Are you thinking of conducting a financial investigation? With the potential financial losses that come with fraudulent activities, it may be worth investing in a trained professional to examine and assess your business’s accounting records. A comprehensive financial investigation will reveal any suspicious activity or discrepancies within the record-keeping system that could put your company at risk of large-scale loss. The results of the financial investigation can show companies what is really taking place inside an organisation. This will assist them in deciding on how to proceed and what steps they can take to protect themselves while growing and expanding.

What does a financial investigation entail?

A financial investigation is an inquiry into the financial affairs of a business. It involves collecting evidence and analysing information to determine if there has been any illegal activity or misappropriation of funds. 

A financial investigation aims to uncover problems that may have occurred and to identify those responsible and hold them accountable. Financial investigators use specialised procedures such as forensic accounting and data analysis to trace money flows between individuals or entities involved in the case. They also look for discrepancies in documents related to the case including bank statements, tax returns, invoices, contracts etc., which could indicate fraudulent activity or potential violations of laws governing finances.

Because financial investigations are complex and require experience and knowledge, it is often required to hire a professional investigator who has the necessary expertise and resources for a successful investigation.

What can a financial investigation reveal?

Financial investigations are becoming increasingly important for identifying and preventing financial crimes. According to a recent survey, out of the companies asked, at least 50% of businesses had experienced financial fraud. Conducting an investigation can be a powerful deterrent against such criminal activity and shows stakeholders that the entity takes such matters seriously. 

 Financial investigations can be conducted for both criminal and civil matters such as fraud, money laundering, embezzlement, tax evasion and bribery. They can result in important findings about an individual such as a potential conflict of interest. This could indicate that the individual is not acting for the benefit of the business. 

Financial investigations can reveal a variety of other issues that could otherwise go unnoticed. These include:

Undisclosed liabilities or debts

Undisclosed liabilities or debts refer to financial obligations that an individual, company, or entity intentionally fails to disclose in their financial statements or reports. This is often a deceptive practice undertaken to hide the actual financial state or to avoid unwanted attention from regulators or stakeholders. These hidden liabilities can include outstanding loans, pending legal claims, or financial losses that have not been reported. Deliberately keeping this information from regulators can not only result in significant fines and sanctions but also put the credibility and future of the organisation at stake. In some instances, it may even lead to the dissolution of the company or criminal charges against the involved individuals.

Identifying sources of income not reported on taxes

Identification of undeclared income sources is a crucial aspect in the fight against tax evasion, money laundering, and other financial crimes. Unreported income may arise from various sources, such as the sale of goods or services, rental income, investment income, unreported employee compensation or earnings from illegal transactions. Identifying and reporting these undisclosed sources of income is critical to ensuring tax compliance and preventing tax fraud.

Tracing offshore accounts

Tracing offshore accounts is the process of uncovering hidden financial assets and transactions that individuals or corporations hold in foreign jurisdictions. Offshore accounts are commonly used for legitimate business purposes such as diversifying investments, tax planning or international trade. However, they can also be utilised to evade taxes, launder illicit funds, or conceal assets from legal claims or creditors. Investigating these offshore accounts often requires sophisticated forensic accounting techniques and extensive international cooperation, as the complex web of financial transactions may involve multiple jurisdictions, shell companies, and anonymous directors. The successful tracing of offshore accounts can lead to the recovery of assets, the prosecution of financial criminals and the reinforcement of global financial security.

Reputation risk

Reputation risk is the potential threat to an organisation’s image, credibility, or overall standing in society and the market, resulting from specific events or actions. Reputation risk can arise from various reasons, such as financial scandals, regulatory violations, product safety issues, or unethical behaviour from senior executives. A damaged reputation can lead to a loss of customer trust, decline in market value, reduced access to capital, and increased scrutiny from regulators, all of which may severely impact an organisation’s stability and long-term prospects. Businesses should actively manage their reputation risk by maintaining robust compliance programs, transparent communication strategies and proactive stakeholder engagement to mitigate potential crises and uphold their reputation.

Noncompliance with laws and regulations

Noncompliance refers to the failure of an organisation to adhere to applicable laws and regulations imposed by local, national or international governing bodies. Noncompliant behaviours can range from minor oversights, such as missing filing deadlines, to grave violations like facilitating money laundering or fraud. Noncompliance may result in civil or criminal penalties, including fines, sanctions, or even incarceration, depending on the severity of the breach. Repeated noncompliance can also damage a firm’s reputation as mentioned above, leading to additional costs and loss of business opportunities. To avoid noncompliance, organisations must have comprehensive compliance systems, regular audits, and clear communication channels to stay up-to-date on legal and regulatory changes, thereby minimising risk and fostering a culture of ethical behaviour.

 In addition, a financial investigation can uncover significant amounts of cash flow and assets that may have been hidden by fraudulent activity. Other issues revealed could include discrepancies between actual activities and reported figures/transactions, unreported gifts or purchases, and even sham transactions set up to hide the source of funds or launder money. Such investigations can also provide evidence against someone accused of financial crimes and help bring perpetrators to justice.

