it extremely difficult to break through or that will deliver a message of the certainty of disclosure once a line is crossed. deterrence provides strong safeguards.
following are just some examples of the services forensic professionals can provide to create a control culture:
- provide methodology to get things done the right way at the right time by the right people
- create a system to track customer orders and assure they do not get mislaid
- manage customer backlogs and verify that the backlogs are for the right reasons
- ascertain that inventory doesn’t accumulate unwisely or unnecessarily
- track, manage, control and contain inventory shrinkage
- set up controls so products cannot be shipped without the proper authorizations. (i was tempted to write “without the proper paperwork,” but most business is now done electronically. for that reason, controls are even more important, and businesses need to use the jit accounting data to determine that the processes are being followed and all authorizations are appropriate.)
- track orders to suppliers to determine they are for the right things in the right quantities and that they are received timely and in good order
- establish methods that make it easy to review operational data in a timely manner; most companies have it available but many lack the ability or discipline to review it properly
- review overhead and determine if it is properly allocated and not excessive in space and cost
- set up systems to review reporting features that indicate the direction of the cash flow, and that it is in the right direction
- develop key performance indicators (“kpi”) separately for each manager as a method for them to review the important metrics on a regular basis – daily as much as possible