Forensic analysis of accounting and operating data

What this work actually examines

Most diligence processes treat the target's accounting records as a closed set. The general ledger is exported, the trial balance is mapped, and the analysis proceeds from there. That approach assumes the ledger is complete and accurate. It often is not. We start one layer deeper, in the operating systems that generate the transactions before they ever reach the ledger. A job management platform, a billing engine, a subscription database, a point of sale system. We extract the raw transaction records from those systems and compare them to what was booked. The gaps are frequently material.

We also examine customer and job level data. A revenue total in the general ledger might be supported by a list of invoices. But if those invoices tie to customers that do not exist in the CRM, or to jobs that were never completed, or to contract values that do not match the signed agreements, the reported revenue is not what it appears. We trace individual transactions back to their source documents. We check whether the customer names, amounts, dates and service descriptions in the billing system match what landed in the ledger. When they do not, we quantify the difference and document the pattern.

The third area is reconciliation across systems. A target might run four or five platforms that each hold a piece of the truth. The CRM says one thing about contract value. The project management tool says another about hours worked. The billing system says a third about what was invoiced. The ledger says a fourth about what was recognised. We map the flow of data between these systems and identify where it breaks. Sometimes the break is a manual journal entry with no support. Sometimes it is an integration that silently drops records. Sometimes it is a spreadsheet that someone maintains by hand and nobody has checked in eighteen months.

The limits of what we do and do not provide

This is data and systems analysis performed to support the client's own accountants and counsel. We are not a CPA firm. We do not hold professional licensure and we issue no professional opinions. The conclusions drawn from our findings belong to your own licensed advisors. We provide the raw outputs, the reconciliation workpapers, the exception reports and the data extracts. Your accountants and counsel determine what those findings mean for the transaction.

We also do not replace a full financial due diligence process. We do not assess the appropriateness of accounting policies, evaluate tax positions, or opine on the fairness of presentation. We work alongside the client's own accountants, giving them a cleaner and more thoroughly tested dataset than they would otherwise receive. The value is in finding the gaps early, before they become post-close surprises.

Revenue testing against source of truth

Revenue is the line most likely to be misstated, and the one that matters most to valuation. We test it by working backwards from the reported figure to the underlying records. If the target reports recurring subscription revenue, we pull the subscription database and check whether the active subscriber count times the stated pricing actually equals the reported number. If the target reports project based revenue, we pull the job records and check completion status, contract value and invoice history.

We look for patterns that suggest revenue has been pulled forward, held back, or recorded against customers that do not substantively exist. A common finding is that the billing system contains invoices raised after period end but dated inside the period. Another is that contract values in the CRM are higher than the values actually invoiced, and the difference was never written down. We do not judge intent. We report what the data shows.

General ledger to operating system reconciliation

The general ledger is a summary. It aggregates thousands or millions of individual transactions into account balances. Our job is to disaggregate it and test whether the components are real. We take a full extract of the ledger for the review period and trace the material account balances back to the systems that originated them. Revenue back to the billing platform. Cost of goods sold back to the procurement or inventory system. Payroll back to the HR and timekeeping platforms.

This process often reveals that the ledger contains balances that cannot be explained by any operating system. Sometimes these are legitimate accruals or adjustments. Sometimes they are errors. Sometimes they are entries that management cannot explain at all. We flag every balance that lacks a clear system of origin and let your advisors determine the appropriate treatment.

We also test the other direction. We take transaction volumes from the operating systems and check that they appear in the ledger at the correct amounts and in the correct periods. A billing system might show five hundred invoices raised in a month, but the ledger might only contain four hundred and eighty. The missing twenty might be immaterial individually, but the pattern matters. It suggests a systemic break between operations and accounting that could affect multiple periods.

Customer and job level data examination

Aggregate numbers hide individual anomalies. A customer that represents fifteen percent of reported revenue might not exist in the CRM at all. A job that was invoiced for two hundred thousand dollars might show zero hours worked in the time tracking system. These are the findings that change deal valuations. We examine the data at the level of individual customers, individual jobs, individual transactions.

