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Forensic Accounting

By John Dietz - Email Editor

Date : 29-May-2007

Dear Subscriber:

Forensic Accounting may not draw media attention or become the subject of TV shows like CSI, but investigative accounting is just as intense when the thought lurks that there may be something worthwhile to discover. In other words, when it comes to finance, hide and seek can be a playful little game, but in financial forensics, the accountant’s job is to find the needle in the haystack. That needle may not be something you currently have or possess, but something you “had.” Money is paper blood. - Bob Hope

Before I go into the details of Forensic Accounting, imagine that Bill is a sales representative and a CEO who travels every week on company business. He works for his own company as a “Sole Proprietor” (first mistake) and never has any hassles with his business in terms of justifying or accounting for spending. Bill uses the plastic card to purchase everything on trips (because it is easier) and he takes cash from the kitty at every swipe. This is certainly common in today’s world.

Fast forward to today. Bill is involved in what seems to be an amicable divorce...until his wife decides she wants every penny of the business worth accounted for. Since Bill has been swiping his card for twenty years at two hundred bucks a week accumulating to over $200,000, he now owes his wife half of the amount in a business audit. Regretfully, Bill takes it on the chin, and is willing to pay up, but his wife has this intuitive feeling that something is not quite right. She hires a Forensic Accountant to represent her in court for the divorce.

The Forensic Accountant notices that on the weeks Bill went to Miami, he pulled out six times more cash, and within the last ten years he traveled more and more to Miami, but his client base or sales did not increase there. On TV’s CSI, the investigator follows the evidence, and in Forensic Accounting, the investigator follows the money. The credit card bills indicate that Bill stayed in a hotel in every city he visited, but while he withdrew cash in Miami, there were no hotel bills.

Have you solved the money crime?

Forensic Accountants apply accounting, auditing, and investigative skills to uncover truth; they form legal opinions, and assist in investigations. They are Certified Fraud Examiners (CFE) or sometimes just Certified Public Accountants (CPA) with specialties in investigation. Forensic Accountants may be involved in both litigation support (providing assistance on a given case, primarily related to the calculation or estimation of economic damages and related issues) and investigative accounting (looking into illegal activities). This makes dealing with the IRS sound like a picnic (and Forensic Accountants can testify as expert witnesses for the IRS too).

A Forensic Accountant is often involved in the following:

--Investigating and analyzing financial evidence for litigation, divorce, embezzling and bankruptcy;

--Developing applications, balance sheets, net operating incomes, documentation of investments and assets, legacy of cash and stock portfolios on investment and business valuations to assist in the analysis and presentation of financial evidence;

--Communicating and presenting the findings in the form of reports, exhibits and collections of documents; and

--Assisting in legal proceedings, including testifying in court as an expert witness.

The Trend

Attorneys hired to investigate illegal activity are often capable of discovering and evaluating tangible assets. Intangible assets may be those in possession now and those that “were” in possession and may require greater diligence to uncover. A court attempting to collect on debt must determine the amount of a victim's financial loss and this means the tangible and the intangible assets AND these often go unnoticed or identified until an expert witness steps in (the CFE or the CPA). It should be no surprise today that in any forensic (pertaining to court) dispute an expert opinion is standard.

Back to the case of Bill who thought that he would go unnoticed abusing his corporate entity, but instead was “busted” for having a long-term affair. I guess it's true; money talks!

The moral of the story is not about Bill and his extra curricular activities; it is that everywhere you go you leave bread crumbs leading right to your assets: your credit cards, purchases, cameras on every street, your public records, your employment and on and on and on. We are a walking trail of information. With Forensic Accounting as an accepted and proven form of investigation, your assets are discoverable, and their motto is to “leave no stone unturned!” Even honest, moral citizens leave trails. Sometimes we need to be protected from ourselves, and the moral of the story: Don’t be sloppy with the details of your life or your corporation!

It isn’t easy to step up, self-analyze and take a look at the trail you leave in your business and your personal life, but you will feel all the more secure for doing so.

Until next time,

John

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