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Forensic Accounting Tools for Business Owners

Leah Wietholter has forensic accounting tools that anyone can use.

You can’t always prevent financial fraud in your business before it happens. But you can catch it early and limit the damage it can do. Easy-to-use forensic accounting processes should be part of your business owner toolkit.

See Forensic Accounting with Leah Wietholter for a complete transcript of the Easy Prey podcast episode.

Leah Wietholter is the founder and CEO of Workman Forensics, a forensic accounting and fraud investigation firm. They investigate fraud and do forensic accounting, and also provide a game-based training called The Investigation Game. Leah also hosts The Investigation Game Podcast. She created the data sleuth process, a scalable data-first approach to forensic accounting and fraud investigation, and wrote a book explaining how anyone can use it.

From Avid Reader to Real-Life Sherlock Holmes

When Leah was young, she loved to read, especially mystery novels. One day when she was twelve, she listened to a radio drama that had a character who was an NSA agent. It was the first time she realized there were career options for women besides teacher or mother. She decided right then that she was going to become an investigator.

By high school, Leah had decided she wanted to work with the FBI. At that time, the FBI tended to hire accounting majors, so when she started attending Oral Roberts University, she chose accounting as her field of study. Her junior year of school, she was chosen as an FBI Honors intern and spent six weeks on the East Coast working as an FBI intern. She returned to Tulsa, Oklahoma to finish her undergraduate degree. While working on her graduate degree, she also worked under a forensic accountant at the local FBI office.

After two years with the FBI, Leah moved into public accounting. Forensic accounting was becoming a more common field. The private sector was investigating some of the fraud before going to law enforcement. The public accounting firm that Leah was working for decided that since Leah had previously worked for the FBI, she would be able to do forensic accounting. What she had done for the FBI and what her firm wanted her to do were not the same thing, but she started figuring it out.

The Birth of the Data Sleuth Process

Leah’s first year working with her local FBI office, she did manual data entry. She did things like hand-entering bank statements into Microsoft Excel. At first, it was very boring work. She started to think that she wouldn’t make it in this career.

A large part of forensic accounting is looking for anomalies in the data.

Then the office started working on a pump-and-dump stock scheme. Her boss handed her a huge box of documents to enter manually. As she was entering the data, she found a bank statement with a $450,000 transaction that said something about Belize. She hadn’t traveled much, but she did know that Belize was not in the United States. Using that transaction, she identified a foreign bank account that nobody else had realized existed. An attorney wanted to know how she found it when the systems missed it, and there was no trick – it was just entering that data.

That opened a lot of doors in my career, just being able to see the story behind what I was entering.

Leah Wietholter

That incident made her realize that she was the first person who got to look at what actually happened. The numbers on the bank statements and other documents told the story. By looking past the boring data entry to find the story, she could actually provide value to the agent working the case. It’s also the foundation of what became the Data Sleuth method, used by Workman Forensics and made available in Leah’s book Data Sleuth.

How Workman Forensics Uses the Data Sleuth Process

The data sleuth process uses forensic accounting methods to find anomalies in the data. It especially looks at bank statements, credit card statements, and payroll reports. By looking first at high-risk transactions, they can spot patterns and anomalies that might indicate fraud.

By understanding patterns within this data and what are the highest risk transactions to notice that could indicate fraud, we’ve built this process and tools that help us identify those things more quickly.

Leah Wietholter

If Workman Forensics was working a case for you, they would start by taking all of your bank statements and digitizing them. Then they would prepare a Source and Use Summary Report. This report is a very simple summary of where all deposit money came from and where all withdrawn money went.

The next step is dividing that summary into sections. They create sections for high-risk transactions, such as wire transfers payments to any entity that ends in LLC, Corp, Co, or Inc. By separating out all of those transactions, they can make sure you’re aware of all accounts and all payments were made to actual vendors. If there’s an LLC you don’t recognize, they can investigate who owns it. If someone is stealing money from you, chances are this report will help you spot it.

Using Forensic Accounting in Your Business

You don’t have to be a forensic accountant or hire one to use forensic accounting principles. A little knowledge and some bank statements will help you check for anything fishy in your business. There are plenty of detailed and complex methods, but start simple. Leah always starts the process with identifying how the money comes into your business and how it goes out.

If you can conceptually identify how does money come in, how does money go out, who touches it, how they would steal, and how would you know, that’s going to help you identify your best places to identify fraud.

Leah Wietholter

How Money Comes In

Think about all the ways money comes into your business and who touches it along the way. Think about different forms of payment: Checks, cash, card, PayPal, Venmo, or anything else. If someone were to steal money from you as it came in, who would it be? And if that happened, how would you know?

As an example from Workman Forensics, bills go out to customers every month. Someone who does accounting could receive the check in the mail, take it home, and deposit it in a bank account they set up with the Workman Forensics name. Leah can notice this issue by checking if she collected all the money she expected to collect that month. If she didn’t, she can start investigating why.

How Money Leaves

Look at how money leaves your business and why. Payroll is often a big expense. So are things like rent and equipment. If money leaves because you spend things on a company credit card, look at that too. Identify how the money leaves, who touches it, who approves it, and who sends the payments. If someone is stealing, how would they do it? If they did, how would you know?

The best way to check this is so simple, it seems silly to call it a forensic accounting method: Look at your bank statements. Read your bank statements, payroll reports, and credit card statements. Is there anything you don’t recognize? Are you paying people what you expected to pay them? Sometimes the business name on the bank statement won’t be an exact match, and that’s okay as long as you expect it. Watch out for any expenses that seem strange or unusual.