 Each type of criminal activity costs organisations major losses in revenue every year; which could be prevented if appropriate actions were taken prior to entering into any sort of business agreement or transaction with an individual or company.

Red flags of financial crime

When it comes to financial crime, the best way to protect yourself is by being aware of the common warning signs. Financial criminals often leave a trail of red flags that can alert you to their activity before any serious damage is done. Knowing what these red flags are and how to identify them is key in preventing financial fraud. Here are some of the most common red flags that should be taken seriously:

  • Suspicious or sudden changes in bank accounts: Unexplained deposits or withdrawals, multiple transfers between accounts, large amounts sent overseas without explanation, or sudden spikes in spending could all be indicative of criminal activity. If an individual’s expense account balance appears abnormally high compared to previous statements then this could also indicate potential fraudulent behaviour.
  • Shifting responsibilities: When the same person is responsible for multiple roles that would normally require oversight from different departments (e.g., accounting and IT) this could indicate an attempt to conceal unethical behaviour. Even though that is not always the case, businesses should be proactive and ensure that more than one person approves decisions.
  • Unusual transactions: If there are suspiciously frequent payments made from one company/individual’s account to another with no apparent connection between them then this could be a sign of money laundering taking place. It may also be worth checking for unexplained wire transfers as well as any other unusual transactions which do not seem connected with legitimate business operations. For example, transactions that lack supporting documentation or are inconsistent with a customer’s normal activity should be flagged for further investigation.
  • A lack of internal controls: Companies without proper internal financial controls are more vulnerable to financial fraud. Internal policies and procedures along with alert systems are crucial for dealing and detecting financial crime. A weak internal control structure makes the business vulnerable to threats and it is a sign that illegal activities could be undertaken without being found.
  • Multiple sources of income: If an individual has multiple sources of income but cannot explain how they are legally obtained then this could be a sign of fraud. Employees should be able to explain how revenue is coming into the businesses and provide evidence for growth and expansion.
  • Structuring: This involves deliberately breaking up large transactions into smaller ones in order to avoid triggering suspicious activity reports (SARs). Structuring is typically done by depositing amounts just below a reporting threshold or using multiple accounts to make payments.

Measures against financial crime

Financial investigations can reveal the need for stronger measures against financial crime. One measure that businesses can take against financial crime is to conduct background checks and screenings on employees, suppliers and other partners. This includes verifying their identity, checking credit reports and criminal records, as well as reviewing their education and employment history. Companies should also ensure that appropriate policies are in place regarding financial transactions and the handling of customer funds.

Another important measure is to implement internal controls such as requiring dual signatures for certain transactions or setting up an internal audit system. Companies should also have procedures in place to monitor customer accounts for unusual or suspicious activities, especially those involving large sums of money or high-risk countries or individuals. Businesses should be aware of the latest trends in financial crime and stay up-to-date on applicable regulations so they can identify any potential risks quickly.

Organisations can also protect themselves from financial crimes by training staff members in basic fraud prevention techniques such as recognising warning signs like the red flags mentioned earlier. They could also be trained in understanding how to identify fraudulent documents and learning about measures to take when faced with a suspicious transaction. Companies may consider using software tools such as transaction monitoring systems which can detect suspicious activity more easily than human eyes alone.

Choosing the right investigator

When choosing the right financial investigator, it is important to consider their expertise and experience in the field. It is essential to choose someone who has an in-depth understanding of the complexities of financial investigations and how they can be conducted effectively. An experienced investigator should have the necessary knowledge and resources to uncover any irregularities or potential fraudulent activity. They should also know all relevant laws and regulations that apply to financial investigations so as to ensure compliance. They should possess strong problem-solving skills in order to successfully identify patterns and possible solutions when dealing with cases.

 Finding a qualified financial investigator can be difficult given the specialised nature of the profession. However, there are many ways for businesses to locate a credible and reliable professional. Seeking referrals from trusted sources such as accountants or existing business contacts may lead to positive results. It is also wise for companies to carefully research different investigators before making a final decision; looking into credentials, background checks and reviews from previous clients could help inform an informed choice. Additionally, there are organisations such as the Association of Certified Fraud Examiners (ACFE) which on top of offering training courses for investigators, also provide access to a network of certified professionals who adhere to standards set by the ACFE.

Keep in mind

Taking no action against financial crimes allows fraudulent activities to take place that could have been prevented with proper investigation procedures. Businesses will face many threats over the years and the best way to deal with them is to take action and choose reliable professionals to handle them. Are you looking for a system to help you?

Polonious offers workload management and a growing list of integrations that are easy to use. We can provide one-click graphical reports, PDF output, and flexible CSV format reporting. As we are ISO 9001 and ISO 27001 certified, our customers get to experience a high-quality service with high security and confidentiality. Do you want to easily access your documents from anywhere you are? Get in touch and we will give you a demo!