How do financial forensics investigators work?

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How do financial forensics investigators work?

In: Economics

its all about tracking the money. How did that money get from one account to the other. Was it from ‘cost of goods sold’?…when investigating terrorism or drug money laundering, the analysts often look at the deposits then need to back track as far and deep as they can to see how that income was generated. It can be a very lengthy process. (The IRS does this when they ‘audit’ businesses). In suspected fraudulent cases, annalist follow the money trail in the discovery process to find the source and then determine if its criminal or not.

It’s the process of critically analyzing financial information with the goal of detecting fraud or other criminal activity.

For example, if I audit the finances of a pizza restaurant, an accountant might approach it as $X spent on materials (cheese, sauce, straws, etc) and $Y spent on overhead (ovens, rent, utilities, labor, etc) and $Z income to determine profit, etc. An accountant might say at the end of the day the company earned $10,000 more than they spent, this is a profitable company.

No lets say I’m interested in buying this pizza restaurant and they send me their audited financials showing they turned a profit of $10,000 last month. Sounds great right?

I will hire a financial forensic investigator who might discover that they claimed to have sold 2,000 pizzas last month, but didn’t buy any boxes or paper plates. How are they selling those pizzas? Or that they “bought” enough cheese to make 10,000 pizzas but only claimed 2,000 sold. Or that they’re paying rent for a kitchen that is either a vacant lot or the owner’s mistress’s apartment. Suddenly I’ve discovered that the financial records of the pizza place is a lie and they committing fraud in one way or another.

As a financial forensic investigator I might be employed as a consultant for business purchases like I explained above.

Or I might be employed by a investment company. Perhaps the pizza place is a national chain that is publicly traded on the stock market. Armed with the knowledge that they are committing fraud I could do the following – borrow 10,000 shares of the stock & sell it. Then reveal the fraud to the world and the company’s stock crashes, and I buy back the shares I sold (for much less money) and return them to the person I borrowed them from for a profit.

Either way, my job is to critically analyze the financial records of a person or company with the intent of discovering illegal activity.

A forensic accountant will look at historical data of a business or industry data analysing the trends in things like gross margin (sales less cost of sales), expenses compared to budget or previous months all in an effort to identify irregularities. If the business has cash sales and funds are going missing then the gross margin will be declining or when a stocktake happens there will be a stock discrepancy. It is important to review the original supporting invoices for expenditure. I have detected frauds where there was invoice falsification with different payment terms, slight changes in vendor names, changes to address details and bank account details for wire payments by comparison to legitimate invoices. A forensic accountant will also review the internal controls. Look at new suppliers added to creditors master files also. Returning checks to persons responsible for authorising invoices is a no no! Having a register administered by someone independent of payments for checks collected is also a good idea. Also if someone looks like they are living a lifestyle beyond their income it’s possibly a pointer to fraud (the creditors clerk has a nice new shot Porsche in the company parking lot, expensive holidays, etc).

Some of the frauds I have detected were perpetrated by the fraudsters falsifying invoices and establishing fake companies with names similar to legitimate suppliers and fake invoices made through basic desk top publishing software. I sourced copies of the paid checks and examined them for evidence of cashing. The additional expenses and variances from budget were explained away by the perpetrator as unforeseen expenditure on a mining company exploration program.

I hope that gives you some insight as to what to look for!