THREE FORENSIC ACCOUNTING TECHNIQUES TO DETECT FRAUD

When it comes to detecting fraud, there are three forensic accounting techniques used. These are data mining with computers, review of other documents using various methods and conducting interviews.

1. Data mining with computers

Data mining is about looking for anomalies, trends and patterns in the data relating to the business and its finances.

These could include the digital accounting files available or files and data sets relating to products, suppliers and so on.

As the world is increasingly moving from traditional paper filing to digital filing, data mining is becoming a more important tool for forensic accountants.

The data mining is often done with automated software that has been designed to notice anomalies or patterns. Occasionally, a person reviews the data and the forensic accounting team studies any noticeable differences further.

A big part of the data mining involves around the concept of Metadata. This is the information related to the organization’s computer programs and the specific files used. Metadata is used to identify things like:

• The date when the file was created and whether it had been modified.
• The location of the file and whether it has changed.
• The identity of the person who has modified and changed information or the location.

Finding and understanding the trail of the digital files is important because it can reveal fraud.

For example, if the financial figures are wrong, data mining can identify whether they have been wrong since the start (i.e. possibly as a result of a typing mistake) or if they have been tampered with later (i.e. changed to create stronger income figures and thus pointing to a fraudulent and intentional action).

Aside from the metadata, forensic accounting also uses data mining to review the information in the file and the patterns revealed by data.

Forensic accountants can spot fraud by data mining with actions like:

• Evaluating the frequency of payments and consistency of financial figures.
• Finding gaps in ledgers or missing data files or information.
• Examining the vendor and supplier information, including addresses.

Data mining also utilizes different mathematical formulas for spotting fraud. Among the most popular is the Benford’s Law. The technique is explained further in the video below:

Data mining is performed on any computer or another device that is used by the organization and which could include information that might help the forensic accounting team.

These include things like personal computers, network servers, answering machines, digital cameras, fax machines, printers, GPS systems and so on.

2. Reviewing other documents

Of course, information isn’t always in digital format and forensic accounting has to use document reviewing strategies to spot fraud. Reviewing physical documents can be tricky for the forensic team because they need to ensure they follow the right legal procedures in accessing, storing and managing these files.

For example, they can’t illegally obtain business documents and then use them to accuse the business of fraud – everything has to follow the correct and legal route.

Generally, when the forensic team receives an invitation to perform the investigation, a legal contract is formed that issues the forensic accounting team with the rights and responsibilities regarding the documents.

In certain instances, the contract also has to deal with the proceedings for digital documents and any documents that might be accessed on employee premises.

Interestingly, a big part of the document review is identifying the carbon copy of these documents. This means checking whether the documents have been modified after the date they are meant to have formed or simply added in later.

Let’s say an employee would try to tamper with sales numbers, he or she might re-print the invoices with different figures.

The review of other documents uses similar techniques to above in finding trends and patterns.

Reviewing will be more laborious if it has to be done manually but forensic accounting teams often scan and create digital data files of the documents to allow data mining.

3. Conducting interviews

But forensic accounting doesn’t just have to rely on data. Talking to employees and other key parties is another crucial technique to help identify data.

For example, by interviewing the organization and the supplier, different stories of the invoicing procedure might come up and point to the system being fraudulent. Indeed, sometimes the fear of the investigation can make people talk and admit fraud – helping the forensic team to find the answers to the questions they might have.

Again, it’s crucial to ensure the interviews are conducted professionally and within the legal boundaries of the country.

The process must be coordinated with the legal teams and generally, there has to be some kind of record of the interview (this can be used in the court as evidence, rather than have a situation of ‘he said, she said’). The purpose of the interview is to identify the following things, which could point out a possibility of fraud:

• Knowledge of the information being examined.
• Opportunities to change, swap or manipulate data.
• Understanding of the procedures being used in the organization.

The forensic accounting team has to be good at communicating with people and use a logical approach to getting to the bottom of things.

It’s important to realize that you might not receive a pure admission of guilt – the person’s unusual behavior might be a sign there is something suspicious going on that needs to be investigated.

Fraud is not just something that occurs in big, popular companies. It can happen to small or big businesses in all industries.

Detecting it can be difficult but forensic accounting provides quite a good number of solutions to identifying whether a fraudulent activity has taken place.

It uses modern technology in the form of data mining to notice anomalies and patterns in data.

But it also helps spot fraud by focusing on the people involved in the situation – using documents and interviews to see whether things are out of the ordinary.

It is essentially picking the pieces apart and seeing whether putting them back together leads to the same results or if things are out of the ordinary.

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