Fraud examination and financial forensics call upon the skills of lawyers, accountants, and other specialists to understand evidence, including its deficiencies. These professionals are trained in the use of jargon to communicate information with other professionals in the same field. Clarity for the benefit of those outside these fields, including the practice of risk assessment, is often sacrificed. Default to the trust us, since you cannot really timely verify is prevalent.
Consider the concept of conflict of interest: often, this condition is broken down into actual conflicts (e.g., the organization’s executive uses an immediate family member not directly employed by the organization to provide consultation services to the organization) and potential conflicts (e.g., the organization may engage in transactions with related parties). Notwithstanding the bias intrinsic to these circumstances, the organization usually reports that it has adequate procedures to manage these conflicts, and it has appropriately applied these procedures. The curious analyst may refer to the external auditor’s report for assurance | skilled independent expert opinion as to the truthfulness of such assertions. However, the depth of this routine review of conflicts of interest may be inadequate to apprise the curious analyst of the particulars necessary for sound fraud examination | financial forensics.
Misleading financial (and non-financial) statements do not generally occur unless someone stands to benefit from false, public reporting. In many cases where materially false statements, whether by commission or omission, reach the public, the analyst would discover winners (i.e., those who gained from such reporting) and losers (i.e., those who lost from such reporting). Winners may use side-agreements, whether reduced to writing or not, to obtain, convert, and launder ill gotten proceeds under the guise of untainted, brilliant, successful investing | financing. This is where conventional analysis may fall short: the reporting entity might have lost wealth overall in the transaction at issue, however the winners may include persons undisclosed | inadequately disclosed acting in concert with decision-makers within the reporting entity. For example, commissions may be earned on brokering, insuring, and committing the employer to cover unsound risks.
Conflicts of interest are expressions of the divergence of goals between two or more persons. The organization may lose or fail, but individuals, both inside and outside the organization, may benefit (cf. AIG and the notorious credit default swap transactions forming a major narrative in the Great Recession): the lawfulness of the path toward achieving this benefit is usually not examined in depth and in real time due to, among other protections, the law of trade secrets. Trust us, since you have to is not an optimal response.