FORENSIC ACCOUNTING -For business owners (and even small businesses)

Our Elders, blessed be their memory, gave the following self-evident advice:

“Those who wish to lose their money will hire workers and will not “sit” with them.”

The principle is extremely simple; a business owner must exercise control over his business! However, this doesn’t necessarily imply that one should suspect everybody.

The owner must be present; he is responsible for supervising his business and his property. An owner must act in order to reduce the possibility of his employees, those who operate the business, to be enticed or tempted.

We interviewed Shmuel Rosenblum, a partner in Rosenblum-Holtzman, and we were intrigued by his thoughts on the matter:

“The problem,” he explained, “is that not every investor or partner in the business can “sit” with the workers … Sometimes it is a shareholder or a partner who lives in Brooklyn or London, and the business activity is in Jerusalem or Petach Tikvah. For example, real estate, industry, import and export etc.”

According to Rosenblum, in such a case, it is essential to hire someone to give some analyses and assessments from time to time. This person should check the accounts, make sure the employees are honoring their contracts, and the silent partner’s rights are being protected. Rosenblum informed us that, “we have customers who hire us for a few hours, just to ensure losses are prevented, and to represent them in day-to-day management.”

During the discussion, he revealed that his firm is working in another, fascinating field:

The profession of accounting is perceived by many as dull and monotonous, but this isn’t necessarily the reality. Nowadays, this profession includes many diverse and exciting fields, one of which is the field of investigative auditing, known as ‘forensic accounting.’

The instinctive connotation is with the concept of detective work, but the basic essence of investigative auditing is the examination and in-depth investigation of significant financial events. This is carried out on a significantly larger scale than those carried out in the framework of routine auditing. Rosenblum claims that his firm specializes in this field.

Rosenblum explained that “experience in a variety of events created a special niche that helps organizations to clarify accounting disputes and to identify and quantify financial irregularities. Today this is called forensic accounting.”

Rosenblum emphasized that “engagement in investigative auditing requires confidentiality. An economic organization or individuals who have encountered fears of financial irregularities are sometimes willing to forego the claim or the exposure of failure.” Rosenblum stressed that “anyone involved in the field must internalize that he is not entitled to publicize his ‘successes.'”

For example, Rosenblum-Holtzman’s recently dealt with a corporation which was entitled to royalties for a patent that was sold to a company operating abroad. According to Rosenblum, the methods for presenting the sales, from which the compensation was due to the Israeli company, were subject to ‘accounting games’. Accounting knowledge was required to identify methods that were legitimate, but still had a dramatic effect on the compensation to which the patent company was entitled.

If the foreign company abroad used a legitimate accounting method – what could the Israeli company claim?

“Well, one would need to determine what was included in the original compensation contract. In this instance, we revealed that the client deliberately presented its net sales, minus the commission for the distributors. This commission, which was deducted from sales, included payment for a logistic distribution center for a product

Rosenblum added that “we discovered that the royalties contract stated explicitly that expenses for distribution facilities wouldn’t be deducted from net sales, regarding the compensation calculation. The result of the audit was that the Israeli company received a check for several millions. In this specific situation, were we not practicing accountants, who have experience with financial presentation, we may not have achieved that result. Accounting expertise can yield surprising results, especially when dealing with complex financial considerations. I should mention that the international network ‘Morrison KSI’ assisted us.”

Is your basic premise that everyone is suspect?

“Quite the opposite; our motto is that “G-d created man honest.” This is the idea by which I operate; one must judge everybody favorably. Working in financial investigation isn’t a license to slander. If an investigator is motivated to find something amiss, and thereby please his employers, he will ultimately fail.”

Rosenblum stressed further that, “one mustn’t assume this is an elaborate game of ‘cops and robbers.’ The role of investigative auditing is also to assist with litigation, arbitration, to provide support to lawyers, to offer professional opinions on loss of profits, and more. The areas which are included within the framework of investigative auditing are very diverse, and include, inter alia, working in courts.”

Can investigative auditing assist the daily functions of corporations? 

“Our experience of dealing with fraud and embezzlement gave us the ability to develop methods which can prevent such occurrences. Typically, fraud and embezzlement is dealt with after the fact, but our wealth of experience has enabled us to tactically preempt financial misappropriation.

I am often asked to assist companies with developing systems which help prevent fraud. Ultimately, such programs benefit employees who may be struggling financially, and would otherwise be tempted to make a foolish decision. However, our organization has developed certain mechanisms which ensure it’s extremely difficult to commit embezzlement, and this ensures that no employeeis tempted.  Most companies and businessmen are now interested in pre-empting and neutralizing financial irregularities.”

According to Rosenblum, “preemptively blocking the possibilities of financial crime can greatly assist a business. We use our accumulated investigative experience and knowledge to enable a company to close loopholes and potential fraud possibilities”.

Rosenblum – Holtzman, CPA
Arlozorov St 111, Tel Aviv-Yafo, 62098

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