Looking Past the Numbers: How Forensic Accounting Uncovers the Secrets Behind Fraud

April 2019 | Article

On the surface, forensic accounting and an audit may seem like they are similar services, but the fact is forensic accounting is significantly different than an audit. While an audit ensues the left side of the ledger matches the right side, forensic accountants are concerned with more than just figures. Using sophisticated software to identify possible fraud in documents, combined with skilled interview techniques and computer forensics, they can determine if a fraud has been committed, what pressures led to the crime, and what assets can be recovered.

Our work as forensic accountants has led us to uncover the truth behind many frauds and schemes. Here are some examples of how our methods go beyond just looking at numbers.

Employee fraud and embezzlement cost American companies $50 billion annually, much of that coming out of the pockets of small business owners. It’s often an employee who you trust the most who turns out to be the most untrustworthy. Listen to Monday Morning Radio podcast to hear three experts on employee theft – an investigator (from Eide Bailly), a litigation attorney, and a prosecutor -- for a panel discussion on how to prevent, detect, and respond to dishonest employees.

Out of Trust
The bank president was concerned about an auto dealership. The bank had a significant amount of depositor’s money invested as a line of credit to the local car dealer. Periodic visits to the dealer to validate cars associated with the loans could not be personally inventoried. The dealer would profess that the vehicles in question were always “at the car wash” or “out for a test drive” or some similar excuse. Monthly reports to the bank were also creating suspicion that the dealership was paying too much money for vehicles in the inventory.

The dealership was a family owned staple in the community. More recently, the reins had been handed down from retiring parents to a child to operate the business.

It became apparent to the bank president that perhaps there was out of trust selling and other issues that needed investigation. He called Eide Bailly’s Forensic Accounting & Valuation unit to help.

The investigation revealed that the bank had been defrauded of more than $1.5 million by various means. False monthly records to the bank were documented. Several employees were identified as being part of the scheme. They were duped into helping the fraud by the owner.

Computer forensics investigations helped to identify the pressure points that resulted in the fraud: Large personal expenses on company credit cards. Luxury vacations to Europe that included employees that helped commit the fraud, expensive clothing purchases, medical issues. All these things created pressure on the dealership owner. As an example, a single email was traced to a jewelry store in the Caribbean showing an almost $9,000 account credit. Having this information in hand, the forensic accountant could trace six-figure purchases of jewelry by the owner. Purchases on eBay, Amazon, and other online retailers could easily be documented from computer data through forensic tools, as could emails between those involved in the fraud. The dealer eventually was charged and convicted of bank fraud in federal court.

Pressure Pressure Pressure
The construction business was going well. However, total receipts were down. The owner could not figure out why the large amount of red ink was on his ledger. A review by Eide Bailly forensic accountants quickly identified the company accountant as the reason. Using one of several company checking accounts, he was embezzling more than $160,000 a year. To complete the case, computer forensics was needed to identify pressure for the theft and to try and determine if assets were recoverable.

The search began on the internet for digital information. Using the personal email of the accountant, public social media posts were found indicating that the accountant’s leisure time involved significant visits to “gentleman’s” clubs and visits to hotel rooms with the dancers for prostitution purposes. In one post, he acknowledged that he supplied one performer with $3,000 in one month for her various personal needs. Bank records showed the company checks being deposited and money withdrawn from the ATM machines at the club he preferred to visit.

The digital forensics investigation revealed that the accountant had numerous 401K loans outstanding. This information provided to the forensic accountant discovered that he was using company checks to repay the loans. Local hotel reservation for his trysts with the dancers were documented, as were other details on the company losses. In short, there were no recoverable assets to be pursued.

Investigating Employees using Computer Forensics
Computer forensic examiners have seen an increase in business litigation related to breaches of loyalty and fiduciary duties by an employee. The changes in expectations of loyalty to one company can usually be defined by the age of the employee. Baby Boomers typically spent a lifetime being loyal to one company or organization. That is not the case anymore. Employees jumping to greener pastures or deciding to start their own competing business is becoming more common. Unfortunately, when the employee leaves, they frequently are leaving with a part of the company. Customer lists, marketing plans, product designs, bid sheets and invoices can go out the door with them. In some cases, they never leave the company. They just use the company knowledge and assets gained to start an internet company to compete with their present employer.

More on Digital Forensics

Computer forensics can provide value in any type of litigation, business or personal. Companies frequently use in-house IT resources for the review of digital evidence of wrongdoing. This policy can come with some litigation dangers, conflicts of interest being the most obvious. However, a business needs to realize when using in-house IT is appropriate, and when outside resources may be needed. The IT job is to keep the network host and client computers running smoothly and to correct any technical issues immediately. That is their specialty and their training. Computer forensic examinations are an investigation. Specialized examiners trained to follow the leads in a digital world to discover the truth of an issue. When combined with skilled forensic accountants, the matter can be quickly identified and resolved.

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