Catherine Lofland, CPA
ACFE Research Specialist
Imagine a small business owner who catches an employee stealing inventory from his store. The owner calls the police, who arrest the employee. What the small business owner doesn’t realize is that the same employee has also been writing checks to himself under a pseudonym for months, in what is known as a fictitious vendor scheme. A fraud investigator would likely uncover this scheme by examining the financial records; however, if the officers investigating the inventory theft don’t have the accounting knowledge necessary to decipher the financial records, the employee might get away with the embezzlement.
When I tell people I write educational materials in the research department at the ACFE, their response is often, “So, you write courses for forensic accountants?” There is a common misconception that “fraud investigation” and “forensic accounting” are synonymous. While these concepts are related, they are in fact distinct. A fraud investigation is conducted by either financial or non-financial professionals and refers only to fraud matters. Forensic accounting, on the other hand, refers to work done by accountants in anticipation of litigation and doesn’t necessarily involve fraud.
Although ACFE members include many CPAs and accountants, a large portion of our membership work in non-financial professions, including law enforcement, attorneys, private investigators, detectives, consultants and compliance professionals. Many of these people have limited or no formal accounting education.
It is important for any fraud examiner to understand the nature of financial transactions and how they affect a company’s books. When conducting a fraud investigation, one must be on the lookout for indications within financial reports and data that reflect financial statement manipulation, theft of assets or corruption. However, analyzing a set of books might be daunting to someone who has never taken an accounting class. For those of you with a limited exposure to basic accounting concepts, I encourage you to check out our new online self-study course, Financial Investigations for Non-Financial Professionals. This course walks you through the three essential financial statements, the basic accounting principles driving the numbers on these statements and simple financial analysis techniques that can quickly highlight suspicious activity.
Since fraudulent acts are often of a financial nature, it is important for a fraud examiner to have a fundamental knowledge of accounting principles and a familiarity with the structure of financial statements in order to conduct a thorough fraud investigation.