From Chaos to Clarity in Financial Investigations

Written by Tracy L. Coenen, CPA, CFF

The financial part of a case can become overwhelming very quickly. Particularly in cases involving white collar crime, securities fraud, Ponzi schemes, or other fraud recoveries, the trail of financial documentation is often very long. A forensic accountant needs to examine the financial documents and piece together the evidence in a way that attorneys, judges, and juries can understand.

When there are mountains of data, the investigator needs a way to quickly examine the data, assemble it in a format that is usable, find connections between transactions, and quantify results. Traditional forensic accounting techniques are no longer effective in these types of investigations. The volume of data can quickly overwhelm the investigator, and this affects the quality of the results

Size Matters
When the volume of financial documentation exceeds the bandwidth of the forensic accounting firm, the professionals will use a technique called “scoping” or “sampling.” The investigator selects a threshold below which no transactions are examined. For example, he might decide that all transactions under $1,000 are too small and insignificant to the investigation, and will only examine transactions larger than this threshold. Alternatively, the investigator might examine only transactions of a certain type or involving certain parties.

There is an obvious problem with employing a scoping or sampling technique: important information can be overlooked. The thresholds used by forensic accountants are usually arbitrary, and there is always a chance that a small transaction might yield valuable information in a financial investigation. One small transaction might point to a previously unidentified bank account, person, or entity.

Ignoring small transactions is often a necessity when investigating using traditional techniques. The “old” way of doing a forensic accounting engagement involves a lot of manual examination of transactions and tabulation of data. The time required to manually examine all transactions often exceeds the capacity of the forensic accounting team.

Technological innovations have made it possible for financial investigators to examine 100% of data, making their investigations more accurate and more thorough. The technology also allows the investigator to spend less time manually matching transactions and entering data into a database, and more time doing the actual investigation.

Dissecting the Numbers
The secret to quickly getting to the heart of the financial analysis is the technology’s ability extract data from databases, electronic images, or paper documents (even those of questionable quality). The software doesn’t just capture the data, however. It also reconciles it to guarantee accuracy. The data is organized in a way that is useful to the financial investigator, and the software runs advanced analytics to immediately identify anomalies and transactions of interest.

The ability to quickly and accurately examine financial data is especially helpful in cases involving large volumes of banking data. Often in fraud cases, bank statements, check copies, ACH reports, and deposit tickets need to be examined in detail to determine the flow of funds. Traditionally, this has been a time-consuming and expensive process, with varying results.

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

  • Examining and mapping the flow of funds
  • Identifying transaction patterns
  • Applying advanced analytics to detect anomalies in data
  • 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 fraud

Paradigm Shift
The use of such sophisticated software in financial investigations represents a major paradigm shift for forensic accountants and their clients. No longer do we need forensic accountants to spend hundreds of billable hours manually examining transactions, entering them into a database, and checking the data for accuracy. This “busy work” has been all but eliminated in favor of the more accurate data capture and reconciliation done by the software.

The financial investigators can quickly get to the business of investigating, and their clients benefit from much quicker answers. What initially may have looked chaotic–tens of thousands of pages of financial data between hundreds of accounts and entities–is reduced to a usable format allowing the investigator (and the client) to gain clarity rapidly.

Don’t be fooled. Technology alone cannot replace the forensic accountant. A keen investigator is still needed to make the data meaningful and identify the smoking gun. But financial investigators can quickly get down to the real business of investigating with the help of computers and intelligent software. Not only can the clients get faster results, they can also get a better work product that is free from arbitrary sampling and data input errors.

Tracy L. Coenen, CPA, CFF is a forensic accountant and fraud investigator with Sequence Inc. in Milwaukee and Chicago. She has conducted hundreds of high-stakes investigations involving financial statement fraud, divorce, securities fraud, investment fraud, and criminal defense. Tracy is the author of Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud, and has been qualified as an expert witness in both state and federal courts. She can be reached at [email protected] or 312.498.3661.