By Peter Smith

MCJ, CFE, CTSP, CSO

March 23,2011

Fraud is a concern for any business which employs employees, accountants or other hired professionals which have access to the business’ income receipt or funds. Essentially, all businesses are at risk of fraud to some degree. Fraud is most commonly committed in the form of embezzlement or skimming, acts which can be difficult to detect, even in small business settings.

What is Forensic Accounting, and What is a Forensic Audit?

Forensic accounting is a financial service which concentrates on identifying or preventing fraud in business settings; forensic audits performed by forensic accountants focus on identifying ways in which a business is vulnerable to fraud or identifying fraud which is being committed. Professionals who are qualified to perform forensic audits gather concrete evidence which is admissible in a court of law.

Common Aspects of Fraud

Embezzlement is the most common form of fraud in business settings. People who commit embezzlement typically do so systematically, in small amounts to avoid detection. Without the help of a forensic audit, embezzlement can often continue over a long period of time, adding up to significant financial losses for the company against which fraud is being committed. If tried, civil fraud cases (cases in which the victim is an individual, not the public) are often settled out of court, meaning that the person who committed fraud is able to walk free and commit fraud again.

When a forensic accountant performs a forensic audit, he or she investigates the business’ financial records in search of patterns which could indicate skimming or embezzlement. Forensic accountants also perform thorough background checks of employees, since people who commit fraud often have a history of doing so.

Detecting Fraud through Forensic Auditing

Forensic audits involve a very detailed, thorough investigation of every aspect of a business’ financial activities and history, a process which may involve detective work.

Take, for example, a restaurant owner who suspects that one of his waiters is skimming cash from his or her tables. In order to take action against the employee, however, the business owner requires proof. A forensic accountant might begin by hiring trained professionals to dine at the establishment in order to observe the employee in question take orders, place orders at the kitchen, deliver food and complete sales at the cash register. The professional might find that the employee completed credit card transactions normally, but voided the sale whenever dinner was paid in cash, pocketing the cash.

By itemizing all voided receipts, the forensic accountant could determine exactly how much money the employee was skimming, providing the restaurant owner with the evidence needed to press charges.

Forensic Auditing and Fraud Prevention

Forensic audits are not only used for detecting fraud; a forensic accountant may also investigate a company to find any areas in which the company may be vulnerable to fraud. By identifying these areas with a thorough forensic audit, companies can take action to prevent fraud by following recommendations such as using video camera monitoring, increasing management involvement, segregating duties or performing random spot audits.