Ever wonder how businesses that lose all their paper records to a fire, or that never had records in the first place, manage to recreate those financial records?
The answer is the unusual branch of accounting known as forensic accounting. By using information like bank statements, appointment books, spending trends, and more, accountants and bookkeepers trained in forensic accounting methods are able to piece together financial transactions and recreate a business’s financial history.
This is possible even if a business has done zero bookkeeping since it was started!
Bench was recently featured at mylawCLE’s Forensic Accounting Summit, where Shawna Laker, manager of our Retroactive Bookkeeping team, participated in a panel alongside fellow subject matter experts. Shawna shared her team’s expertise in forensic accounting by highlighting some of the experiences we’ve had in helping small business owners recreate their books—even in instances where the information isn’t easy to find.
Panel: Is the following statement a myth or truth: “My business has no financial records whatsoever. There’s no way an accountant could recreate anything for me!”?
Shawna: This is actually a myth that there can truly be no records. When a small business owner comes to us saying this, it typically means that in actuality, they just don’t know where to start. There’s always third-party information that I think a lot of business owners don’t realize exists, or maybe they don’t have the ability to go and request that information.
I think that’s why we’re all quite passionate about it—because it is the ultimate puzzle to solve.
Panel: What if a business paid for everything using cash? Would there be any records then?
Shawna: There will always be something. It really comes down to understanding the industry that the person is in, and having the creativity to explore different avenues that might give us the information we need.
Consider businesses like nail salons and restaurants, which often deal a lot in cash. As soon as that cash has gone through any type of bank, there’s a record that can be recreated. Or if they have a POS system, that’s an electronic record that now exists and can be pulled.
Then there’s information like using video security cameras to see how many people were working that day, or how many clients were served. Those are also records. It’s really about finding all possible ways to approach a case.
Panel: Let’s talk more about the non-traditional and non-financial data that can be acquired through various means. Can you give an example of a case that you worked on, and what were the techniques you used to gather evidence to recreate the financial records?
Shawna: In December 2019, a client came to Bench Accounting. We’ll call them Pat. Pat was looking for support in recreating financials. They had recently been scammed by their employees, and the FBI was now on the case.
The case began in July of 2017, when Pat was looking to retire and listed their business for sale. They hired three new employees. The agreement was the new employees would work to understand the business and make payments to purchase the company eventually. Because this agreement was in place, Pat began to remove themself from the business’s core operations. Pat was seeing regular payments towards the company’s purchase, and everything seemed normal. It wasn’t until mid-2018 that something seemed wrong. Employees of the business started reaching out to Pat because they were not being paid on time, and some payments were not being made altogether.
Upon further investigation, Pat began to uncover what happened. The three new employees had created a bank account under the business name and used it to collect sales. They never informed Pat or the other employees about this account. When they would wire money from the fake account to the legitimate business accounts, the scammers told Pat the transactions were investments toward the purchase of the business. Even more, they took out multiple loans under the business name and since the scammers were also doing the bookkeeping, hiding this from Pat was easy.
In December 2019, Pat was left with employees who needed to be paid, while the state was looking for context into the business’ revenue, the sales tax that had been issued, loans the business had defaulted on, and more. Pat was tasked with recreating financials for this period, under all of this pressure, alone.
Bench worked with Pat and started to collect all of the documents we had access to. We got login credentials for the accounting software they used over this period to get as much context as possible. Depending on the time zone and Pat’s availability, we made time to talk and chat through the activity on the bank accounts we noticed.
Eventually, we found all of the fraudulent loans and got access to the fraudulent bank account used. We could then recognize activity on this account as fraudulent in the financials. Payroll was an issue for Pat being so far removed from the day-to-day operations during the period. We crafted resources for the staff to help investigate over or underpayments to employees.
In April 2020, we wrapped up the books with several notes for Pat’s tax filer outlining the fraudulent activity. Our bookkeeper reached out and discussed the whole financial package and notes for the tax filer to ensure everything was in order. Lastly, we gave Pat our direct line to ensure we were easy to reach for any revision requests.
Panel: What type of technology is important to use for this type of case work?
Shawna: At Bench, we have our own proprietary software that we utilize. But I think an incredibly important element of any software is the user, and in our case, we’re not only utilizing the software, but we are providing the service as well.
Folks that are using Intuit or Xero or Excel—DIY accounting software—are at a potential risk to make mistakes, and in fact one of the questions that we hear most often from clients is “How do I fix this?”
That’s why we use our own Bench software. It’s an excellent place for business owners, partners and bookkeepers to see multiple years of work and store all our documents.
Another question we get often, and it’s an important one, is about privacy and security measures. People should absolutely be aware of these issues when they’re putting financial data or privileged information into any software program, especially one that’s free or has poor reviews.
At Bench we hold ourselves to a very high standard—the same standard that online banking and shopping sites use in terms of encryption.
Is your business in need of forensic accounting?
If this situation sounds familiar, Bench can help! Our team is experienced at recreating financial records, managing back taxes, and completing retroactive bookkeeping to help business owners get back in the IRS’s good graces. And the best part? Bench’s team is fast—our specialty is completing years of bookkeeping on quick turnaround times.