Forensys
 

A Systems Approach to Investigative Accounting

by Stephen Markson & Robert Forsyth

A major problem for those who practise investigative accounting is the sometimes overwhelming amount of data to be reviewed, categorized, and summarized. This series of tasks becomes increasingly complex as the object of investigation grows from an isolated incident to a web of multiple-company, multiple-country transactions. To process all of this data and turn it into knowledge, it is often worthwhile to look at the overall project and organize it using a systems approach.

Fortunately, advances in systems development technologies have enabled the economic construction of application software customized to meet the requirements of individual cases and to integrate with common office automation tools. Recent applications of this approach have resulted in cost and time savings, more effective communications, and systems which can continue to be used for the prevention of future problems.


KNOWLEDGE MANAGEMENT SYSTEMS
Investigative accounting is a knowledge management system.

To explain this, we start with the basic definition of a system: a system transforms its input into its output. Figure 1 is a generic system diagram:

In a knowledge management system (Figure 2), knowledge workers such as investigative accountants use tools to process "raw" data and transform it into knowledge:

This is the model being used to develop case-specific systems for investigative accounting applications.


INVESTIGATIVE ACCOUNTING SOFTWARE TOOLS
Investigative accounting knowledge management systems involve a four phase process shown in Figure 3:

A variety of software tools (applications) are available to assist the investigative accountant with each phase of the process.

Data is normally acquired as documents or electronic files. Most often, audio-visual information is first converted to one of these two formats. Electronic files must be acquired by a program that can decode the native file format. For example, word processors can be used to acquire most document files; spreadsheets are used to acquire spreadsheet files and so on. Documents can be scanned into a document management system and/or significant data can be compiled from the documents by investigators and entered into some electronic medium. Document management systems normally provide database facilities for achieving this.

Management and organization of the information can be handled by a variety of software applications. The most obvious examples are document management systems, database managers and spreadsheets. Other examples include the file system of Windows, which enables the organization of electronic files from any application into a tree-like structure of nested folders. In specialized applications, we can use computer forensics software to extract information from computers under investigation. This type of software provides extensive facilities for organizing and managing the discovered information.

Analysis of data also can be accomplished through the use of many different software packages:

Communication is the most important phase of the entire process. The results of the analysis are communicated to the client through the use of text and graphics in reports and presentations. Word processors, electronic spreadsheets, database managers, graphics and "slide show" or presentation software are all commonly used for this phase of the investigative accounting process. Additionally, animation or advanced visualization software can also be effectively used for larger audiences.

There are two other types of software packages that investigative accountants employ. Firstly, there is accounting and financial analysis software. An accounting system under investigation can itself be used for data gathering, analysis and reporting. Alternatively, other financial analysis software can be used to mine the data of the accounting system in question, such as the "Accountant's Drill". Secondly, specialized integrated packages are available that combine data acquisition tools with a database manager, analysis and communications functions. Examples include "ACL for Windows" from ACL Services Ltd., CaseWare International Inc.'s "IDEA for Windows" and i2 Inc.'s "Analyst's Notebook".


TYING IT ALL TOGETHER
Many companies, especially knowledge-based businesses, also use custom software, which until now has not been used to any great extent in investigative accounting. Our own experience has shown that custom software can be developed effectively and economically for particular investigative accounting cases. This has been accomplished through the development of an application shell using a database application development environment. The shell can be structured and modified quickly to meet the requirements of the specific case. Although the cost and time savings benefits from these systems are more obvious on the larger files, the benefits of improved communications and reuse of the systems in proactive risk management applications also can be realized on even the smallest cases.

What are the generic requirements of a custom investigative accounting system? Of primary importance is the ability to work within the common office automation tools environment: word processor; spreadsheet; database; presentation manager. For example, the Microsoft Windows tools are Word, Excel, Access and PowerPoint respectively. The characteristics listed below (in relation to the process shown in Figure 3) assume the full context of the custom software plus the office automation environment.

Acquisition

Management/Organization/Administration

Analysis

Communication


HUMAN RESOURCES
Developing, implementing and using software customized for a specific investigative accounting assignment requires collaboration with an information scientist, who must come equipped with the application shell referred to above and the necessary skills to structure, program and modify it, as well as integrate it with other office automation tools as each case requires.

In an internal corporate environment, the requisite human resources may come from the IT (information technology) department. Even if the IT department does not provide programming services, people within the department are likely to have the skills necessary to write programs for the application shell, as well as for the office automation environment. (The latter programs are referred to as macros or scripts. For example, Microsoft products use a form of the programming language Visual Basic called VB Script.)

Alternatively, information science skills can be obtained from business systems development professionals ranging from independent programmers to large systems development organizations. It is likely that these individuals or companies already have an application shell in use as the starting point for their own business systems development work.

BENEFITS
Benefits fall into three categories:

Time and cost savings (efficiency)
Time and cost savings accrue from all phases of the knowledge management process. Maintenance of a centralized database integrated with other office automation tools removes the need for entering data more than once and lowers the risk of data entry error. The focused functionality of the custom software saves the time necessary to adapt more generic software packages to the requirements of the case.

Repetitive organizational or analytical tasks can be automated by means of macros or other programming. Reports and presentation graphics can also be generated automatically, directly from database information, without transcription errors. Finally, all of the case data, organizational (structural) information and analytical and communications techniques used on the case can be encapsulated and archived for future reference.

Improved communications
Custom investigative accounting software enables the programmatic control of communications - data and analytical results can drive text and graphic communications directly. This not only insures accuracy, but also enables exciting possibilities such as the real-time visualization of query results.

Proactive risk management solutions
Customized investigative accounting systems can be used to prevent the type of problems that they were created to solve. For example, a system was developed to quantify a fidelity insurance claim by reconciling fraudulent revenue transactions in the accounting system with actual bank deposits. The same system could be used on an ongoing basis to reconcile all revenue transactions with bank deposits.


CONCLUSION
A systems approach to investigative accounting can benefit practitioners in a wide range of situations. Whether they work in internal audit in a large corporation, in law enforcement, as individual independent investigators or as part of a forensic accounting firm, they can all take advantage of the opportunities of efficiency and improved communications that accrue from the effective use of systems technologies.



Stephen Markson, B.A., B.A.Sc., P.Eng. is a principal of ForenSys The Forensic Systems Group and has been developing financial systems since 1967. ForenSys provides data management, analysis and reporting services and systems for forensic, investigative, litigation support and computer security applications.

Bob Forsyth has been a CGA for over twenty years, and is also a CFI (Certified Forensic Investigator). He is in public practice in St. Catharines and is the chair of Porter Hetu International in Ontario. Bob has managed a number of large forensic projects for Porter Hetu, and presented a seminar on forensic accounting for CGAO.

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