February, 2009

The BNET business dictionary defines forensic accounting as, “the use of accounting records and documents in order to determine the legality or otherwise of past activities.”

These activities can be tied to a government investigation, client inquiry, employee dispute, vendor issue, or just about any other challenge activity you can imagine.

In a basic sense, anyone who’s culled receipts and other documents out of one or more shoeboxes for an IRS audit is doing forensic accounting. Now, imagine multiplying the challenges by thousands or millions of accounting software transactions; and multiply the complexity to include in-depth analysis as well as review of data.

Plus, you’re now looking at zealous auditors anxious to find fault in the coming era of re-regulation and “cleaning up of America.” Newly appointed Illinois governor Pat Quinn already has announced that he wants to “fumigate” his state’s government.

So, would you rather defend yourself with shoeboxes full of financial records, or bring robust accounting services to the table?

Depending on the size, shape and sophistication of your company, you may feel you can “get by” with entry-level accounting solutions. Here are some reasons to rethink that position:

1. A security breach is only a keystroke away. An employee or hacker intent on stealing accounting software-based information is going to have a much easier time getting through one layer of security (typical of entry-level applications) versus eight (Microsoft Dynamics® GP accounting system software, for example).

Besides investigations, data theft can destroy public confidence in a company. And, there are the expensive and potentially ruinous steps needed to remediate such a breach (e.g., the company notifying holders of all compromised records, offering free fraud notification subscriptions, and the like).

The cost of many mid-market accounting solutions is justified by this one issue alone.

2. Data mining deters threats, identifies inconsistencies. Price Waterhouse Coopers addresses this issue very intelligently in a document entitled, “The DNA of a forensic accountant.” Excerpting from their writing, “Data mining is the art of analyzing large amounts of data in a manner that detects obscure facts, trends, or inconsistencies in a complete and efficient manner utilizing ‘intelligent’ computer applications. Conducted properly, data mining can be used to proactively detect fraud before a company becomes a victim experiencing material losses making them the next headline scandal. Once data such as journal entries, employee, customer and vendors master file data, as well as check registers are obtained in electronic form, a series of procedures can be performed to identify high-risk and suspicious transactions.”

Mid-market accounting system software generally will provide highly accurate and robust data repositories, which can be more efficiently mined than entry-level accounting solutions, which tend to bog down with too many concurrent users, data demands or report requirements.

3. Mid-market accounting solutions can be a deterrent to frivolous lawsuits. Sometimes, sue-happy litigants target companies where they think the consequent disruption and cost to the defendant will force settlement. Or, they seek out firms that will have difficulty defending their accounting software services. The better your accounting software reporting and accuracy, the less you will spend if sued, the less you will be disrupted, the faster you will be able to generate appropriate data in response—and the less you may be targeted in the first place.

Mid-market accounting software services such as Microsoft Dynamics give you a “built-in” protective edge over companies using entry level accounting solutions.

Combine a tough economy and opportunistic employees, and you’ve got the perfect recipe for fraud and theft in the accounting system software realm.

The Wall Street Journal addresses the latest employee “trend,” noting, “About 20% of employers polled last month said workplace theft has become a moderate to very big problem recently…Employers are hot targets for theft because workers ‘know their systems, controls and weaknesses, and they can bide their time waiting for the right opportunity’…”

Other stories reinforce the presence of increased theft in accounting services departments and elsewhere, due in part to tough economic times. An article in securitysolutions.com points out, “As many as one-third of all business failures annually can be attributed to employee theft, according to the U.S. Department of Commerce…The cost of theft and fraud to American business nationally hovers around $40 billion a year, and ‘some experts believe as much as 40 percent of the losses are internal,’ …The Commerce Department also says employee theft is on the rise, thanks to the recession…”

And, it’s not only Madoff-scale fraud that is occurring in accounting services and elsewhere. Employmentblawg.com adds, “…there are millions of smaller fraudulent transactions that go unnoticed every year…From stupid expense violations to ingenious travel scams…a serious problem that costs companies millions…”

So, what’s a company to do? Get top-notch accounting system software. Mid-market accounting solutions provide highly complex levels of security, offer sophisticated transaction auditing and tracking, and present a more daunting target to would-be internal thieves.

Among Microsoft Dynamics® accounting software protective elements, for example, is “RoleTailored” software. Microsoft describes it as, “Software that’s designed around the specific jobs people do…” One practical effect of this is to keep the types of information accessed on a need-to-know basis, limiting exposure.

Also characteristic of mid-market accounting software solutions are role-based permissions, where employees gain access to data based on their roles, locations and timing. A company can define locations, both on-site and remote, from which employees can access data, identify accessible hours and authorized computers—as well as define the scope of information based on the employee’s role in the organization.

Besides the actual protection afforded accounting services departments by this level of sophisticated security, its existence helps send a message that the company will do what is necessary to protect its data. Much like the thief who moves on to a car that appears to be “easier pickings,” so will many untrustworthy employees move on to a company accounting system software environment that offers more theft opportunity.

Just make sure that company isn’t yours.