Identifying Suspicious Transactions

If you’re worried that something suspicious is going on in your business – or just want to make sure you catch it if something does happen – there are forensic accounting tools you can use to become aware of it. And forensic accounting doesn’t mean you have to spend weeks poring through thousands of pages of financial data. By understanding where the most risk is in your business, you can focus your efforts where it matters.

This isn’t magic. It’s just understanding what’s high risk.

Leah Wietholter
Forensic accounting can be as simple as looking at your bank statements and making sure you recognize every transaction.

Forensic Accounting Tool #1: Filter for Even Dollar Amounts

Most people who are embezzling money pay themselves in even dollar amounts. They are much more likely to write themselves a check for $1,500.00 than $1,574.32. Using a filter to look at payments is another easy forensic accounting strategy. Looking in your accounting software or export to Excel and filter for payments with even dollar amounts or that are multiples of 100 or 10.

That doesn’t mean that all transactions fitting this filter are bad. You may have paid $5,000.00 to your attorney as a retainer fee, and as long as you recognize the transaction, it’s not a problem. But if you discover that you’re paying ABC Company $5,000 and you don’t know why, investigate. You can check your Secretary of State to find who the business is registered to. If you find out it’s registered to Bob from manufacturing, you can ask why your business is paying him this money.

This isn’t a perfect tool – perhaps the person embezzling from your business is smarter and doesn’t pay themselves in even dollar amounts. But it gives you a smaller set of data to look through for anything suspicious.

Forensic Accounting Tool #2: Look at Actual Statements

If you want to know what is actually happening in your business, you need to look at bank statements, credit card statements, and the actual payroll reports.

Leah Wietholter

It’s tempting to just look at the data from QuickBooks (or whichever accounting software you use). But someone taking money from your company doesn’t have to log the transaction. Anything they don’t want you to see just won’t get put in QuickBooks, and they won’t reconcile the account.

Reconciling: Comparing what’s recorded in your accounting software with what’s cleared with the bank. The only real number is what’s in the bank, so if something wasn’t entered in your accounting software (or was entered but hasn’t cleared the bank yet), your information is inaccurate.

If the person handling your bookkeeping isn’t reconciling your account, you have a big problem. That problem isn’t necessarily a fraud problem or something that you need to use forensic accounting to solve. But even if somebody isn’t stealing, if you’re not reconciled, you have no idea how much money you actually have. When Leah does presentations, she says, “The rest of this presentation is interesting, but if you’re not reconciled, leave now and fix that first.” You cannot have reliable financial information if you’re not reconciling.

Preventing Fraudulent Transactions

Some people may call Leah a pessimist, but she doesn’t think all fraud is entirely preventable. The important part is to identify and stop it quickly. In the majority of cases Leah has worked, the theft went on longer than five years. The loss is on a curve: They start small, then grow more confident, and by the time they’re caught the loss is huge. If someone paid their electric bill or credit card bill with company money, it’s important to catch it at the beginning, rather than after several years of theft.

I don’t think you can prevent [fraud] 100% of the time. It’s about detecting it quickly.

Leah Wietholter

That said, there are some things you can do to both reduce people’s ability to commit fraud and catch it quickly if they do.

Create an Operating Expenses Bank Account

Leah got this idea from the book Profit First by Mike Michalowicz. The book was discussing cash management, but Leah read the book and thought it was a great fraud prevention measure. With Workman Forensics, Leah knows how much expenses are going to be every month. She can put that sum in a bank account for the financial person to control. If they’re short at the end of the month, Leah immediately knows there’s a problem.

When money comes in, separate out your profit, taxes, etc. into other bank accounts that only you, the owner, can access. All reasonable expenditures – rent, payroll, equipment, etc. – goes into an account that your financial person can manage. If you separate out the profit first, no one has access to it to steal it. Leah keeps all her accounts at the same financial institution, but restricts what permissions each person has.

Create an Account for Wire or ACH Payment

This is a bank account that normally has nothing in it. If someone wants to pay your company via wire or ACH payment, give them that account number. Once they payment arrives, move it to a different account. If there is a breach or fraud, the damage is limited – thieves won’t be able to get anything because there’s nothing in that account.

Have a Process to Monitor Your Accounts

We can blame the bookkeeper, but at the end of the day, the owner is the one responsible for what’s in the account. As the owner, you have the right to check in with the finances of your business.

Leah has seen cases where someone is in a partnership and the partner controls all the money. She’s also seen cases where the bookkeeper has account access and won’t give it to the owner. You don’t need forensic accounting tricks to get access to your business’s accounts. You can go down to the bank, prove you’re the owner, and get added to the account.

It is your right to check in. If you have a weird feeling, check. It might not be fraud. It might be nothing, or it might be negligence. Regardless, the person who has the opportunity to do any embezzling is the person who the owner has decided to trust. Check for yourself.

You can find everything about Workman Forensics, the Data Sleuth book, The Investigation Game, and the podcast on their website, workmanforensics.com. They have lots of blog articles with downloads and resources, as well as a YouTube channel with advice. To learn more about forensic accounting tools, check out Leah Wietholter’s book, Data Sleuth: Using Data in Forensic Accounting Engagements and Fraud Investigations. It was originally written for people who do fraud investigation work, but is full of stories and details the process for anybody interested in knowing how to do it in their own business.

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