Denice R. Preston
In today’s uncertain business environment, businesses must up their risk-management game. Forensic accounting can assist in spotting potential problems before it’s far too late.
Christopher is the Senior Writer for Toptal and has 13 years experience in researching and writing about the ways in which technology is changing the way that sectors operate, such as manufacturing, banking, manufacturing, and health care . He was previously the technology and business editor for AmericaEconomica and has created articles in the name of Sony Pictures, Johnson & Johnson, Mini, and LATAM Airlines.
FEATURED EXPERTS
Neel is a consultant in finance and strategy with over 27 years of experience within the industry and has experience in guiding business ventures through a range of regions, countries, and even different cultures. He was the CFO for South East Asia for Johnson & Johnson and a former CFO for Asia Pacific for Medtronic. John Lee
John is an expert in finance and business strategies. expert with a specialization in tax-related issues and regulatory issues that arise from remote work. Co-founder of two companies and an alumni from Deloitte along with CRH. Erik Stettler
NERA Economic Consulting
Erik is co-founder of Firstrock Capital, a global venture capital fund that has invested in more than 50 companies which have raised over $500 million. A data scientist with an MBA with distinction from Harvard, Erik serves as the Chief Economist at Toptal.
Some time ago, Neel Augusthy– a forensic accountant at Toptal and who had been in CFO regional and divisional positions for Medtronic and Johnson &Johnson–was conducting a review of the company’s performance in response to the demands of the company’s owner, the conglomerate. Like most professionals in forensic accounting, they mix quantitative and qualitative methods like conversations as well as behavioral observations and visits to sites during their work.
August started this specific investigation as he usually does by looking over reports of companies similar to his own. The company was less profitable than other companies in the same category, and its profit margins didn’t align with its expenditures, both of which are alarming signs. The next step was to spend a considerable amount of time speaking and listening to vendors and employees of the business.
The importance of asking questions is making people open for you to talk with them, she explains. “You are almost required to appear childish, asking questions out of sheer ignorance: “Can you tell me how this works? I’m hearing this from you, and another source there is telling me the same thing, and how does it all work together?”
When Augusthy met with the company’s vendors, a lot complained about the low margins they were receiving, which was not logical in light of the amount the company claimed to be paying them. Therefore, he took the company’s general manager out to dinner under the pretense of meeting up and discussing possible improvements.
“When people talk, and they feel comfortable, they tell you a lot of things they probably shouldn’t,” says August. “I wanted to know the GM of the vendor department] why they complained about their margins being so low when they are paid the amount they do. He replied, “Oh, these people continue to complain without justification.'” The GM also made other remarks that seemed like a slap to Augusthy as well: “He’d just ‘bought this piece of land here’ and that one over there. And I thought this wasn’t a good sign. Now he’s got lots of money for those purchases.”
“That’s when I figured out he had been skimming from the business by taking money that was due to the vendors,” Augusthy claims. Following an investigation into the matter, the company was able to remove the manager and implemented controls and balances to ensure this didn’t occur again.
What Is Forensic Accounting?
Forensic accountants sometimes referred to as investigatory accountants, are typically employed to investigate criminal activity. However, it’s not all they are involved in. These specialists have the particular accounting expertise and instruments to investigate the truth behind financial statements and also uncover issues and risks that are not readily apparent such as those that relate to:
Falsehood: losses of capital because of a criminal or wrongful deceit.
Compliance with regulations: taxes or fines for violation of the laws.
Liquidity Loss of capital due to debt that is excessive and inadequate equity.
investment: the loss of capital because of investing in a business that is struggling.
Credit loss from capital resulting from the lending of money to an individual who is in a position to pay back.
In the over twenty years that have passed since the saga of scandals and collapses in Enron and WorldCom led to the creation of the Sarbanes-Oxley Act, The risk management environment has grown more complex and volatile. The rapid pace of technological advancement and the disruptions to supply chains, and the imminent climate change crisis do not just make it more difficult to identify financial risk. The increased volatility can also provide an opportunity that is ripe for fraud.
The study of 150 companies that span three different industries reveals the many negative and significant effects of fraud.
Although traditional risk assessment methods are effective in identifying and alleviating various issues, they aren’t always enough to detect the various types of risk to financial assets. With the changing business environment, it’s possible to see a significant under-utilization of risk management and forensic analysis, particularly among smaller to medium-sized companies, According to Toptal chief economist Erik Stettler. In his previous job with NERA Economic Consulting, he examined the near-failures and failures of several notable US organizations throughout the Great Recession.
A lot of companies attempt to cut costs by utilizing less rigorous checks employees in-house, Stettler says, but it’s risky as staffers may not have the expertise or be so familiar with the way work is conducted within the business that they don’t recognize suspicious signs. Failure to recognize the signs of fraud, ignoring regulations or having a shrinking liquidity costs the company more than the initial cost of specialized investigative accounting, which can range between $30,000 and $50,000 for each project, Stettler says. However, a December 2017 study of multinational companies found that the annual average cost of non-compliance amounted to nearly $15,000.
