The Importance of “the Story of the Business”

Posted on May 6, 2014

By Pete Miller, CPA, CFE

One of the great myths of forensic accounting is that it is a study entirely of numbers and financial data.  It can be, but the trickier frauds will likely not be discovered from a study of numbers alone.  The numbers can be manipulated and altered to cover the tracks of the perpetrator.

The thing that is considerably more difficult to cover up is what I commonly refer to as “the story of the business.”  The story of the business boils down to what’s going on in the business that is noteworthy and meaningful.

What are people in the company talking about?  Are they saying things like “Boy, our products have been flying off the shelves lately,” or “Did you hear that we are opening another plant?” or “Did you meet the new consultants that are working in the conference room?”  If these operational storylines are being discussed on the shop floor or at the water cooler, they should have a consequence that will appear in your financial statements.

For context, let’s take the comment, “Boy, our products have been flying off the shelves lately.”  If that is truly the case, a well-run company would expect a variety of financial accounts to be impacted, but it would  reasonably expect operational cash flow to improve as well.  If the expected results are not seen in the financial statements, some extra digging will definitely be needed.

A common concern that business owners will present when they suspect fraud is that their products are flying off the shelves but their cash flow is struggling, and they don’t know why.  There of course can be a number of reasons why, but the business doesn’t have systems setup to compare operational information with financial results to determine which of the plausible reasons is the actual reason.

The story of the business is much more organic and difficult for one person to manipulate.  For that reason, the best internal control systems and fraud prevention techniques will find a way to harness the key points of the story of the business and marry them with financial data.

This kind of “dashboard” material is a terrific validation tool and provides for highly valuable analysis to help run your business, but also to help prevent/detect fraud.  Do you have the right operational metrics at your fingertips?  If not, developing systems to capture and report that data will provide multiple benefits and are worth exploring.

© Clark Nuber PS and Focus on Fraud, 2014. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Focus on Fraud with appropriate and specific direction to the original content.

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This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.

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