Step 3 & 4: Investigating the numbers and tracing the money
Forensic accounting isn’t just about spotting fraud, it’s about following the money.
Once red flags have been raised, the next step is to dive deeper into the numbers and trace every transaction to its origin. Forensic accountants use advanced techniques like data forensics and ratio analysis to uncover hidden financial patterns. These techniques help piece together the complex web of financial activity, revealing exactly where the money’s going (and where it shouldn’t be).
Let’s look at the case of Volkswagen; the famous diesel emissions scandal. Investigators used forensic techniques to trace fraudulent payments and cover-ups, exposing how the company manipulated emissions tests to save billions. By analyzing financial transactions and data trends, forensic accountants could identify the layers of deception that had been hidden from auditors and regulators.
Forensic techniques like data forensics can uncover hidden files, encrypted transactions, or tampered records. Meanwhile, ratio analysis helps identify discrepancies between a company’s reported earnings and its actual financial condition. A sudden drop in profitability, paired with unexplained expenses, raises alarms, leading investigators to the truth.
The deeper you dig, the more likely you are to find the truth hidden in plain sight.
How would you spot financial discrepancies in your own business?
