Fraud Detection Makes Accounting Alluring

Source: Accounting Today

It’s difficult for lay people to understand what accountants do beyond bookkeeping and tax returns. Finding fraud is easier to understand—and it’s sexier too.

Forensic services are booming. Seventy-eight percent of the top 100 accounting firms say forensic services increased last year. Stonefield Josephson in Los Angeles says forensic work is about 10 percent of revenue and expects it to increase 25 percent this year. Forensics is 12 percent of the revenue of Berdon LLP in New York.

Meyners + Company in Albuquerque reports forensics is being split into narrower specialties such as asset misappropriation, fraud prevention, and financial statement fraud.

Fraud-prevention consulting is the fastest growing forensic activity at CBiz. According to Hein & Associates in Denver, clients are focusing on prevention because companies are worried about the effect of internal fraud on their reputations. When a loss occurs, the companies have to spend money to determine who stole what. Then they may never recover the loss. It may be cheaper to prevent the loss in the first place.

The Fraud Documentation Plan

Management and its advisors can rank the probabilities of occurrence of various types of fraud. Based on probabilities, management can decide whether to implement protection controls.

An overall fraud documentation plan should be created. The plan might include:

• A vendor validation process—including analyzing accounts payable transactions.
• Review of adjusting journal entries to detect financial statement manipulation.
• Surprise audits.
• A procedure for evidence protection.
• Review of notification clauses in crime insurance policies.

Asset misappropriation is the most common type of fraud, and financial statement fraud is the least common. Other types that are gaining notoriety are:

• Construction fraud, such as rigged bids and use of inferior materials.
• Backdating of stock options.

Technology and Fraud

Technology affects fraud in two opposite ways. Use of technology, because it removes human impact on data, can increase the potential for fraud. On the other hand, computer software programs can help analyze data and detect aberrant patterns.

Fraud is becoming more complex, partly because of increased technology, and partly because commercial transactions are becoming more complex.

What Else Should Accounting Firms Do?

Accounting firms with dedicated professionals and sophisticated software will attract more forensics business.

Nevertheless, the most important fraud prevention initiative remains segregation of duties.

From Accounting Today, May 7, 2007, SourceMedia Inc., One State Street Plaza, 27th Floor, New York, NY 10004, 800-221-1809. For the complete article, click on the following link: http://www.webcpa.com/current_issue.cfm?pub=ato, then select the article Forensic Accounting: CPA Gumshoes in the May 7, 2007, issue.