Some individuals and businesses claim false information about their financial situation in order to avoid paying taxes. Forensic accountants trace earnings to determine the extent of tax fraud that was perpetrated. Forensic accountants may also use data to prove that an accused company did not commit tax fraud.
Basics of Forensic Accounting
What Is Forensic Accounting?
If you turn on the news today, you will likely see a story related to fraudulent activity. As criminals and scammers adapt to a world that revolves around the internet, committing fraud has become far easier. According to the 2018 Global Fraud and Identity Report, 33% of businesses experienced more fraud losses than they did in the prior year.
Thankfully, people with excellent numerical skills are seeking employment as forensic accountants. Forensic accountants use their auditing abilities combined with investigative skills to determine what causes suspicious financial activity. Businesses use this information as credible evidence in trials and/or to recover losses from a scam.
Because of their important role and difficult work, forensic accountants generally receive lucrative salaries. The Association of Certified Fraud Examiners reports that the median salary received by certified forensic accounts is above $100,000. With a growing need, lucrative earning opportunities, and an opportunity for analytical people to exercise their problem-solving skills, this field remains a top choice for many students. Continue reading this guide to find out more about forensics and see if this career is a good match for you.
What Forensic Accountants Do
Forensic accountants examine data to determine where missing money has gone and how to recover it. They may also present reports of their financial findings as evidence during hearings, where they often testify as expert witnesses. This work serves an important purpose at public accounting and consulting firms, law firms, law enforcement agencies, and insurance companies.
The role a forensic accountant plays in each of these settings varies. Each firm deals with money in different ways, and scammers target organizations based on their duties. Some accountants work on a broader fraud cases, such as those working at law enforcement agencies or law firms. Accountants working in more specific fields, such as public accounting or insurance, typically focus on specific types of fraud, such as insurance fraud. Forensic accountants working at some agencies are more likely to testify in court.
Because a forensic accountant's job is crucial for financial security and safety, the position requires certain competencies. The next section discusses the skills and prerequisites a forensic accountant needs, as well as how they apply to different cases.
Forensic Accounting and Its Applications
Before you earn a position as a forensic accountant, you must earn certification as a public accountant and obtain 1-3 years of experience in the field. After earning these prerequisites, individuals should possess strong knowledge about general accounting, which can be combined with specialized knowledge to handle a variety of cases.
When a stockbroker or organization makes false claims about information that investors use to form decisions, they are committing securities fraud. Forensic accountants work to help investors avoid these scams and uncover companies engaging in securities fraud. The 2001 Enron scandal -- one of the largest financial scams to date -- stands as a perfect example of this crime.
Money laundering makes it difficult for forensic accountants to trace where illegal money comes from. Strong analytical and accounting skills are required for forensic accountants to solve this crime -- in which companies or people transfer illegal money into several small amounts -- and find the original source of the funds.
Family and Marital Disputes
Fraud can also occur within families and marriages. Whether it is hiding money or using a relationship to steal funds, forensic accountants help get to the bottom of these situations. Although these crimes typically exist on a smaller scale than scandals with larger corporations, family and marital disputes can still be quite damaging.
Business Economic Losses and Bankruptcy
When a business experiences severe economic losses or faces bankruptcy, a forensic accountant can play a valuable role in the recovery process. Failing businesses hire forensic accountants to look at their financial situations and determine if any foul play was involved in their economic losses. Sometimes these professionals discover evidence of fraud that can help a business regain its footing.
Hidden or Misappropriated Assets
Misappropriated assets may appear as embezzlement, payroll fraud, or property theft. Individuals or businesses can also hide their assets, purposefully leaving them off of a balance sheet to keep them from another individual or entity. Financial accountants work to uncover these discrepancies and keep people and companies accountable for their finances.
False insurance claims are a common way for individuals to benefit from a lie involving protections on their assets. Examples include faking claims that may be difficult to disprove, such as theft or a staged home fire. Forensic accountants carefully look at the facts surrounding these claims to determine their validity.
Terrorism and Counterintelligence
Cybersecurity breaches have become one of the most common forms of terrorism/counterintelligence, and forensic accountants can help prevent these issues. Maintaining security in finances and tracking money carefully can limit damage and help stop these attacks from happening.
Forensic Accounting Audit Procedures
A forensic accounting audit requires a different type of handling than a financial statement audit. Each situation requires a unique protocol. This process involves an initial investigation, information reporting, and a final litigation. The information below explores forensic accounting investigations and speaks to the importance of a forensic accountant's specialized skills while conducting research to make a claim.
