New Frontiers in Financial Forensics

Part III in a Series Addressing Advances in Forensic Accounting and Financial Forensics

Those working to manage valuations and investigate fraud are seeing the impact of two trends that emerged in 2023: an increasingly tight labor market and the advancement and adoption of new technologies. The reality is as we enter 2024 and the workforce continues to shrink, the implications of these new technology innovations will only continue to grow. The author shares his views on how the innovation will impact the valuation and forensic professions.

Those working to manage valuations and investigate fraud are seeing the impact of two trends that emerged in 2023: an increasingly tight labor market and the advancement and adoption of new technologies. The reality is as we enter 2024 and the workforce continues to shrink, the implications of these new technology innovations will only continue to grow.

While there are a host of new tools and a burgeoning excitement around the implications of AI, many teams are still grappling with how to utilize technology to address data in a way that defines and builds a forensic case. Anyone who has started a case with an immense amount of data knows the sense of overwhelm that can take hold. Often, there is a desire to digitize everything quickly. Organizational approach matters and ensuring that data sets are evaluated at the outset and appropriately and effectively categorized is critical.

For me, the experience of overwhelming data came about in a case I worked on in 2017, which ended up being the largest Ponzi scheme ever in the state of Washington. I was part of a team faced with connecting the dots between tens of thousands of transactions. Even at the federal level, there were no sophisticated tools to help at the time, only huge teams and tons of work hours. Worse, as those huge teams reviewed, categorized, and analyzed the data, there was no guarantee that it was accurate or that it covered one hundred percent of the relevant banking activity. With all the innovation in the tech industry, it felt like a gap that could—and would—be filled in the years ahead.

Today, those tools do exist, mostly in software platforms that create verified financial intelligence. These tools have forever changed how we handle valuations and forensic accounting, giving us the long-sought-after trifecta of ease, speed, and accuracy.

Today, with the right framework and the right technology tools, even the initial categorization of banking data can happen in minutes rather than days or weeks and without huge teams. In fact, with today’s software offerings automatically categorizing all income and expenses, creating a trended statement using banking transactions can be completed with just a few clicks. Moreover, these tools allow us to avoid data sampling and look at the entirety of a data set. Whether someone is an attorney, forensic accountant, auditor, or investigator, the process of evaluating a case, determining key facts, and preparing case documentation and court-ready documents has fundamentally changed in the last five years.

In the case of investigations, these tools not only offer insights more quickly but also reporting that is visual and traces the flow of funds. These visualizations can be instrumental further along, providing court-ready documents. With verified financial intelligence and AI, you now only need a few hours to transform years of statements, checks, deposit slips, and accounting system transactions into courtroom-ready evidence.

In addition to government cases, these technology innovations are also rapidly changing how the field approaches high net-worth divorces and related lifestyle analysis in addition to complicated asset division scenarios.

As an example, my firm was involved in a case with an eight-figure marital estate, which included 11 separate accounts dating back over four years. There were more than 12,000 transactions to review. Clearly this was a daunting lifestyle analysis. It was also compounded by a less than four-week turnaround time. The attorneys and our client, Stout, needed help applying technology and a data-driven approach. With a tech-forward approach, the team was able to use the facts provided in the bank statements to gain a quick understanding of the standard of living established by the parties during the marriage. Ultimately, the team produced court-ready data within 48 hours, met the court deadline, and was confident the analysis was accurate and reliable. Had they not applied verified financial intelligence and led with technology, the team would have needed three times as many people to get through the information and would have missed the deadline.

In another case, more than 10,000 transactions had to be untangled and analyzed when a couple was divorcing. They had been house flippers, with a staggering number of accounts and complexity to their assets. While house flipping can be a lucrative endeavor for couples, a subsequent relationship breakdown necessitates understanding finances and compensating for hours spent on materials and manual labor. Dividing the assets equitably between partners loomed as a lengthy and convoluted process. To help move the case along, attorneys brought in 4 Corners Financial Forensics. With 16 accounts dating back six-and-a-half years, the 4 Corners team needed to sort through the more than 10,000 transactions to help parse out where spending was being put toward the couple’s house renovation business projects. With a tech-forward approach and the application of verified financial intelligence, the investments, resulting in more than two million dollars-worth of proceeds, were analyzed. Court-ready data was ready within 24 hours and mediation deadlines were met.

Verified financial intelligence and AI applications will only continue to grow and find footing in the years ahead. Whether pressure-testing M&A activity and getting to a true financial analysis sooner, untangling assets in a high net-worth divorce, or conducting financial forensics and investigations within the government sector, all of us in the field should readily embrace the technologies that accelerate and improve our work product. AI’s implications will be clearer in time, but the stage is certainly set for advancing technology in our field. If you have ever wondered how to eradicate the costly and mind-numbing parts of the process and spend more time on analysis and the work that drew us to the field in the first place, know that now is the time.

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Tod McDonald, CPA, CIRA, was the lead on an investigation that unraveled a $150 million dollar agri-business Ponzi scheme in Washington. He was a senior auditor at Ernst & Young early in his career and has spent decades working to clean up and turn around complex accounting and financial situations. Today, he is the co-founder of Valid8 Financial, helping forensic accountants, fiduciaries, attorneys, investigators, and auditors eliminate data prep work associated with finding and analyzing evidence of financial records.

Mr. McDonald can be contacted at (206) 920-1144, by e-mail to t.mcdonald@valid8financial.com, or linkedin.com/in/todmcdonald/.