We match customer records across systems. The billing system, the CRM, the support ticketing platform and the contract repository should all reference the same customer entities. Often they do not. Customers are duplicated, misspelled, assigned different identifiers in different systems, or recorded under the name of a subsidiary that was dissolved two years ago. We build a unified customer master and use it to test revenue concentration, churn and average revenue per customer against the numbers in the management presentation.

For businesses that deliver services or projects, we examine job level profitability. The target might report healthy gross margins at the aggregate level, but a job by job analysis often shows that a small number of large jobs are profitable and the rest lose money. That pattern has implications for scalability that a top line margin analysis will miss. We provide the job level data and let your team assess what it means for the investment thesis.

How this fits into a broader diligence process

This work sits between the operational due diligence and the financial due diligence. Our technical due diligence practice examines the technology stack, the codebase, the infrastructure and the engineering organisation. Our systems and data room review organises and indexes the documents the target provides. The forensic data analysis connects those streams by testing whether the numbers the target reports are supported by the systems the target operates.

We typically begin this work as soon as the data room is open and the target has provided access to its systems. The initial extraction and reconciliation takes between two and three weeks depending on the complexity of the environment. We report findings as we go, not in a single document at the end. That lets your team raise issues with management while there is still time to resolve them.

The output is a set of workpapers, exception reports and data extracts that your accountants and counsel can use directly. We do not write a glossy report. We provide structured data, clear descriptions of what we tested and what we found, and direct access to the analysts who did the work. Your advisors can ask follow up questions, request additional cuts of the data, and incorporate our findings into their own work product.

What we need from the target to begin

We need read only access to the general ledger for the review period, typically the last three fiscal years and the current year to date. We need equivalent access to the operating systems that generate revenue, costs and cash flows. That usually means the billing platform, the CRM, the project management or job tracking system, the procurement system, the payroll system and the banking records. We also need the chart of accounts, the trial balance for each period under review, and any management reporting packs that were provided to the board or to lenders.

We work with the target's IT and finance teams to arrange access. We use read only credentials and do not modify any data. We extract the data we need to a secure environment and perform the analysis there. At the end of the engagement we destroy the extracts unless your team instructs us otherwise. The target's data never leaves the controlled environment we establish for the engagement.

Common findings and what they typically mean

Most targets have gaps between their operating systems and their accounting records. The question is whether the gaps are material and whether they indicate a deeper problem. We have seen targets where the billing system contained invoices that were never posted to the ledger because the integration had been broken for six months and nobody noticed. We have seen targets where the CRM showed contract values that were thirty percent higher than the amounts actually invoiced, and the sales team was compensated on the CRM numbers.

We have seen targets where the general ledger contained revenue from customers that had no corresponding record in any operating system. When asked, management explained that those customers were handled manually outside the normal processes. That explanation might be true, but it also means the reported revenue cannot be independently verified. Your advisors will need to assess the risk that poses.

Not every finding is a problem. Sometimes the gaps are small, well explained and immaterial to the transaction. The value of the work is knowing which is which. A target with clean, well reconciled systems is a positive signal. A target with pervasive gaps might still be a good investment, but the price and the post-close integration plan need to reflect the state of the data.

Working alongside your existing advisors

We are not a replacement for a financial due diligence provider. We are a complement. Your accountants will typically focus on accounting policy, tax structure, working capital and the quality of earnings. We focus on the data that underlies all of those analyses. We give your accountants a cleaner dataset and a set of exception reports that let them focus their judgement where it matters most.

We coordinate directly with your deal team, your accountants and your counsel. We attend diligence calls, we raise issues as we find them, and we adjust our scope if new risks emerge during the process. Our goal is to make your existing advisors more effective, not to duplicate their work or to substitute our judgement for theirs.

The engagement is structured as a fixed price scope with clear deliverables. If the scope needs to expand because the target's systems are more complex than anticipated or because new areas of concern arise, we price the expansion separately and only proceed with your approval. There are no surprise invoices at the end of the month.

• Read only access to general ledger and operating systems
• Full extraction and reconciliation of material account balances
• Revenue testing against billing and CRM records
• Customer and job level data examination
• Exception reports and workpapers delivered as we go
• Direct analyst access for your team and your advisors
• Fixed price scope with separately priced expansions