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What is a Forensic Accountant?
A forensic accountant is an accounting professional who works to investigate instances of financial fraud. Forensic Accountants frequently work in a division of a public accounting firm, risk consulting firms, insurance companies, and with law enforcement. They are especially skilled at discovering all sorts of financial fraud.
Most forensic accountants start out in standard accounting jobs where they gain experience auditing. Once they transition over to Fraud Examination, their duties change somewhat. They then specialize in using forensic methods to track how funds might be laundered through seemingly legitimate assets such as real estate. They analyze financial data to seek irregularities that might indicate fraud, and then they gather their findings to provide testimony in court, or for internal investigators.
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Why Hire a Forensic Accountant?
Ultimately, the job of a forensic accountant is to provide litigation support by means of accounting. They use tools such as digital forensics, historical accounting, and often observational methods to discover and prosecute financial crimes. They can also be used in cases where a defendant has been erroneously charged, or when people or entities must prove a case.
There are many reasons a company or individual might hire a forensic accountant. They have specialized skills that make them perfect for investigatory auditing and that is a requirement for many instances. Here are 8 of the situations in which people and companies turn to forensic accountants.
Divorce & Marital Assets
When it comes time to divide marital assets, things can get muddy. The finances can be particularly difficult in the case of couples with a high net worth. Investment portfolios, multiple bank accounts, and far flung real estate or other private investments always complicate matters. Further, one party may have tried to stow money offshore, jumble their financial records, or otherwise obscure assets from his former partner. Divorcing parties are known to employ a multitude of underhanded methods to hide their funds.
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Thus, a forensic accountant is needed to comb through all of the marital accounts and financial statements. They can uncover irregularities and discover where funds may be obscured or hidden. When parties submit disordered and nonsensical financial records, a forensic accountant can sort through it all with maximum efficiency and conduct the analysis in a timely manner.
When divorce cases involve large and complicated asset portfolios it is vital to find and hire a reputable forensic accountant. If the parties have owned, or have some mutual claims on, a corporation, it is imperative that the company’s financial statements come under the scrutiny of a forensic accounting professional who is specifically trained to find the patterns and irregularities consistent with fraud. Their final report may even be beneficial to the corporation, possibly helping them patch potential leaks and opportunities for malfeasance.
In fact, in high value divorce cases, Forensic Accountants might be called back to the case to conduct follow up investigations. For instance, one party may later try to claim a financial change that impacts the divorce decree. Perhaps the claim impacts alimony or child support payments. These claims must be assessed in light of a forensic audit that can uncover wrongdoing or unethical accounting practices.
Mergers and Acquisitions
When one company merges with, or purchases, another, a great deal of financial analysis is involved. If there is a merger of equals, both sides may wish to examine the other’s financial records for the purposes of discovering any possible fraud. If it’s a one-sided sale, the acquiring entity will fully audit the company they intend to purchase. Forensic accountants may be called in by the investment bankers to determine that the books are all in order.
In fact, some argue that a forensic audit and analysis should be part of every merger and acquisition due diligence period. They have special tools and skills and can uncover irregularities and outright frauds that traditional accounting methods don’t detect. Their work will help all parties move forward with greater confidence. After all, it is not unheard of for employees of a target company to loot the coffers in advance of the sale. During a full, forensic due diligence audit, even the tax picture of the target company can be unveiled to provide a full picture of any future tax exposure which might arise from previous fraud or other problems.
Not only can a forensic accountant discover instances of crime, but they might discover that a target company’s statements regarding projected earnings, debts, or asset value may have been inflated or otherwise erroneous. This may have been the result of simple error, but the acquiring company will want to adjust their bid accordingly. Naturally, it also could happen that a target company has somehow undervalued itself, tipping the purchaser that he is getting a better deal than previously thought.
Additionally, the target company may wish to conduct a forensic analysis of the purchaser. After all, if a company has worked hard to establish a product line or top-quality service, they don’t want to see their hard work dissipate when their company is purchased by another entity that is crippled by embezzlers and fraud.