The Auditing Process
Forensic accountants typically begin an investigation and collect evidence when fraud suspicions already exist. Because of this, the data they look for when conducting an investigation include red flags and discrepancies that might indicate fraud has taken place. They may interview staff at an organization to gain more information and attempt to find the individual behind the fraud. Using the gathered information they begin to form a hypothesis as to what happened and create follow-up plans to continue to assess the business. Once this step reaches completion, the forensic accountant determines the next necessary action and relays this information to the company.
Once forensic accounting professionals gather information/data and develop a case, they present a summary of their findings to necessary personnel. Using this information, these workers determine how the fraud occurred and who played a role. Then, the accountant determines how to handle the case and suggests steps the company should take next. In addition, they may recommend ways to prevent these incidents in the future by increasing/strengthening internal security and pointing out red flags. After submitting their report, the forensic accountant prepares for their role in court proceedings related to the case.
The final step of a forensic accountant's process involves participation as an expert witness in the incident's court case. The professional presents their findings as evidence in court and testifies against the offenders. They explain any evidence and interpret financial documents in understandable terms, presenting how they identified the subject. This means that the accountant must not only find evidence but also use rhetoric that makes sense to the court. Once this step reaches completion, the court determines the final decision for the situation. The forensic accountant plays an important role throughout this process.
Prominent Forensic Accounting Investigations
Forensic accountants have appeared in many prominent cases, from Al Capone's trial to several modern scandals. These major moments highlight the need for this profession and remind businesses the importance of reaching out as soon as red flags arise. Check out the major scandals summarized below to learn why businesses consider forensic accounting invaluable to their financial stability.
- This Texas energy company participated in one of the largest audit scandals in history. Enron lied to investors by hiding billions of dollars in debt and failed projects through several illegal practices. When shares for the company dropped in price from $90.75 a share to less than $1, shareholders were enraged and sued the company for $40 billion, leading to an investigation from the U.S. Securities and Exchange Commission. Enron eventually filed for bankruptcy in 2001.
Lehman Brothers Bankruptcy
- Financial services firm Lehman Brothers stands as the largest bankruptcy ever filed, holding over $600 billion in assets upon its demise. The company became involved in mortgage origination -- the process of distributing home loans to borrowers -- which led it to become a hedge fund for real estate disguised as an investment bank. During the subprime mortgage crisis in the late 2000s, the company fell into disarray and bankruptcy. The government launched an investigation into this event, and crimes like account manipulation were uncovered.
The AIG Bailout
- The American International Group received a government bailout for $180 billion, playing a prominent role in the 2008 financial crisis. After questionable financial decisions, the corporation became wrapped up in a life insurance scheme. Forensic accountants helped discover these malpractices.
How to Become a Forensic Accountant
Education and Training
Most forensic accountant positions require a bachelor's degree in forensic accounting, finance, or accounting; a law enforcement or criminal justice degree may also qualify individuals for jobs in this field. A higher-level forensic accounting degree, such as a master's or Ph.D., often allows professionals to find more lucrative positions. In addition to on-the-job training, most forensic accounting careers require at least 1-3 years of experience in a general accounting profession for qualification.
Most jobs in the field require a certified public accountant license to practice, but additional certifications also exist. By passing the Certified Fraud Examiner (CFE) exam, an individual can gain helpful licensure that opens doors for more careers. Becoming a CFE also allows members to take part in networking events and access additional resources. Accountants can also earn the Certified in Financial Forensics (CFF) credential. You can obtain this certification by passing the CFF exam and completing 5,000 hours in the field. These certifications, although not always required, may be preferred by employers.
Forensic Accounting Professional Organizations
Forensic accountants can join professional organizations to learn new information, access resources, and network with other professionals. The following organizations can help you to keep up with the latest trends and much more.
- Association of Certified Fraud Examiners: With over 85,000 members, this organization works to certify fraud examiners. It also offers members opportunities for networking, professional development, and a variety of helpful tools and products. Joining this organization provides a great way to meet other fraud examiners.
- Institution of Certified Forensic Accountants: One of the largest professional organizations in this field, ICFA provides professionals with continuing education resources and opportunities to network. Additional benefits include a magazine and invitations to regular in-person sessions.
- National Association of Forensic Accountants: Founded in 1991, this organization provides members with informative newsletters, annual conferences, interest sessions, and certifications. Younger professionals can also take advantage of mentorship opportunities.
By accessing the forensic accounting career page, readers can learn more about this exciting field, including salary expectations, education requirements, and roles within forensic accounting.