A Guide to Forensic Accounting
Committing fraud has never been as prevalent and sophisticated as it is today. Criminals often use the Internet to commit fraud, making these crimes easier than ever. Research indicates that more businesses are victims of fraud losses every year. Forensic accountants are professionals who use their numerical skills and auditing abilities to investigate suspicious financial activity. Companies can then use this evidence in trials to recover losses. Because of their important duties, forensic accountants earn lucrative salaries. This career is in demand, as the need for forensic accountants is rapidly increasing.
Applications of Forensic Accounting
Forensic accountants have specialized abilities to examine data to help track and recover missing money. Public accounting and consulting firms, law firms, law enforcement, and insurance companies hire forensic accountants. Forensic accountant duties vary depending on the setting. Some accountants work on large fraud cases, while others work in specialized fields to focus on only specific types of fraud. Testifying as an expert witness in a trial is an important part of a forensic accountant's duties.
- Individuals and businesses may claim false information on tax returns to avoid paying taxes.
- Forensic accountants trace earnings to determine if tax fraud has occurred.
- Forensic accountants can also use data to prove that a company accused of tax fraud did not commit the crime.
- Criminals may launder money to prevent forensic accountants from tracing illegal funds. Money may be transferred in small amounts to avoid detection.
- Forensic accountants use analytical and accounting skills to solve money laundering crimes, finding the original source of the funds.
- Forensic accountants often follow an electronic path to trace laundered money.
Family and Marital Disputes
- Within families and marriages, individuals may hide money to steal funds from others.
- Forensic accountants investigate these financial disputes to help resolve them.
Business Economic Losses and Bankruptcies
- Forensic accountants are involved in the recovery process of business economic losses and bankruptcies.
- A failing business may hire a forensic accountant to examine a financial situation to determine if foul play has occurred.
Terrorism and Counterintelligence
- Forensic accountants can help prevent cybersecurity breaches, which may be a form of counterintelligence.
- Forensic accountants also work to maintain security in finances to prevent terrorism and breaches.
A forensic accountant needs specialized skills to investigate, research, report, and testify about an audit. A forensic accounting audit involves an investigation to collect evidence, which usually includes looking for discrepancies that can suggest fraud. The accountant may interview staff to gain information. After collecting information, the forensic accountant forms a hypothesis and a plan. The next step involves reporting of data and information to present the case. The accountant makes recommendations for how to handle the case. Finally, the accountant may participate in litigation as an expert witness. The accountant presents findings and testifies against the offenders. The court will determine the final ruling in the case.
Prominent Forensic Accounting Investigations
Forensic accountants have been involved in a number of prominent cases, which show the need for people working in this profession.
- Enron: Enron was involved in one of the biggest audit scandals. Enron lied to its investors by concealing billions of dollars in debt and failed projects. Company shares dropped from $90.75 to less than $1, leading shareholders to sue the company for $40 billion. The U.S. Securities and Exchange Commission was in charge of the investigation. Enron subsequently filed for bankruptcy.
- Lehman Brothers: Lehman Brothers was a financial services firm that filed for the largest bankruptcy ever, involving $600 billion in assets. The company dealt in mortgage origination, which set up the company to become a hedge fund for real estate while being disguised as an investment bank. Lehman Brothers folded and filed for bankruptcy, which then sparked a government investigation into the crimes committed.
- AIG: The American International Group was granted a $180 billion government bailout, which factored prominently in the 2008 financial crisis. AIG also became involved in a life insurance scheme. Forensic accountants investigated to learn about these crimes.
How to Become a Forensic Accountant
Most forensic accounting positions require a bachelor's degree in forensic accounting, accounting, or finance. Some people also enter the profession with a criminal justice or law enforcement degree. Earning a master's degree or doctorate in forensic accounting provides a pathway to higher earning positions. Many companies require one to three years of general accounting experience before working as a forensic accountant.