The Best Practices Guide to Financial Disputes and Investigations

Navigating financial investigations and dispute resolutions demands a keen understanding of the intricate and challenging processes involved. From the moment bank statements and other financial documents land on your desk to crafting a compelling case narrative, the journey is riddled with nuances that can significantly impact the outcome.

This guide is intended to serve as a beacon, illuminating the best practices while shedding light on common pitfalls to sidestep along the way. We’ve identified and outlined 7 steps to help equip you with the tools and insights needed to traverse the complexities of disputes and investigations with precision and confidence.

The initial step in any engagement is obtaining the necessary documents, often through subpoena requests. These documents can vary widely in format and type, with some being easier to extract transaction data from than others. The format type of documents received determines the types of software tools required for the engagement.

A. Hard Copies

In contentious matters, professionals are sometimes forced to “dumpster dive” for documents, searching through garages, attics, boxes, and filing cabinets. The resulting finds are typically old, incomplete, and sometimes marked-up documents. Regardless of quality, the documents need to be digitized. The good news is that most modern printers also offer scanning and copying capabilities and can therefore be used to digitize the hard copies into PDF files.

B. Scanned Images

In many instances, PDF documents may already be available, or the financial institution may provide the files to you in a PDF format. This sounds like good news, but it is often quite challenging, as the information is typically provided as a single file with multiple accounts spanning many months or years.

C. Native PDF Files

Native PDF files are the easiest to work with. Many tools exist to extract data and error rates are extremely low. Also, native files will likely be organized by individual account period which helps avoid the pitfalls associated with hard copies and scanned images.

D. TIFF / Other Document Types

On occasion, financial institutions may provide transaction lists via XLSX, CSV, or TXT/JSON among others. Excel handles dozens of file types and is very useful.

After your documents are reviewed, organized into files, and accounts are listed, you are ready to begin to load or extract data into a database. The following best practices are designed to help ensure the resulting data is completely accurate before you begin your analysis.

A. Bank Statements

Many tools exist to help professionals extract transaction data from PDF or other image type statement files using specialized OCR technology. All tools tend to work well with native PDF files; it’s the non-native PDF file types that sometimes wreak havoc, resulting in even more work than simply manually transcribing data. For small projects, these may only be minor annoyances, but as you get into engagements that require analysis of dozens of accounts, multiple legal entities, and a variety of document types and data sources, the work can become insurmountable without the right software tools.

B. Brokerage Statements

In many cases, analysis includes brokerage accounts which can make data extraction especially complicated. Most specialized OCR tools for statements do not support brokerage accounts as they focus on banking and credit card statements. The most advanced solutions will support brokerage statements by extracting only cash in and cash out transactions. Without this functionality, professionals are often left to manual transcription.

C. Check and Deposit Slip Images

If required, subpoena wire transaction details, and/or check and deposit slip images from each financial institution. Wire details are likely to be provided via a CSV or text file. If not already included on the statement, check and deposit slips will likely come via a multi-page TIFF or PDF file. There are two key capabilities required to integrate these important details with ease:

1. The ability to extract transaction information from both printed and handwritten check and deposit slip images.
2. The ability to integrate details from the extracted check or deposit slip images and wire transaction details with the appropriate bank statement transactions

Often, this is the most difficult and the most crucial step as wire details and checks contain information about where the money went and where it came from.

Reconciling data involves comparing and aligning different sets of data to ensure accuracy, consistency, and integrity. This process is essential for identifying discrepancies, errors, or anomalies within the extracted data and resolving any inconsistencies before proceeding with further analysis or investigation.

A. Identify Account Periods

The only way to do this is to compare the extracted transactions with account period dates and balances.  As you can imagine, trying to do this in Excel for a project with hundreds, or even thousands of account periods is daunting.

B. Find and Fix Incorrect or Duplicate Bank Statement Data

No matter how data gets extracted from documents, errors are likely.  Professionals can burn too much time chasing, updating, and verifying corrections.

C. Load or Integrate Data with Master Copy

After extracted data is confirmed as 100% accurate with no duplicate transactions, load the data into the master database or integrate with the master file. This is also the time to match check and deposit slip images to relevant bank statement transactions.

D. Identify Missing Data (And Repeat)

Examine all data and accounts thoroughly to determine the existing data timeline. This is the time to look for continuity between all account periods, ensuring that the prior account period's ending date matches the current account period's beginning date. It’s also important to check the consistency of prior ending and current beginning balances as well as identify any inconsistencies or gaps that may indicate missing data.

At this point, the transaction database is a clean foundation or starting point. Keep in mind, more work may be required before analysis can start, especially if wires, checks, or deposit slips were used to initiate banking transactions. In these cases, the transactions on the bank statements will not contain the right information for proper analysis, so you need to do the necessary prep work.

