In 1992, only one in five Americans owned a computer, even fewer were on the internet, and a “twitter” was something a sparrow did, not humans.
Forensic Strategic Solutions (FSS) was founded in October 1992, and like the internet, the concept of forensic accounting was still foreign to most people. In fact, forensic accounting was such a new concept to the general public at the time that the Los Angeles Times even commissioned an article on the new world of financial investigators who “un-cook bogus books.”
For our clients, however, the need for professionals who specialize in fraud investigations and provide expert testimony on complex financial issues has been clear from the start. And during the last three decades, as financial fraud and the need for forensic accountants has escalated—thanks, in large part, to rapid advances in technology—highly skilled specialists who can unravel the most complicated financial mysteries are in even greater demand.
As we celebrate the 30th anniversary of FSS, our team reflects on the challenges attorneys face in finding the right experts to detect and prevent fraud and to unravel other complicated financial issues.
How has FSS responded to the ongoing changes on the financial investigations landscape?
Current industry literature cites technology like data mining, AI, and advanced analytics as “novel” ways for firms to serve clients, find fraud and untangle financial mysteries. We began implementing these tools more than 20 years ago. Applying new technology to the investigative process is engrained in us and has been a key element in our success in helping to assist our clients.
Early on, we understood that we could not be generalists. FSS would make financial investigations an area of specialty and add practice areas that would complement each other. Today, we have five integrated practices — Accounting Malpractice Claims, Forensic Technology, Fraud Examination, Investigative Financial Consulting, and Litigated Business Valuation Services — serving clients.
Collaboration is essential to achieve results for clients. For example, our Litigated Business Valuation Services practice may be determining the value a business as part of a divorce and require the assistance of our Forensic Technology and Fraud Examination teams to help uncover potential hidden assets and fraud that could affect the value of the business.
What is the biggest challenge organizations face when it comes to financial fraud?
The biggest question clients face is “how do we go about investigating this fraud?” Most organizations do not have the experience to properly perform an investigation—one that will not only uncover the fraud, but will also yield evidence that will be admissible in a court of law.
An organization or its regular outside auditing firm may think it knows how to conduct an investigation, but their efforts are often woefully inadequate. We’ve found that most people lack a real understanding of what can be done in the digital world and how frauds can be masked.
How has the digital revolution altered investigations, financial fraud and what does that mean for attorneys, companies, auditing firms and their clients?
One of the most important developments we have seen during the last 30 years has been the growing sophistication. The digital world has grown up, fraudsters have followed, but most investigators and CPAs have not followed suit.
Unfortunately, the accounting profession has been extremely slow in recognizing the impact of technology, both as an audit risk and as a tool to help them spot potential irregularities. For instance, many auditors are only now grappling with the audit risks presented by digital currencies and related transactions. However, digital currencies have been accepted by a number of large retailers for years, and Japan has recognized Bitcoin as legal tender since 2016. Why is potential fraud risk only now being recognized?
Even a tech-savvy auditing firm or client may lack a full understanding of how frauds can be performed. CPAs, for example, may think that because they are deploying software to help conduct their audits, they are insulated from fraud. What they may not realize is that some fraudsters are now deploying artificial intelligence to circumvent their software.
What skills do forensic experts use to help deal with the ever-increasing sophistication of fraudsters?
Financial investigation experts understand they must deploy a range of skills, particularly as those frauds have increased in sophistication and complexity. An expert team will understand how the latest technology can be deployed by fraudsters, and they will be knowledgeable about any new types of schemes that have emerged.
Understanding the methods a fraudster may use is one part of the equation, the skillful use of technology is another. Financial data tells a story, and expert investigators are able to use data mining, advanced analytics and artificial intelligence to get behind the story and objectively dig out the truth. Technology like data mining and AI allow the investigator to review and analyze all the data in financial records, not just conduct a test on a sample basis.
Human intelligence and on-the-ground investigative experience is crucial, as well. Seasoned investigators will be able to spot patterns in the data, and will possess exceptional interviewing skills that can elicit information (and often confessions) that can be vital to proving a case. More than that, they will know how to conduct financial investigations that are legally and ethically sound. The last thing a client needs is to collect evidence that will be ruled inadmissible in court. An expert investigator can ensure this does not happen.
Do most CPA firms have the expertise to handle financial investigations?
Not at all likely. This year marks our 30th anniversary, and it is also the 20th anniversary of one of the landmark events in modern accounting: the Sarbanes-Oxley Act, which was passed after the massive financial fraud schemes at companies like Enron and WorldCom. Sarbanes-Oxley created a whole host of new requirements aimed at ensuring a company was free from fraud, and it put a big spotlight on the accounting industry as a result.
Since then, a number of firms – large and small – have touted their forensic accounting expertise. For those of us at firms specializing in financial investigations, however, the “forensic” skills many firms say they possess appear limited at best. We know, in fact, that the number of true financial investigation firms is very small, and only a few firms are equipped with the necessary know-how to successfully conduct financial investigations.
A potential client looking for financial investigation services should look closely at the track record and credentials of a firm they are considering engaging. They might ask a few basic questions:
• Does the firm’s team have a history of managing significant financial investigations for organizations?
• Do members of the team have professional fraud investigation credentials? For instance, have they been designated Certified Fraud Examiners (CFEs) by the Association of Certified Fraud Examiners, Certified in Financial Forensics or Accredited in Business Valuation by the American Institute of Certified Public Accountants.
• Do members of the firm serve as expert witnesses in fraud-related litigation, accounting malpractice, or domestic relation cases?
What does the future hold for forensic accountants when it comes to financial investigations?
As electronic devices and communications continue to proliferate, financial fraud is sure to follow. The ongoing digital revolution will place even more pressure on auditors to meet accounting professional standards around detecting fraud. We have noted on many occasions over the years that as technology has created new opportunities for fraud, regulators, judges and jurors are increasingly holding audit firms to account.
We believe the need for financial investigators will continue to grow, and those providing investigative services will be smaller, niche firms who have the expertise cited above. For our part, FSS has continued to grow and succeed by building a skilled team of deeply experienced financial and technology experts. In the years ahead, we look to remain a leader in the financial investigation niche as expert witnesses and financial investigators, and we will continue to grow strategically to better serve our current and potential clients.
We are grateful to our clients, partners, employees and friends who have been by our side throughout the last 30 years. To learn more about our firm and the work we do, contact us for a consultation.