The Importance of Forensics

March 2019 | Article

Have you ever wondered why a specific word can elicit such different emotions for different people? Experience has taught me that the word “forensic”—as in forensic accounting, forensic examination or forensic audit—can cause people extreme discomfort. On the flipside, the term “materiality” can make forensic accountants uneasy. I believe all of this discomfort is due to a misunderstanding or misinterpretation of these words. The following can help dispel some of the discomfort for businesses across all industries.

To gain a better understanding of these terms, let’s first consider another uncomfortable word: fraud. Every two years, the Association of Certified Fraud Examiners (ACFE) releases a report on the effect of fraud in the workplace. This report is titled “Report to the Nation,” and it examines fraud-related matters around the world. What this report shows is that fraud does not discriminate between for-profit or nonprofit (NPO) organizations. It doesn't discriminate between the mom-and-pop store on the corner or the major corporation in Silicon Valley. Money can be taken from any organization, no matter the organization’s size, number of employees, type of service provided or the amount of revenue generated. The amount of the money taken, or its “materiality” to the organization, also doesn’t matter; just because a larger organization may be able to weather the loss of more money doesn’t mean the impact on them is any less serious than it would be on a small business. When fraud occurs, businesses both big and small have to find ways to make additional revenue to offset the amount that was taken.

When an employee, boss, friend or family member takes funds from an organization without permission, those who are left behind to pick up the pieces and move the organization forward find themselves overcome with many different emotions. No matter the term you wish to use for this type of activity—be it theft, larceny, embezzlement, fraud, misappropriation or a host of other terms—the activity itself is an emotional matter. The individuals conducting the improper activity build relationships with other members of the organization and become friends, family and even bosses. People are often closer to those they work with than some members of their family, so dishonesty in the workplace can cause a lot of strife. When emotions get involved, rational or critical thinking can take a backseat to the hurt and feelings of betrayal. Fortunately, there are professionals who are trained to provide logical advice and help find suggestions and solutions in these situations. These professionals are forensic accountants.

To debunk the discomfort, let’s break this word down. The term “forensic” simply means “for court.” A forensic accountant is trained and has the experience to help their clients navigate the justice world, be it the civil side or the criminal side. An experienced forensic accountant has spent years dealing with both sides and knows how to assist with any anxiety surrounding a potential day in court. Believe it or not, many forensic accountants are never called to testify; the work they conduct for their client provides leverage in negotiations, and many times an agreement is reached before the inside of the courtroom is ever seen.

If the inside of a courtroom doesn’t sound like someplace you wish to spend much time, no worries—you’re not alone. However, if you run a business, own a business or oversee a business for someone else, sooner or later you will likely find yourself needing legal counsel. The ACFE reports around 75 percent of all business are affected by fraud, and it can take up to 24 months before that fraud is detected. Also, in 53 percent of the cases examined for their report, no stolen funds were recovered. Therefore, preventing a fraud from occurring provides a great return on investment for any capital expenditure for fraud prevention methods.

While a for-profit company needs to protect its revenue and reputation in order to keep customers and employees happy, a nonprofit must work even harder to protect its reputation for keeping their funds safe and used for their intended purposes. Sine NPOs rely mainly on donors, if the organization is not providing the services set forward in their mission statement, why would people continue to donate money?

As you can see, “forensic” isn’t a frightening word at all; in fact, forensic accountants are helpful allies who can help your organization limit fraud opportunities. “Opportunity” is the only side of the fraud triangle an organization can control so it’s important they limit fraud opportunities to the best of their abilities. An Internal Control Examination (or ICE exam), one of the services a forensic accountant can assist with, is designed to do just that; ICE exams look at the cash and accounting controls an organization has in place and determine if any opportunity exists for someone to manipulate their position and take advantage of the business. To locate or identify potential fraud, organizations can also hire forensic accountants to assist with forensic audits, forensic examinations, fraud risk assessments or due diligence fraud exams.

As a business owner, business manager, member of a board of supervisors or trustees or any other top company executive, it’s your job to take proactive measures to protect your business. Contact us today to learn more.

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