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SOS Case – Forensic Accounting
SOS has had numerous cases that involved forensic accounting. Many of them are used to truly identify correct cost, to determine the (pawn) cost of products, bids, or areas that are truly profitable or not profitable. SOS has identified areas that a company was focused on, to which it was expending valued resources which were a loss to the company. Hidden value was found that was unrecognized in the company. With modest resources refocused, the company became a leader in the new focus with a huge growth in sales volume and a 40% EBITDA.
SOS Case – Fraud Analysis - Son Embezzles Funds from His Father
Appointed as the conservator by the Idaho District Court, for an elderly man who was financially insolvent, SOS did forensics on the man’s past financial affairs. Over the previous 8 years, the elderly man had given power of attorney to one of his sons. The son made financial decisions with the father’s assets that were self-serving. He also set up over 200 financial accounts where he shuffled money between them, siphoning off a percentage for himself. Though the records could not be fully created, SOS brought in additional help, and proved not only mismanagement of funds but personal fraud by the son. The elderly client had over $7 million that had been mismanaged or taken through fraud.
SOS Case – Missing Accounting Records is Not the End of Forensic Effort
In a number of cases, the accounting records are missing or false. SOS then uses other means to reconstruct the financial history, such as creating historic operating pro formas for departments or specific cost areas, or the entire company. SOS takes what it can glean from the verified records, then adds employee information, supplier and third-party records, thus recreating the accounting. It tests that work by further detective work. Eventually, if the results are reasonably verified, it creates a financial report. Fraud or misrepresentation can be proven even without the accounting records being supplied. In one case, the accounting records were on a computer that was taken, proper backups were claimed to not be made, off site storage of records were reported stolen, e-mail copies of data were reported no longer accessible, the original invoices and accounting records and copies located at two separate location were reports as lost. SOS was able to reconstruct what happened with a report to the court on that case.
SOS Case – Checks and Balances, a duty to remove temptation
Some of the people are honest all of the time; some are dishonest all the time; the majority however fall into the category of being tempted. It behooves every organization to minimize the opportunities for theft by proper structure, checks and balances in funds and resources, with known oversight to save many from falling into temptation. Further, management should be aware of daily opportunities to test the overall system. There are lots of tests. John Locke noted that he who lies for you will lie against you. Get to know your employee’s integrity and celebrate good examples, with management held to the highest standard. This helps set help set the culture for success.
SOS Case –Financial Normalization and Standardization
Utilizing financial statements that are built for financial reporting and taxes, are not normally appropriate for industry benchmarking, management analysis, and business valuation. They must be normalized to the industry, adjusting assets to market value, adjust officer payroll to replacement cost, remove unnecessary assets, adjust rents to market value, etc. Once normalized they can then be standardized to a percentage of the company’s key metric (generally sales but sometimes other metrics such as labor cost). Further operating ratios, risk assessment ratios, cash conversion, and many others tell a powerful story to management. Thus financial reporting gets converted for better benchmarking to the company’s industry, competitive analysis, pro forma work, management decisions, and strategic analysis. SOS does this for most of its clients.