Ultimately, any time a corporate merger or acquisition is in play, a forensic accountant should be a necessary part of the due diligence process. Their dogged pursuit of fraudulent or unethical irregularities can make put both parties’ minds at ease.
Standard audits are designed to discover misstatements and then to report them if they are deemed material. That is, small irregularities might be overlooked or dismissed. A forensic audit, on the other hand, looks to determine the nature of those irregularities and perhaps uncover a pattern. That is, a clever thief might siphon off small amounts of money or merchandise over a long period of time and thereby avoid detection in a typical audit.
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In fact, a forensic accounting team’s goal is to discover theft and fraud. They have specific goals and methods that are not the same as a standard accountant’s audit and analysis. They might delve deeper into financial and IT systems to determine if there are weaknesses, whether exploited or not, that the company must address to prevent future problems.
Once on the job, a Forensic Accountant will look for illegal or unethical practices such as:
- Ghost or padded payroll accounts
- Under-reported income
- Excessive payments to creditors – who may have informal connections to suspected individuals
- Unsubstantiated debts
- Payments or transfers to suspicious LLCs both foreign and domestic
- Suspiciously large purchases by parties who don’t seem to have the income to support the items
At the end of the day, any substantial financial entity must employ a forensic accountant to assess the books every so often. It is not sufficient to rely on a standard auditing team, as they are only looking for material irregularities, which might not be sufficient. That is, immaterial patterns and shortages might add up to a larger scale fraud that has a long-term impact on the entity’s health and commercial viability.
Sometimes parties try to avoid fulfilling their contractual, financial obligations. They might try to obscure the value of, and sales price for an item they sold. They may be attempting to underpay a co-owner who deserves their even share. In other cases, a company might try to obscure how they have used, and profited from, items licensed from another vendor. Forensic accountants are skilled at examining financial and other records to determine exactly what is owed under the contracted agreement.
These disputes can arise in any number of situations. It can even arise with regard to employee compensation. That is, sometimes employees receive the bulk of their annual salary in the form of a bonus payment. These payments are tied to a measure of their success and that of the company or department as a whole. When employees feel that seemingly skimpy bonus checks were the result of under-reported revenue, they might seek redress in the form of a forensic accounting audit. It could be that the standard accounting methods didn’t catch the fraud that impacted the bonus payments.
If contract disputes escalate and must be resolved in court, a forensic accountant can provide detailed, objective testimony. In some cases, parties might both employ forensic accountants and thus provide conflicting views of the case that lawyers must argue before the jury.
When armed with full knowledge of contract law and forensics, a forensic accounting team can uncover the truth of a contract dispute. Whether someone is under- or over-reporting funds in an attempt to avoid fulfilling their obligations, a forensics team will get to the bottom of it. Forensic accountants take an approach that traditional accountants do not. They seek out the patterns and chief characteristics associated with financial wrongdoing and ensure that interested parties, including juries, are fully informed.
Sometimes companies and individuals inflate the value of their physical and real assets and use those fraudulent numbers in their insurance claims. They might also seek to capitalize on a fraud case and claim to have incurred a larger loss from theft and fraud than the facts support. Forensic accountants can investigate and, by recognizing patterns in the financial records, determine the true worth of a claim.
It can also happen that insurance companies seek to avoid paying claims. After all, their chief goal is to minimize payouts on claims. In cases such as a fire or other disaster, a person or company might lose all of their records. Thus, insurers seek to take advantage of this and pay only a portion of their contracted obligation. Forensic accountants can be hired by attorneys to recreate financial documents and thus bolster the claimant’s assertions in court. In fact, sometimes insurance companies opt out of a court battle when a forensic accountant’s evidence is overwhelming.
Whether you are a claimant or an insurance company who feels that they’ve been wronged, a forensic accountant is necessary to avoid losses. Unfortunately, not every insurer or insured entity operates with the most ethical principles.
