When accounting practices go under the microscope: once a financial investigation has begun, it's time for an all-hands-on-deck alert. Time is precious, and help from a broad-based forensic team--lawyers, accountants and other specialized professionals--can be highly valuable.

• Author: Hochberg, Neal A.

We have entered a new era in American business, marked by an historic level of outside scrutiny into corporate accounting practices. Some CFOs view this new environment as onerous and unnecessarily bureaucratic; some see it as appropriate and long overdue, and others feel like it's a little bit of both.

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Regardless of one's personal perspective, the reality is that the accounting scandals of the past few years have yielded a variety of changes in both the regulatory climate and the governmental focus on how companies handle their accounting and financial reporting. The Sarbanes-Oxley Act has created paranoia aplenty, the Department of Justice and the Securities and Exchange Commission (SEC) are on the prowl and various other government agencies are redefining what is--and is not--acceptable corporate behavior on a seemingly day-to-day basis.

In this new business environment, no organization is immune to the prospects of a financial investigation.

When a company is in the throes of a financial probe, the stakes are enormously high. Daily business operations are interrupted, stock prices and market capitalization can quickly plummet and shareholder and employee confidence often erodes. Time is of the essence--every hour, every day, every week counts.

Overview of Forensic Financial Investigations

Financial investigations are accounting inquiries aimed at ascertaining whether a company's financial results were misstated or whether one or more employees received an improper financial benefit from the company. Sometimes these activities rise to the level of being "forensic financial investigations." The word "forensic" simply means that the information uncovered is capable of being used in court. Most of these investigations are conducted by a team that includes lawyers, accountants and other specialized professionals.

Typically, investigations are begun because someone raises questions regarding the propriety of a transaction or group of transactions. They can also be tipped off because of a concern that the company's financial statements may contain errors, either by intentional falsification or inadvertent mistake.

In many cases, forensic financial investigations are initiated by a company's board of directors, audit committee or litigation committee. Sometimes, investigations are conducted at the behest of management or the company's in-house counsel. When a company is in bankruptcy or receivership, such investigations are often done at the direction of a creditor's committee, the receiver or a bankruptcy trustee.

Triggers for Financial Investigations

There are a...