Joining the worlds of accounting, auditing, and investigation, forensic accountants are detectives who decipher the threads of financial crimes. Forensic accountants are usually CPAs (Certified Public Accountants) who “trace funds, identify assets and conduct asset recovery, and perform due diligence reviews” (Investopedia). When analyzing potential financial misconduct, forensic accountants narrow in on contract breaches, hidden assets, and individual and company financial records. Common crimes include embezzlement, employee theft, falsification of financial information, and fraud cases such as securities or insurance fraud.
Forensic accountants may work in several categories – such as asset misappropriation and corruption. They can work in business losses and bankruptcy to investigate “possible fraud or mismanagement of assets” (Coursera). Investigation of assets may extend to trademark and patent infringements, construction claims, or product liability claims. In separate individual and business cases, forensic accountants look for assets that have been concealed, secretly transferred, or stolen – for example, when an employee might have stolen company equipment.
Businesses should also be careful with fraudulent financial reporting – forensic accountants can easily uncover when accounting records have been tampered with – such as the omission of transactions, balances, and disclosures from the reports.
In insurance policies, forensic accountants mostly quantify losses resulting from accidents.
Forensic accountants are heavily involved in identifying securities fraud – a white-collar crime that involves withholding information or presenting false or misleading material to induce investors into trading and marketing activities that cause them significant loss (not far from Leonardo DiCaprio’s character in The Wolf of Wall Street). Securities fraud includes investment fraud, pyramid schemes, and Ponzi schemes. In recent times, it has also come to include Internet schemes, where people provide false information about stocks online to force an increase in them, known as a “pump-and-dump” scheme. To become a certified fraud examiner (CPE) for such cases, it is required that the forensic accountant also be a CPA. Not all cases that forensic accountants work on are fraud – they will work closely with attorneys during marital disputes, to evaluate and investigate property, a business, or other shared assets. When a business closes, and monetary disputes are to be settled, a forensic accountant may be called to perform an evaluation and settle them.
Forensic auditing is a specialization of forensic accounting, which looks to make sure that an organization’s financial records are compliant by examining them for “potential fraud, misconduct, or other irregularities” (Stevenson University). Forensic auditors do not investigate specific transactions for fraud, as they generally work more broadly to identify areas of risk beforehand. They generally “provide reports to management or to regulatory agencies” rather than work in legal proceedings (Stevenson University).
The analysis conducted by forensic accountants can involve understanding how the fraud was obscured, tracing assets, calculating economic damage suffered by the client or other party, and researching and advising ways to improve internal controls so fraud does not reoccur. Forensic accountants will also look to recover the exact time and date of financial details being altered. Beforehand, an auditor will perform a conflict check to identify whether fraud was perpetrated due to personal interest or gains, or whether it was a bribe or extortion. In insurance claims for an event, such as a fire, forensic accountants will investigate questions like “What changes occurred in the financial condition prior to the date?” “What was the financial condition at the date?” “What was the future financial picture?” – if the event had not occurred – and “Was there a potential financial benefit from the event?” (J.S. Held). To validate insurance claims for personal cases like injury, medical expenses, earning capacity, and out-of-pocket costs after the injury is inspected.
Small businesses may only have one employee handling accounting duties such as “authorization, execution, custody, and posting of transactions” (J.S. Held). Some of the preventative strategies for fraud that forensic accountants may advise to such businesses include segregating duties or rotating them to strengthen regulation.
When financial integrity can be compromised, forensic accountants navigate an array of situations to ensure fair compensation for losses and protect against future fraud, guiding those they work with toward effective internal controls and accountability measures.
Sources:
https://www.investopedia.com/terms/f/forensicaccounting.asp
https://www.theforage.com/blog/careers/forensic-accounting
https://www.coursera.org/articles/forensic-accounting
https://www.forensicaccounting.com/four.htm
https://learn.neumann.edu/neuperspectives/what-is-forensic-accounting
https://www.stevenson.edu/online/about-us/news/forensic-accounting-vs-auditing/
https://www.forensicaccounting.com/four(5).htm
https://www.investopedia.com/terms/f/forensic-audit.asp
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