Today’s digital landscape opens the possibilities for organizations to better identify, investigate attacks, and forecast future attacks. Artificial intelligence, machine learning, and statistical concepts of cognitive analytics with skilled forensic investigation help auditors get into the mind of fraudsters to better understand their motives and methods. With this approach, auditors can identify the root cause of incidents to improve their sensing capabilities and help prevent re-occurrence.

Continuous Fraud Monitoring Using Different Technologies

It has become essential for organizations to continuously monitor for potential risks and analyze new emerging threats to be able to mitigate the blind spots in their fraud defenses and ​avoid the risk of being blindsided financially, operationally, and legally.

Analytics provide insights based on what the data reveals. Some techniques available to the forensic accountant include:

Benford’s Law

Benford’s Law states that, in a naturally occurring set of numbers, the smaller digits appear disproportionately more often as the leading digits. The leading digits have the distribution shown in the following table, where the number 1 appears slightly more than 30% of the time as the leading digit, and the number 9 appears as the leading digit less than 5% of the time (which is a difference of 6x).

1 = 30.1% frequency of occurrence                                        2 = 17.6% frequency of occurrence

3 = 12.5% frequency of occurrence                                        4 = 9.7% frequency of occurrence

5 = 7.9% frequency of occurrence                                          6 = 6.7% frequency of occurrence

7 = 5.8% frequency of occurrence                                          8 = 5.1% frequency of occurrence

9 = 4.6% frequency of occurrence

The analysis involves calculating the distribution of the first digit in a series of numbers. If the distribution varies from the proportions indicated by Benford’s Law, then it is possible that someone is engaged in fraud. The reason for the difference is that someone committing fraud will create randomly generated numbers, rather than following Benford’s distribution.

Link Analysis

Given the complexity of serious fraud investigations, and the significant number of individuals and entities ordinarily involved, an analytic procedure known as ‘link network diagramming’ – commonly referred to as ‘link analysis’ – is applied to facilitate the investigation and case structuring. Link analysis is essentially a graphic method for integrating and displaying large amounts of data that are related to complicated criminal activities and civil wrongs. By analyzing large quantities of financial information using computer software, this technique can be an effective way of uncovering patterns or commonalities that link individuals and entities together. These patterns or commonalities may appear superficially unrelated. A new master database can also be created by merging two databases using digital analysis software. This will enable the search for common characteristics in the data, such as telephone numbers and addresses.

Gap Analysis

Gap analysis identifies unaccounted items in a set of sequentially numbered or dated documents or transactions. In an accounting system with satisfactory internal controls, all numbered documents, such as voided checks and invoices, should appear sequentially. The forensic accountant uses digital analysis software to identify gaps in records, such as missing invoices or check numbers in a company’s accounting system, and then develops a procedure for inspecting and investigating the findings. The absence of a normal recurring transaction can also be detected by gap analysis over a range of dates.

Duplicate Number Test

An uncharacteristic recurrence of a number, such as a check number, invoice number, or dollar amount, is detected using the duplicate numbers test. In addition to detecting unusual numbers, forensic accountants can analyze digital data using software that analyzes data patterns. Reviewing amounts disbursed in a percentage chart, highlighting the percentages of total records and total disbursements of each transaction category, can provide useful insight. By further investigating an observation of a specific category, relevant conclusions can be drawn when duplicate numbers are observed.

Rounded Numbers Test

In this analysis, the abnormal frequency of rounded numbers is determined by taking the same approach as the duplicate numbers test. When fabricated numbers are created, individuals tend to estimate, so rounded numbers can be an indication of an estimated amount. To determine the validity and purpose of deviant occurrences of rounded numbers, the forensic accountant investigates each incident.

Enabled by advances in computing power and data management, forensic analytics is a critical capability in future investigations. Our expert analysts in our Forensics Accounting & Investigation Services possess a broad variety of skills to look beyond the numbers in order to find the connections or the actual intent of the transactions that are not apparent or expected.

Frequently Asked Questions (FAQ)

1. What is Forensic Accounting?

Forensic Accounting is the combination of accounting, business, investigation and expert testimony skills and experience applied to assist in resolving business and personal disputes.

2. How can I detect fraudulent activity?

There are a number of tools a forensic accountant can use to help detect fraudulent activity within a business. One of the most helpful class of tools are referred to as data analytics.

3. What is a Fraud Risk Assessment?

A fraud risk assessment is a review undertaken by a forensic accountant that rates the businesses policies and procedures against a best practice standard, such as AS8001-2008.

The fraud risk assessment identifies areas where the business needs to improve its policies and procedures, and will offer assistance to achieve these improvements, as well as prioritizing these improvements.

4. What are the differences between forensic accounting and auditing?

In its simplest terms, virtually all audit engagements have a single objective of expressing one opinion on a whole set of financial statements, whereas each forensic accounting engagement is very uniquely focused on a client’s particular need(s) and the objective is usually to report recommendations or findings.

5. What distinguishes a traditional accountant from a forensic accountant?

The emphasis of a traditional accountant is to convert raw financial data into information useful for decision makers, typically presented in the form of financial statements. Forensic accountants’ work product flows from the scope of the particular project, typically consisting of written or oral reports of findings, or recommendations, or both.

Want to share this post?



Related Posts
Cybersecurity Assessment Checklist
SPC NXT At IIA India International Summit 2023
Vendor Risk Management Checklist
A Definitive Guide To Client Accounting Service
Vendor Risk Management & Mitigation
Does your Financial Institution need an audit committee?

Next-Generation Offshoring:
the Future Imperatives