The
Fraud Files
Forensic
accounting: A new
twist on bean counting
By
Tracy L. Coenen
Nov.
30, 2005
 |
| Tracy
L. Coenen
|
Traditional
accountants and auditors have long been referred to as “bean counters.”
Some may take offense at the phrase, but if they’re being honest, they admit
that it is a simplistic but accurate representation of the work they do.
Your
average, everyday accountants and auditors are generally engaged to count the
beans. They take a look at the numbers, make sure they all add up, and possibly
issue a report saying how and why the numbers add up.
There
are different kinds of beans, just like the various industries that accountants
may come across. Counting different types of beans may require different techniques
and rules.
Accountants
are good at reporting their findings after they count the beans. But what if the
beans are missing? Or what if the beans are there, but are so mixed up that they
make no sense?
Would
a “regular” accountant know how to find the beans? Could she or he sort
the beans in a way that makes sense to non-accountants? The average accountant
has never had to find or sort beans before, so who knows if she or he can find
the beans?
Forensic
Accounting as Bean Finding
In
contrast to traditional accounting and auditing, bean finding involves different
skills. A good understanding of financial statements and the underlying data is
still critical. In addition to this, forensic accountants need an ability to effectively
apply investigative techniques.
“Investigative
intuition” is a good way to describe a necessary element of the forensic
accounting equation. While understanding investigative techniques is one thing,
being able to apply them in the best way is different.
I
don’t think that the “gut” feeling of a good investigator is teachable.
If one possesses that intuition, even in its rawest form, then that ability can
be developed and honed. But if a person doesn’t have the basic instinct,
it will be hard to make her or him into a good forensic accountant.
The
investigative intuition is used to find the beans, or in other words, to follow
the money. Forensic accounting engagements are usually geared toward finding where
money went, how it got there, and who was responsible.
Once
the beans are found, they must be reassembled into a meaningful format. Sometimes
all the beans aren’t found. There may be holes in the data, and a good forensic
accountant can fill in some of the gaps with good estimates or explain why those
gaps aren’t filled.
While
“regular” accountants and auditors typically have a standard format
for their work, often detailed in work programs, forensic accountants do not usually
have such a structured method of conducting investigations. There are standard
documents that are collected and possibly a typical starting point for an investigation.
But from there the project can go in any direction.
I
liken a forensic investigation to a family tree. The investigator starts going
down one path, and there are several branches and directions in which to move.
A path is selected for the investigation, and again there are many more paths
branching off that one.
A
good investigator is able to organize those divergent paths so that she or he
can go back and investigate the remaining paths. An effective investigation, therefore,
combines the instinct, technical knowledge, and organizational skills.
Areas
of Specialty
Within
the specialty of forensic accounting, there are sub-specialties. Some forensic
accountants try to work in all of them, while others of us have selected a couple
of areas on which to focus.
Some
forensic accountants may focus on investigating corporate fraud, while others
work mainly in litigation, assessing damages in corporate disputes. Insurance
claim analysis is a popular area of expertise, and this involves examining the
accuracy and completeness of insurance claims and supporting documentation.
Other
specialty areas include business valuations and computer forensics. In my opinion,
both of these areas require a fair amount of specialized knowledge. Look for a
firm that has professionals who focus entirely on one or the other of these, rather
than firms or professionals who dabble in them.
In
my opinion, it is best to work with an expert who has chosen one or two areas
of specialty, rather than trying to be all things to all people. Specialists are
much more valuable to cases, rather than professionals who muddle through any
sort of work they can acquire.
Certifications
can become an important part of selecting an expert. Be wary, though, of certifications
that are nothing more than a title for sale. Selling certifications and continuing
education is big business, and it is important to be sure that any certification
touted by a potential expert is meaningful.
As
an example, the Certified Fraud Examiner (CFE) designation is the “gold standard”
in the area of fraud. It is earned through an application and testing process,
so membership is limited to those who can demonstrate their knowledge. On the
other hand, some certifications simply may be purchased. Attorneys should be skeptical
of seldom-heard designations and inquire as to their authenticity and meaningfulness.
Industry
experience is less important than investigative experience, in my opinion. It
is easier to get up to speed on a particular industry and its unique characteristics
than it is to hope that someone develops investigative skills overnight. If you
are lucky, you may find a competent forensic accountant with a particular industry
focus such as hospitality, construction, or the like. However, the investigative
skills should be the primary concern when searching for an expert.
One
further complication is the ability of the forensic accountant to testify well.
A good investigator does not necessarily make a good witness in court, so it is
imperative to find a forensic accountant who can convey findings in a non-technical
format.
Look
for an expert who has testified 10 or more times in the last five years. There
is nothing wrong with asking an expert for a list of testimony experience prior
to engaging her or him on your case.
Why
does it matter?
An
attorney generally gets only one chance to make her or his client’s case.
Do you want an inexperienced so-called expert to spoil the evidence, spend your
client’s money, and waste everyone’s time? It would seem so much more
logical to engage a qualified, experienced expert who can handle the case the
right way from the start.
I’ve
often been asked how an attorney can differentiate between potential experts.
My best advice is to ask fellow attorneys. I’ve found that attorneys are
a fairly close-knit community when it comes to referrals. The names of the good
experts will surface repeatedly.
Fortunately,
bad experts are generally discovered fairly quickly. It takes only one botched
case for an expert to be blacklisted. A botched case isn’t one in which the
results were unfavorable to the client. It is a case in which the forensic accountant
very simply messed up the investigation, issued a baseless report, or did not
testify well.
Look
for an expert who can “walk, talk, and chew gum at the same time.” A
good expert should be familiar with legal terminology and should be able to carry
on an intelligent conversation about her or his work on prior cases. The inability
to communicate about one’s supposed area of expertise should throw up major
red flags.
Forensic
accounting isn’t really new, but has received more press in the last five
years. Prior to that, forensic accountants worked quietly and without fanfare.
Since this specialty is now the hot new career, it is important to be able to
differentiate between truly qualified professionals and those who are simply in
training. I don’t like to see clients spend money on training for a novice.
Locating
the right bean finder may take a bit of work. It’s not always easy to verify
an expert’s qualifications and experience. But the work will pay off in the
long run, because you will work with a professional who has the proper credentials
and the ability to execute under pressure.
Tracy
L. Coenen is a CPA, a certified fraud examiner, and president of Sequence Inc.,
a forensic accounting firm with offices in Milwaukee and Chicago. She has gained
recognition locally and nationally as an expert in fraud and financial investigations.
She can be reached at Tracy@sequence-inc.com.
