The Future of Fraud Investigations: A Guest Post From Tracy Coenen

Tracy L. Coenen, CPA, CFF is a forensic accountant and fraud investigator with Sequence Inc. in Milwaukee and Chicago. She has conducted hundreds of high-stakes investigations involving financial statement fraud, securities fraud, investment fraud, bankruptcy and receivership, and criminal defense. Tracy is the author of Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud, and has been qualified as an expert witness in both state and federal courts. She can be reached at tracy@sequenceinc.com.

This article was originally published on Securities Docket, the website of securities law, edited by Bruce Carton.  It is reprinted here by permission of Ms. Coenen.

The Future of Fraud Investigations

What is at the heart of almost every securities case, whether the case is pursued by the government or a private party? It is a trail of money. The difficulty in prosecuting or defending a securities case is the fact that there is voluminous financial data that must be culled, analyzed, and presented in a way that proves the case.

For the last three decades, securities and financial fraud cases have been evaluated by forensic accountants using manual processes. The financial investigators compared accounting data with source documents, ultimately trying to prove the source and use of funds.

This is complicated, especially in large cases (which are the ones the government most often cares about), because there can be a multitude of involved people, entities, bank accounts, and brokerage accounts.  The process of understanding and organizing the flow of funds is complex, and it can take months or even years before plaintiffs or defendants know exactly what happened to the money.

Cutting-Edge Forensic Accounting

The world of forensic accounting is moving in a new direction, however. Fraud investigators are slowly beginning to use technology to analyze large volumes of financial data much faster, more efficiently, and more accurately than they have been able to do using traditional investigative techniques. The shift has been moving at a snail’s pace, however, but this provides significant opportunities for parties to litigation who are willing to embrace change and harness the power of cutting-edge technology.

There is no substitute for the judgment, skepticism, and investigative intuition of a seasoned forensic accountant. But when a tried and true method of investigating financial crimes and allegations of fraud is combined with the latest technology, extraordinary results are possible.

Doing Things the Old Way

In any forensic accounting engagement, examining source documents is critical to finding out what really happened with the money. For example, bank documents like statements and canceled checks will tell us exactly where the money went. Accounting records can be manipulated, but unless someone is very clever and has serious connections within a bank, the bank documents ultimately tell the truth.

In securities and fraud cases, multiple years often need to be examined. This means hundreds of thousands of transactions need to be sorted, matched, and evaluated. It can take hundreds or thousands of hours to do this using traditional techniques, which involve a manual process of examining the evidence.

Forensic accountants will often “scope” the transactions, meaning they will select a dollar figure and only examine the transactions larger than that amount. Scoping is done to reduce the volume of work, and is done under the assumption that smaller transactions are immaterial to the investigation. Time and efforts are usually focused on the larger transactions.

Unfortunately, the process of scoping leaves valuable evidence unexamined. Who is to say that a $100 transaction may not hold the key to an investigation? Ignoring smaller transactions is unwise, particularly when dealing with a sophisticated fraudster who knows that smaller transactions are less likely to be examined by investigators.

In addition, this manual process leaves the investigation open to human error. Investigators could miss an important transaction or make a mistake when entering data into a database or spreadsheet used to log transactions of interest.

Investigative Innovations

Although not widely used in the private sector, investigative software provides an opportunity to do a comprehensive analysis of all financial documentation while eliminating data entry errors and risks inherent in a manual examination process.  I’m not talking about merely scanning documents and hoping a computer imports the numbers correctly.  Next generation investigative software recognizes data in many different formats, puts the data into a database, and rapidly reconciles all the numbers to guarantee accuracy.

Once the accounting system data, bank statements, checks, deposit tickets, brokerage account statements, credit card statements, and other financial data are properly imported into the system, the magic can begin.  The forensic accountant can quickly map the flow of funds, search for transaction patterns, create charts and graphs that show entities and transactions of interest, create customized reports, and much more.

The financial data is instantly more valuable and usable for the fraud investigator, who can dig deeper into the transactions and the flow of money. The data can be fully analyzed in a matter of days or weeks, rather than months or years, and the forensic accountant can examine 100% of the transactions.

If the future of forensic accounting is here, why aren’t my colleagues using this technology on a wide scale? In a nutshell, it is because of the high cost of implementation and the difficulty of integrating it into a traditional accounting firm. Traditional methods of performing and billing for fraud investigation services don’t mix well with the latest technology, and forensic accountants are usually slow to adapt their investigative methods.

Putting the System to Work

The combination of a first-rate forensic accountant and cutting-edge technology can be used in many types of cases involving high volumes of financial data, such as money laundering, financial statement fraud, securities fraud, health care fraud, investment fraud, and Ponzi schemes. Government agencies have been using this type of technology for several years, validating the investigative methods and results.

If you haven’t figured it out already, one of the greatest advantages to working with a forensic accountant who possesses superior investigative skills and the latest technology is the ability to keep up with law enforcement. In a financial fraud or securities case, there is a good chance that government investigators will be using new age technology to build their case against your client.

The best defense is a good offense, and instead of waiting months or years to see what the government comes up with, you could conduct a parallel investigation  in a matter of weeks or months with the best available resources. You will know exactly what the government may find, and you’ll know it light years sooner.

Don’t be satisfied with the old way of doing fraud examinations.  In civil or criminal cases involving high volumes of financial transactions, it makes sense to work with a financial investigator who can find answers faster, more accurately, and with greater efficiency. The investigation can be more thorough, yet can be completed in a fraction of the time a traditional investigation would take.