Two headlines sum up the coming regulatory deluge that Wall Street and Main Street alike can expect from our Federal Government.

The first, from the Washington Post, states, “New SEC Chair Off and Running With Enforcement Measures.” The second, by contracting specialist Eric Sobota in the Federal Compass, notes, “Effective Investigations Key to Compliance with New FAR [Federal Acquisition Regulation] Ethics, Compliance and Mandatory Disclosure Requirements.”

Katrina and Iraq War government contracting fraud, coupled with myriad maladies on Wall Street, have jumpstarted the regulation machine. With the new Obama Administration and a Democratic Congress, expect it to accelerate to warp speed.

To avoid being run over by it, get on top of it. Get ahead and stay ahead of this new regulatory business environment by reviewing every aspect of your company’s accounting, tracking, and reporting structures—in departments ranging from accounting services to CRM.

If you don’t do it now, here’s a taste of what you may be subjected to later:

• From the Washington Post SEC story, quoting incoming SEC chairman Mary Schapiro: “The new chairman also said she would speed up the process of launching formal investigations into potential acts of corporate crime… ‘Those who break the law and take advantage of investors need to know that they will face an unrelenting law enforcement agency in the SEC.’”

• From contracting specialist Sobota: “Contractors must now deal with increased oversight and requirements that many are not well-prepared to face…The new rules carry a heavy penalty for noncompliance…”

Think you’re immune if you don’t contract with the Federal Government or have much interaction with SEC-related realms? Think again. Quoting the Post story, “Schapiro also said the Financial Accounting Standards Board, the independent panel that sets accounting rules for U.S. companies, is exploring changes to rules that require firms to mark the value of assets on their balance sheets to whatever the market is paying.” Don’t expect FASB accounting services reforms to stop there.

Sobota notes, “…the Federal Government is becoming increasingly impatient with the perceived lack of effort exhibited by contractors towards meeting their procurement integrity obligations. We advise contractors to take a fresh look at their practices to ensure they are prepared to meet this new heightened level of scrutiny.” You may not contract with the Federal Government, but expect scrutiny nonetheless.

In the accounting software realm, start your review by checking the following:

1. How does your accounting system software provider track regulatory updates?

2. How fast can accounting system software be updated to comply with new regulations and requirements?

3. How will you be notified of accounting system software updates? Will you need to be proactive and check the accounting software purveyor’s website or other information repository? Or will your accounting software provider notify you in a timely manner?

4. How will needed accounting software updates be available? Will the accounting system software user have to go to the website to request or download new accounting solutions updates, or will the purveyor push these updates out to their subscribers? If it’s the latter, how—a link to a website download area, sending of a CD, other processes?

5. Besides actual accounting software updates, how proactive will your purveyor be in keeping you “in the know” about regulations and requirements affecting the accounting services world? Again, will these be pushed out to you, or will you need to go get them on an accounting software website?

These are issues you must become knowledgeable about, to make sure your accounting services can handle the coming deluge. For those inclined toward procrastination, just remember that if you stick your head in the sand now, it’s going to be that much harder to get out later—once the deluge has turned it into quicksand.

Instead of frantically searching for prospects to shore up business revenues in these tough times, mine one of the most valuable business development tools out there—your accounting system software. There is a treasure trove of data that can be mined using today’s robust and comprehensive accounting solutions.

Presuming you have accounting services capable of generating accurate and sophisticated reports, you can pursue all types of opportunities. Following is a starter list of ways that accounting system software can be used to enhance your business:

1. Identify upward-trending (and timely paying) customers via your accounting software. Where you find companies that have been spending ever-greater amounts of money, reach out and determine what other upselling opportunities may exist. Generally, these companies will be financially healthy relative to many others in a downturn.

If, when discussing new opportunities, you discover that they are on the verge of a cutback because of economic conditions, you may be able to forestall and limit the damage by being proactive. Offer incentives for certain revenue thresholds; possibly reward the customer with more favorable payment terms. Even though this won’t always result in a revenue increase, it may stop a substantial decrease—a win in its own right.

2. Identify downward-trending (and timely paying) customers via your accounting software. Find out why they’re trending downward. Be proactive to see what, if anything, can be done to turn the tide on their revenue stream. If you determine that some type of incentive is warranted, offer it. Regardless of the outcome, a constructive and positive discussion initiated by you will generally be favorably received. While it may not have short-term payoff, it well could pay off down the road.

3. Establish a set of accounting software metrics comprising your most valued customers. Then, thank them with an elegant gift or other token of appreciation. In contrast to the first two suggestions, this should be low-key gesture that speaks for itself—not a sales pitch.

4. Conduct a widespread accounting services review to look for overall trends that may dictate a fundamental business shift. For example, if revenues are down across one industry sector and up in another, you may opt to shift industry focus for new business development. Or, you may discover that diversifying products or services may warrant consideration.

5. Use your accounting system software to cull out a manageable group of “representative” customers that you can survey to determine likes, dislikes, and projected future needs. This can become a valuable marketing research tool to rework business development strategies and approaches as appropriate.