What is Forensic Accounting?

August 19, 2021 | bestvalue

Accounting is a broad term that describes the process of recording financial transactions about a business. There are several areas of accounting, such as financial accounting, tax accounting, and accounting information systems. Forensic accounting just happens to be one of those areas of accounting that we’re going to take a closer look at today.

Forensic accounting almost seems like an oxymoron. You’ve got forensic, which seems exciting, and accounting, which sounds boring. Well, forget how you’ve seen accountants portrayed as in Hollywood because that’s not a realistic portrayal. Forensic accounting is about trying to catch the tax evaders and fraudsters and putting them in jail. 

It’s not just criminal investigations, however. Forensic accounting is used in litigation, as well as in the insurance industry. Forensic accountants analyze, interpret, and summarize complex financial and business matters, and these happen to be the three areas where they are needed the most. 

Forensic accounting is also used to prevent crimes from occurring as well, whether intentionally or not. Some companies will hire forensic accountants to ensure that their books are kept up to date and are correct, to avoid any penalties or fines from the government or other regulatory bodies.

You’ll see that there is a lot to forensic accounting and that the field is still growing today. Not only is it growing in market growth, but also specializations and needs.

What Does Forensic Accounting Mean?

Forensic accounting is one type of accounting that is a little different than the other types of accounting. In most other types of accounting, you’re tracking ins and outs, dealing with contracts, helping with advice, completing projects as they come. 

Forensic accounting requires a bit of investigating and reconfiguring a company’s financial information if there something is missing or if the information is not available for the accountant to review. 

The focus of a forensic accountant is to obtain all available information, and come up with an accurate record of debit, credit, and cash transactions in financial statements. In most cases, forensic accountants work with law enforcement on cases that involve fraud, claims, and disputes.

Some responsibilities of a forensic accountant include:

  • Examining the company’s accounts and financial data, analyzing resources, and making sure financial records are accurate and consistent
  • Documenting financial reports, reviewing clients’ financial statements, analyzing profits and expenses while balancing financial books, and writing financial reports for their clients.
  • Managing financial system, records, and budgets
  • Running financial audits, which include performing interviews to collect and verify the information.
  • Analyzing data from financial records, systems, and budgets looking for discrepancies and irregularities, and identifying important information.
  • Carrying out forensic investigations for the appropriate authorities, tracing funds to their origins and being able to provide a record, identifying assets.
  • Writing forensic reports that may be used in a court of law, analyzing profits and expenses, preparing analytical data, and presenting findings in court.
  • Preventing possible fraud cases by balancing companies’ financial books.
  • Attend court.

Forensic accountants are accountants, investigators, analysts, report generators, expert court witnesses, auditors, interviewers, budgeters, financial planners, bookkeepers, and so much more. You can’t give just one definition for a financial accountant as they have so many roles to play, and that could all be for just one case or client. 

At one point, being a forensic accountant meant that you would go through paper ledgers page by page and each paper receipt one by one. But times are different now. Much of the information is on the computer now, which makes things easier to trace and also saves a lot of time for the forensic accountant. 

However, on the other end of the coin, it also means that the forensic accountant also needs to be proficient in information technology, and oftentimes that includes software development and the back end of many software programs so that they can trace transactions.

There is always balance, so it’s not to say that one way is better than the other. Times change and the role must change with it, as well as the meaning.

Understanding Forensic Accounting

Forensic accountants are usually employed by police, insurance companies, banks, public accounting firms, or government agencies. They compile financial evidence, develop computer applications to manage the information collected, and communicate their findings in the form of reports or presentations.

Forensic accountants will follow a case through tracing the money, identifying the assets, recovering assets, due diligence reviews, prepare visual aids for court as needed, and testify in court. Three main areas utilize forensic accountants:

Forensic Accounting for Litigation

A forensic accountant will often be called in during litigation when quantification of damages is needed. The parties involved in the legal dispute will use this to assist in resolving the issue via settlement or court decisions. The forensic accountant could be used as an expert witness if the decision ends up going to trial. 

Forensic Accounting for Criminal Investigation

Criminal investigations may be what people automatically think of when they hear forensic accounting. And why wouldn’t you? We hear the word forensic and automatically think of criminal investigation. 

Forensic accounting is used to see if a crime not only occurred but if there was criminal intent. Some of these crimes include theft, identity theft, falsification of financial statement information, securities fraud, or insurance fraud.

Some forensic accountants work on recovering hidden assets, such as those in business or divorce disputes. Others work more in civil matters dealing with disagreements in company acquisitions, breach of contracts, tort, breaches of warranty, or business valuation disputes.