A traditional CPA doesn’t have the training to conduct an investigation into insurance fraud, or unethical practices. Unfortunately, since some people seek to take advantage of others who have suffered a disadvantage, or defraud a large company, forensic accountants will remain necessary.
Embezzlers are increasingly clever and difficult to track and catch. Even in cases where the crimes seem egregious and obvious, standard accounting methods may not catch them. Sometimes CPAs are specifically instructed to seek out fraud, but their professional demeanor is not that of an investigator. Thus, when a company senses a need to investigate possible fraud or embezzlement, they must hire a forensic accounting team.
Even in a case where an executive was embezzling large sums of money on a regular basis, employing what would appear to be blatant methods, a standard accounting team might be unable to discover the theft. For instance, if the executive was paying himself from an expense account rather than a standard, taxed paycheck. He might also accept client payments in cash, violating company guidelines, then pocket these large payments or even purchase artwork using the company’s accounts but have it shipped to his own house. A dogged forensic accounting team would be able to document all of the crimes and successfully prosecute the executive.
Though regular CPA auditing is recommended for every company, when a forensic team takes over, far more may be revealed. Though the above example seems egregious, the necessary evidence was only uncovered and presented when a forensic team was on the case. There are far less obvious cases, too. In this day of digital transfers, encrypted accounts, and a myriad of nefarious computer hacking tricks, forensic accountants are a practical necessity.
Forensic accountants exist primarily to provide evidence and presentations for the purposes of litigation. They are trained to work with attorneys and law enforcement to investigate financial records including tax records, debt transactions, and foreign wire transfers. They know how to spot the patterns generated from embezzlement, asset inflation, and money laundering.
Forensic accountants often work for independent consulting firms that can assess a company’s overall health and make recommendations regarding security. Their audits are as valid as that of any CPA, but they enter a company specifically looking for fraud and opportunities that criminals might exploit.
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In the case of very large estates, concerned parties might feel that they are owed more than they’ve been given. Their fellow family members may have conspired to hide certain assets or obscure the actual wording in a last will and testament. This might particularly pertain to children who may have been named in an estate, but who never saw the full amount of their intended inheritance.
In inheritance disputes, the financial picture of the deceased might be so large and complicated as to muddy the waters when it comes time to divide it according to their last will and testament. The value of certain assets may have fluctuated in a more positive or negative direction since the document was created, or those values might not meet the expectations of those named in the will. Further, the executor might operate on bad faith and thus strive to misrepresent assets in an effort to line their pockets.
When large estates are changing hands, it’s vital to not only have estate attorneys present, but to employ forensic accountants who can audit the entire estate and determine the most equitable fund disbursement. Even in a case where there is no dispute, it may still be valuable to have a forensic accountant audit the entire estate, so as to put everyone’s mind at rest. After all, when a seemingly minor irregularity makes millions of dollars’ worth of difference, a forensic audit is a minor expense.
Forensic accountants are in high demand. As society becomes more and more aware of white-collar crime and its very real impact on society, investigators rely on the courtroom testimony of forensic accountants more than ever. Thus, students are seeking forensic degrees that will put them on the path to becoming a forensic accountant, and more and more CPAs are seeking to add Fraud Examination certificates to their resumes.
Academia is responding to this demand with Bachelor of Accounting degrees dedicated to forensics. Students can also seek graduate certificates in the field or add a Cybersecurity degree to their credentials. When one looks at employment statistics on the field, it’s clear to see why students are clamoring to become financial investigators.
Currently, the Bureau of Labor Statistics does not specifically track Forensic Accounting, but they do show that Accountants and Auditors will grow by 10% through 2026. In contrast, Information Security Analysts are looking at a 28% increase in the same time frame. As for salary, the Association of Certified Fraud Examiners show that Certified Forensic Accountants are earning up to $147,000 per year. Thus, it’s easy to see that pursuing a career in forensic accounting is a wise career move.