Recovering from Financial Data Loss: What to Know About Forensic Data Reconstruction

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When financial data has been lost or destroyed, it’s imperative that organizations have their data reconstructed quickly and efficiently in order to move forward. Forensic data reconstruction allows organizations to recreate their accounting systems.

Here’s what you need to know about financial data loss and how forensic data reconstruction can help.

Types of Financial Data Loss

Financial data loss can occur due to a variety of things, including accounting system failures, intentional record destruction by insiders, or cyber-attacks that encrypt accounting files, rendering the files useless.

However, there are a few common areas organizations can watch for that are prime for potential data fraud or loss.

Internal Threats

Many cases of lost and destroyed data are the result of an insider’s action. If an employee is committing fraud, they may be destroying data to cover their tracks. In the case of a fraud allegation, data reconstruction can be done so that you can be certain of the integrity of your accounting. When investigating suspected financial crimes, you may not be able to rely on accounting entries, even if they are available.

Accounting System Failures

Using legacy, on-premises software and not performing regular backups could be the biggest threat to your financial data. However, it is also the easiest to mitigate. Making sure that your data is stored securely in the cloud with regular back-ups will decrease the risk of experiencing a catastrophic hardware or software failure that results in total data loss.

Ransomware

While many cases are due to internal threats, there’s also the possibility of a cyber-attack. Ransomware is often created to target accounting system files (such as QuickBooks) and encrypt them, making them unreadable for an organization. When accounting systems are inaccessible, it’s hard to make strategic decisions or retrieve what was lost.

We recently had a client who dealt with over 40 encrypted QuickBooks files. While the company did have backups, the backups weren’t up to date. This led to over three months’ worth of financial data needing to be recreated in order to operate the business.

Understand the key risk factors when it comes to a potential financial data loss or cyber breach.

The Use of Forensic Data Reconstruction

An organization’s accounting system houses a great deal of vital information relevant to a company’s success and growth. When that information is compromised, the organization is left in a perilous position. Forensic data reconstruction can help organizations get back up and running faster.

What is forensic data reconstruction?

Forensic data reconstruction is the use of forensic technology to extract data from source records such as bank statements or invoices. This information along with coding is then used to recreate the accounting systems. Regardless of how the data was lost (internal threat, ransomware encryption, etc.), forensic data reconstruction can help rebuild the needed information to move forward in an efficient and effective manner.

The Process for Forensic Data Reconstruction

Forensic data reconstruction utilizes a variety of forensic technologies to restore necessary financial transactions. Forensic investigators do this by utilizing source documents such as:

  • Bank account records
  • Investment account records
  • Credit card records
  • Invoices
  • Payroll records
  • Other financial records

Once the data has been extracted from the source records, a comprehensive database of financial transactions is created.

This information can then be coded and imported into an organization’s accounting system. Organizations can choose to have their own accounting staff work on this or outsource the work to a bookkeeping or accounting outsourcing firm to ensure the data is property coded before import.

The Role of Forensic Data Reconstruction in Insurance Coverage

Often, the act of forensic data reconstruction is tied to an organization’s cyber insurance policy. Coverage can happen one of two ways:

  1. Many cyber or property insurance policies may cover the act of data reconstruction through computer hardware and software replacement costs. Cybersecurity insurance seeks to mitigate vulnerabilities in business systems within an organization.

  2. As part of a business interruption claim, a forensic accountant will calculate the damages related to a loss of business income for the damage period. Historical accounting information is often needed as part of this claim preparation process.

Financial data reconstruction can recreate an organization’s financial position prior to the damaging event, as well as the extent of the damage over a specific time period.

How to Choose a Forensic Accounting Firm to Do Data Reconstruction

Having a trusted advisor on your side before financial data loss arises is crucial. When looking for a forensic data reconstruction specialist, consider the following:

  • A firm that leverages state-of-the-art technology to both re-create the data and record past financial transactions.
  • Connection to both the forensic accounting and accounting services. Forensic data reconstruction relies not only on the identification and rebuilding of financial information, but the accuracy of the accounting records throughout the process.
  • Experience with working with insureds and insurance carriers and understanding the insurance claim process.
  • Experience with cybersecurity threats and mitigation, as well as proactive security planning.

Ultimately, you want to choose an advisor who can help your organization prepare ahead of time, quickly alleviate the burden of an incident and help you get back to business in a timely manner.

Learn more about how our firm utilizes accounting, forensic and cyber together to create solutions to your challenges.

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