Forensic accountants can also work on assignments that see them investigating construction claims, patent or trademark infringements, product liability claims, or the breach of a non-disclosure agreement.

And then you have your high-profile criminal investigations like the Bernie Madoff Ponzi scheme, the Enron collapse, Worldcom accounting scandal, Instock trading scandal, and so many others. All of these cases led to many people going to prison, including Martha Stewart. 

But white-collar crimes aren’t the only criminal investigations that forensic accountants help out with. They also help the FBI, CIA, and CSIS in compiling financial reports on terrorists, both international and homegrown, as well as spies, and other criminals. 

Forensic Accounting in the Insurance Industry

Forensic accountants are often used in the insurance industry. They may be asked to quantify damages arising from medical malpractice, a vehicle accident, or another type of claim. However, there is some concern with using forensic accountants in the insurance industry as they use historical data, and some feel that they could miss relevant current information that may change assumptions around a claim.

Importance of Forensic Accounting

The importance of forensic accounting has been growing more rapidly in recent years, even though it originated in the 1930s when the IRS investigated the infamous gangster Al Capone. The good guys caught their man and were able to prove that Capone owed the government over $215,000, for which he was sentenced to ten years in prison.

More recently, however, financial technology shapes the forensic accounting landscape more so than gangsters not paying their taxes. In most cases, forensic accountants are hired to ensure that a company’s finances are in good standing order and that everything is being done on the up and up.

Having accountants in-house is not uncommon for companies. These accountants will often monitor and minimize any irregularities or complications. However, cases of sophisticated fraudulent activity are on the rise in many big corporations and even in smaller companies. 

By employing forensic accountants, modern businesses are bound to find these cleverly masked fraudulent activities. In some cases, the accountants are brought in as a preventative measure or fraud examiner before any loss is incurred.

Forensic accounting is starting to break out into more specialized fields, going beyond just accounting and finances. More and more, forensic accountants need to know more about legal processes and information technology.

One reason there is such an increase in demand for forensic accounting is the emergence of entrepreneurs and business professionals starting their businesses instead of working for someone else. Plus, the majority of them plan to be online-only businesses.

With so many of our daily tasks taking place online these days, it opens up a world of opportunity for prospective technical savvy lawbreakers. From online shopping to banking, there are a lot of opportunities and vulnerabilities out there. Even with all of the safety precautions one might take, the bad guys are always one step ahead, it seems, which is a great example of why it is so important for forensic accountants to keep up with technology and stay one step ahead of the bad guys.

Degrees for Forensic Accounting Jobs

All forensic accounting jobs will require at least a bachelor’s degree in forensic accounting or a closely related field. Some of the other degrees that are accepted are accounting, mathematics, business, and economics. Many accountants will take additional courses over their careers to keep current and increase their knowledge in a specific area.

The following is a good example of a path to take to become a forensic accountant.

  • Graduate from High School – This might seem like a no-brainer, but the planning does start in high school. If you’re serious about becoming a forensic accountant ensure you excel in math, statistics, computer science, and psychology classes. You may also want to think about interning or doing a co-op in accounting, forensics, computers, banking, or other relevant fields. Doing so will look good on your post-secondary applications, could lead to letters of recommendation, and learn job-ready skills that you will need down the road.
  • Enroll in a Bachelor’s Forensic Accounting Program (or a Related Field) – You will need to have a minimum of a bachelor’s degree to become a forensic accountant, so there is no need to waste time and money starting with a certificate or associate’s degree. Depending on where you attend, you will have specific requirements for classes that you must take. Most of them will center on statistics, computer science, calculus, etc. Some students prefer to pursue a degree in business, finance, or regular accounting, instead of specializing in forensic accounting off the bat, giving them a broader education, which may open more doors.
  • Take the Required Certification Testing – In North America the exam is called the CPA, though it stands for something different in Canada (Chartered Professional Accountants) vs the United States (Certified Public Accountant). Each country probably has its equivalent, which gives accountants that little bit of extra certification over just having a degree. There is also an examination to be taken for aspiring forensic accountants. Check-in your area to see what the qualifications are. The more you can take, the better it will look.
  • Gather at Least One to Three Years of Work Experience – It would be best if you were able to work with a forensic accountant and garner as much knowledge and experience as you could from them. Other areas that are great to gain experience in are fraud detection, internal auditing, white-collar crime investigations, and other relevant areas. 
  • Seek Licensing Elsewhere – Depending on where you live, you may need other licenses to work in other locations. Some regulations may be provincial or state, while others may be federal. If you are working on a case, make sure that you have jurisdiction to work on all areas of that case.
  • Never Stop Learning – Always take the opportunity to learn, whether it’s from others, a lunch and learn, a conference, seminar, or you decide to enroll in school and gather another online certificate. Technology changes at a fast pace. Someone who is going to be a forensic accountant has to keep up with that pace in several different topics.