Data preparation is the tough part, while analysis is where professional firms stand out. The trick is to finish data prep quickly so there's more time for analysis. Since every case is unique with its own needs, it's important to adapt accordingly. In this section, we'll cover some common types of analysis used for disputes and investigations.

A. Threshold Analysis

If the client is cautious about spending or uncertain about the need for a detailed investigation, a threshold analysis can be helpful. This involves creating a table that categorizes transactions based on their amounts and counts. For instance, clients can assist in streamlining the workload by focusing only on transactions above a certain value threshold, making the task more manageable.

Depending on the scope of the engagement, or the related budget and timing, a threshold analysis can be useful. Here’s what that might look like:

1. Filtering out low dollar transactions
   Also known as “de minimis transactions/values.” This is important so the focus can be on higher level cash flows in and out of the target accounts.

2. Labeling transactions as “<$1,000”
   Labeling and then filtering out those transactions can result in a substantial reduction in the amount of analysis to complete.

3. Identify the optimal net dollar threshold
   For example, is it $100? $1,000? $10,000? Take into account the total aggregate dollar amounts that those transaction thresholds represent.

B. Even $ Check Analysis

Even dollar amount transactions can be interesting to forensic accountants because they may indicate patterns or behaviors that warrant further investigation. Here are several reasons why such transactions might draw attention:

• Unusual Patterns: Transactions in even dollar amounts may stand out when compared to the typical transactions that involve cents. Forensic accountants often look for irregularities or patterns that deviate from the norm.
• Manipulation or Round Figures: Even dollar transactions could be a result of intentional manipulation to make accounting irregularities less noticeable. Perpetrators might round figures to simplify bookkeeping or hide fraudulent activity.
• Concealing Fraudulent Activity: Fraudsters might use round figures to mask their activities. For example, they may manipulate accounts or engage in fraudulent transactions to create a facade of normalcy.
• Lack of Variation: In legitimate financial transactions, amounts are often diverse and rarely rounded to even numbers. A lack of variation in transaction amounts could be a red flag for forensic accountants.
• Automated Processes: Sometimes, even dollar transactions may be indicative of automated processes or system-generated transactions. Forensic accountants need to investigate whether such processes are legitimate or if they are being exploited for fraudulent purposes.
• Money Laundering: Criminals involved in money laundering might use even dollar transactions to obscure the origin or destination of funds. These transactions may be part of a scheme to layer or disguise the illicit source of money.
• Check Tampering: In cases of check tampering or forged checks, fraudsters may alter the amounts to round figures to avoid suspicion.
• Employee Theft: Employees involved in theft or embezzlement may prefer even amounts to make it easier to manipulate records and cover their tracks.

In forensic accounting, the key is to identify anomalies or patterns that deviate from normal business practices. Even dollar amount transactions are just one of many potential indicators that forensic accountants consider during their investigations. Analyzing financial data in detail allows them to uncover discrepancies and potential fraudulent activities.

Benford’s Law

Forensic accountants use Benford's Law as a tool to detect anomalies and potential irregularities in sets of numerical data, including financial data. Benford's Law, also known as the first-digit law, states that in many naturally occurring datasets, the leading digits are not uniformly distributed, but instead, smaller digits (1, 2, 3) appear more frequently as leading digits than larger digits (7, 8, 9). This law is based on mathematical principles and has been found to apply to various datasets, including financial transactions.

Here's how forensic accountants typically use Benford's Law in their analyses:

• Expected Distribution: Benford's Law provides an expected distribution of leading digits in a dataset. Forensic accountants calculate the expected frequency of each leading digit based on Benford's Law.
• Comparison with Actual Data: Forensic accountants then compare the distribution of leading digits in the actual financial data with the expected distribution from Benford's Law. Significant deviations may indicate the presence of irregularities.
• Focus on Anomalies: Large discrepancies between the expected and observed distributions may signal potential areas for further investigation. Forensic accountants may scrutinize transactions associated with these anomalies to identify potential errors, fraud, or manipulation.
• Identification of Red Flags: Benford's Law is often used as a red flag tool. It doesn't prove wrongdoing but highlights areas where additional scrutiny may be warranted. Forensic accountants can use it as an initial step to prioritize their efforts in a financial investigation.
• Applicability to Various Data Sets: Benford's Law can be applied to a wide range of financial data, including income, expenses, invoice amounts, and more. It is particularly useful when dealing with large datasets where manual examination of individual transactions is impractical.

It's important to note that while Benford's Law is a powerful tool, its application is not foolproof, and there can be legitimate reasons for deviations from the expected distribution. Therefore, forensic accountants use it as one part of a comprehensive toolkit for financial analysis and investigation, combining it with other techniques and methods to build a more accurate picture of the financial situation.