Using the Forensic Data Engine for Fraud Auditing and Forensic Accounting

Excerpts from "Chapter 2: Forensic Accounting and Fraud Auditing Fundamentals" of the book Fraud Auditing and Forensic Accounting, New Tools and Techniques by G. Jack Bologna and Robert J. Lindquist (2^nd edition, John Wiley & Sons, 1995) that illustrate the usefulness of the FDE in fraud auditing and forensic accounting.

In the introduction, p27, discussing the functions of a fraud auditor, it is noted that fraud auditors need to assess their investigative findings. In doing this,

...the auditor might need to examine several transactions over an extended period to determine if a pattern of conduct exists and if there has been deceitful reporting to management.

For a case in which the data has been entered into the FDE database, this can be quickly and easily accomplished by one or two queries.
The FDE can greatly reduce the time spent on the following tasks listed on p29 under the heading WHAT SHOULD A FRAUD AUDITOR KNOW AND BE ABLE TO DO?:

• Identify questionable and exceptional situations in account balances.
• Identify questionable and exceptional transactions (too high, too low, too often, too rare, too much, too little, odd times, odd places, odd people.)
• Follow the flow of documents that support transactions.
• Follow the flow of funds into and out of an organization's account.

On pp32-33, under the heading FINANCIAL AUDITING AND FRAUD AUDITING, in which the two disciplines are contrasted, it is pointed out that the fraud auditor (our comments in italics)...

...seeks relevant information, organizes it in some meaningful way (loads it into the flexible data structures of the FDE), and then sees the pattern it creates (by querying the FDE database, browsing the results, printing reports and creating graphics - automatically and accurately).

The patterns to look for are the exceptions and oddities, the things that do not fit in an organized scheme because they seem too large, too small, too frequent, too rare, too high, too low, too ordinary, too extraordinary, too many, or too few, or feature odd times, odd places, odd hours, odd people and odd combinations (all of which can be tested by querying the FDE database). In a word, one looks for the unusual rather than the usual. Then one goes behind and beyond those transactions to reconstruct what may have led to them and what has followed from them. A more complete assessment of fraud is possible if the data that precedes or follows a questionable transaction are available. (The FDE can always handle more data - without requiring more effort from the fraud auditor/forensic accountant).

The FDE facilitates the search for patterns and the unusual with its powerful query capability and then provides rapid, error-proof automated methods to incorporate the evidence (query results) into client reports and graphic presentations.

Rarely does an auditor know at the outset that a fraud, theft or embezzlement was committed. One may have some rather sketchy information at best, and then applies the investigative mentality (armed with the FDE): How to determine whether a fraud, theft or embezzlement has in fact occurred. The objective is to determine whether a crime exists... These are some of the steps in the fraud auditor's takes (sic):

1. Acquire all available corporate documents (and data) relating to the allegation (into the FDE)...

3. Assess the allegation against the available documentation (and data) to determine the next appropriate move (what FDE queries to make, what report formats and exports to create).

• Determine, if necessary, whether further documentation (and data) is available from the company (for entry into the FDE)...

• How far back in time should one go? (With the FDE, the amount of data does not matter. Go back as far as there are records!)...

The FDE extends the intuition of fraud auditors and investigators by enabling rapid verification of many different scenario hypotheses, limited only by their own imaginations. The FDE can be adapted and programmed to find the unusual in any conceivable situation and then produce striking reports and graphics which make it easy to explain the fraud to clients and in court. The flexibility of the FDE makes it the perfect tool for fraud auditors who (pp36-41)...

...The knack of intuition can be acquired (and more readily if one uses the FDE) if one retains an open, objective, and inquisitive mind... one that can synthesize data and put it all together in some sort of scenario (facilitated by the FDE)...

... because...

...Financial audit methodologies and techniques come and go, but none are truly designed to ferret out fraud (except those that allow the flexibility to adapt to each new fraud case)...

...and...

...Fraud detection is more of an art than a science. It requires innovative and creative thinking as well as the rigors of science ( The FDE is a tool which allows fraud auditors to merge their intuition with the power and precision of data science)...

...Fraud auditing is not easy. It is often frustrating and grueling work. You will be surrounded with data, documents, reports, analyses, observations, and interview notes; and times, dates, places, people, procedures, and policies to remember (unless you let the FDE do it for you).

...the term forensic in the accounting profession deals with the relation and application of financial facts (an FDE database) to legal problems. Forensic accounting evidence (FDE reports and graphics) is oriented to a court of law, whether that court is criminal or civil. Furthermore, with its orientation to courts of law, the quality of the work forensic accountants must attain is subject to public scrutiny if the matter at issue goes to trial (not a problem for the FDE with error-free reports and graphic presentations)...

...The forensic accountant draws on various resources (which can be conveniently combined in the FDE) to obtain relevant financial evidence and to interpret and present this evidence in a manner that will assist both parties (The forensic accountant can use the FDE for analysis and then to generate consistently formatted, clear reports and graphics that explain the analytical results).

The FDE can be used in all five areas of application of forensic accounting (p43):

1. Corporate Investigations....the forensic accountant assists in addressing allegations ranging from kickbacks and wrongful dismissals to internal situations involving allegations of management or employee wrongdoing (these situations and many more can easily be modeled in the FDE)...

2. Litigation Support....investigating and assessing the integrity and amount (this is ideally suited to the FDE) relating to such areas as loss of profits, construction claims, product liability,...

3. Criminal Matters....sort out, assess and report on financial transactions (exactly what the FDE does!) related to allegations against individuals and companies...

4. Insurance Claims....assess both the integrity and quantum of a claim. The more significant areas relate to the calculation of loss (the calculation capabilities and speed - as well as reporting and graphics capabilities - of the FDE encompass and go well beyond those of spreadsheets)...

5. Government....assist governments to achieve regulatory compliance...grant and subsidy investigations (the FDE can be used to model these situations and then produce clear and concise reports and graphics to illustrate and explain)...

Then, in SOME REFLECTIONS ON FORENSIC ACCOUNTING (selected results from a questionnaire circulated among staff members of Peat Marwick Lindquist Holmes, pp46-49):

...I would define my forensic accounting responsibilities as follows:

- Investigation and analysis of financial documentation (the FDE can help with data and document organization)

- Communication of the findings... ...in the form of a report, accounting schedule (produced automatically and error-free by the FDE)...

- ...assistance in further investigation... ...appearing in court as an expert witness (aided by presentation materials from the FDE and safe in the knowledge that conclusions are based on accurate data from the FDE)...

...When looking at a given forensic accounting engagement, there are two major areas... ...First, there is the investigative aspect (use the FDE for analysis...), and second, the communications aspect (...and presentation reports and graphics). I... ...would include... ...the ability to assimilate large volumes of information (it is no harder for the FDE to deal with gigabytes than one byte), general organization and administrative skills (the FDE never forgets where anything is filed and lets your system of organization evolve as the case unfolds), use... ...or understand the abilities of the microcomputer (loaded with the FDE!)...

Because the book was published in 1995, the section entitled FRAUD AUDITING SOFTWARE TOOLS (pp53-59) omits mention of the Forensic Data Engine. Many other software packages are described which are very specific in their application (as to the type of fraud, industry or systems environment), or are very expensive or difficult to obtain, implement and support. On the other hand, the FDE is a comprehensive, economic alternative that can be readily adapted to any situation, uses industry-standard queries, provides flexible reporting and graphics options based on industry-standard software packages, accepts input from any electronic source and exports data in any format for word processors, spreadsheets or graphics programs.