Forensic accounting is the practice of binding together accounting and auditing with investigative skills to assist in legal matters. It is primarily used in areas such as litigation support, investigation, and dispute resolution.

 

The Forensic Accountant was asked to assist with a deeper investigation of the unusual items noted.

Methodology

Due to the internal auditors' lack of familiarity with normal cash payments of the company, it was possible to eliminate a large number of the unusual items they had found. However, attention was focused on other non trading items. It was not long before a lawn mower paid for by the company on behalf of the managing director was found.

The Managing Director, when confronted with these facts admitted that he had authorised the payments. In mitigation he claimed to be repaying the cash by offsetting this loan with expense payments due to him for frequent business trips.

Following on these revelations, the scope of the investigation was deepened to include the expense claims filed by the Managing Director. While this was in process the company accountant came to the office late one evening and suggested that the activities of the Financial Director should also be examined. In particular cheque requisition forms should be examined in detail.

As a result of this tip-off every area of involvement of the Financial Director was reviewed. This included executive payroll, expense reports and cheque requisitions. It soon transpired that the Financial Director had a lot of explaining to do:

  • Executive bonuses had been paid gross via expense accounts without tax or social security being deducted. He had "lost" the executive payroll records when asked to produce them.
  • There were large numbers of cheques drawn "for cash" by the Finance Director without adequate explanation of where the cash had been spent.
  • An analysis of his petrol expenses for the year compared to his mileage and type of car indicated that he was claiming petrol for a second car as well as his company car.
  • He had been taking reject and obsolete stock and selling it at car boot sales and local markets. He had been keeping the proceeds of these sales.
  • Expense claims showed that he and the Managing Director frequently entertained their wives at the company's expense. Customers of the company were conspicuous by their absence from these soirees.

The total cost to the company of these activities of the Finance Director was approximately £15,000.

Results

When confronted with the findings of the investigation, the Finance Director offered to repay the money that could not be accounted for. He subsequently resigned and received no settlement pay. The Managing Director was heavily censured and required to repay the unauthorised loans immediately.