What Skills Do You Need to Become a Forensic Accountant?

Forensics accountants require strong skill sets, but not just the ones taught in their degree program. They not only need to be good with numbers, but they also have to have other skills, knowing that they will be working with others, testifying in court, investigating, etc.

  • Analytical Skills –  Much of their time is spent analyzing financial documents, so it’s no surprise that a forensic accountant needs strong analytical skills and critical thinking to effectively conduct financial investigations.
  • Investigative Abilities – Forensic accountants need to rely heavily on their investigative skills. Some of them even work in law enforcement, conducting investigations and building legal cases. So, they must have strong investigative abilities. Some forensic accountants have taken extra courses to strengthen this skill set.
  • Attention to Detail – While auditing is taught in classes that you take as part of your bachelor’s degree, some people have better attention to detail and are just naturally better at auditing, which is an extremely important skill set. If you find that you’re not at the top of your game with it, you need to work hard and even ask for help if you have to. 
  • Communication Skills – Forensic accountants need strong oral and written communication skills. Interpersonal communication skills are necessary, too. They will need to testify in court as witnesses, interview witnesses, work with colleagues, and prepare investigation reports.
  • Organization Skills – There is a lot of documentation that a forensic accountant has to deal with, both hard copies and soft copies. And many accountants work on more than one case at a time. Keeping everything organized is imperative so as not to make a catastrophic mistake, which could cost the accountant several hundred hours of work, and that’s if he’s lucky.
  • Computer Skills – Forensic accounting is leaning more and more towards technology, so forensic accountants must keep up with their computer skills, and even going beyond the basics is highly recommended as they will be called on to conduct cyber forensic investigations and use data analysis software.

Top Forensic Accounting Careers

If you’re looking for a career as a forensic accountant, but you’re not sure exactly what path you want to take, we researched the top 5 specialized areas of forensic accounting. With the job rate jumping between 13% and 20% by 2022, there will be plenty of spaces to fill.

1. Governmental Departments (FBI, CIA, IRS, CSIS)

Working with the government will include such responsibilities as investigating the financial history of terrorists, spies, and criminals, testify in court as a potential witness, build financial profiles of suspicious individuals, meet with prosecutors to discuss strategies, compile financial investigative reports, and more. So long as you can obtain a top-level security clearance, that is.

2. Accounting Firms

In this role, you will need to uncover potential financial fraud and collect evidence, translate technical jargon into everyday language so that the client understands, and testify in court as needed. You will also perform computer forensics, conduct interviews to find facts and truth, quantify financial losses due to misconduct. When employed at a forensic accounting firm, you never know what kind of case you will get as you will be working with all sorts of different clients, and often, you will have more than one client at a time.

3. Corporate Security and Risk Management

Forensic accountants specializing in corporate security and risk management are responsible for protecting financial assets from internal and external threats, ensuring organizational compliance with laws and procedures, analyzing changes in laws, taxes, exchange rates, and audit financial statements for risks. Keeping an eye on the global climate is extremely important in this position, and so is having an interest in the stock market.

4. Law Firms

Law firms hire forensic accountants to act as in-house consultants for financial issues to help them translate complex financial findings into a more simplified language. The forensic accountant helps lawyers in finding financial experts for testimonies and will also perform audits as required.

5. Financial Consulting Firms

Financial consulting firms use forensic accounts to investigate fraud, corruption, regulatory scrutiny, both inside and outside the firm. The forensic accountant will also analyze and reconstruct financial records and other documentation or digital information. In doing so, they may need to conduct fact-finding interviews. They will also assess vulnerabilities to fraud and embezzlement allegations.

You will not be a boring accountant, staring at your stapler, with one of the jobs listed above. In forensic accounting, each case is completely different, and you never know what is coming up next. Will your next case have you chasing a yacht in the Bahamas? Or perhaps you’ll be assigned to one of the cases you’ve heard rumors about and is about to hit the front page of the newspaper. 

New branches of forensic accounting are popping up all of the time, with the need to keep up with the times and ever-evolving technology. Just because something new pops up doesn’t mean the old stop being a thing, so the need for jobs continues to grow. The growth has been on an upward trajectory, but it’s now hit the biggest spike it’s ever seen, and forecasters believe it will stay like that for a while.

In Summary

Forensic accounting is an exciting field in what some people may think of as an otherwise boring career choice. Though forensic accounting has been around since the 1930s it feels as though it has only been talked about more recently. Some people still aren’t quite sure exactly what it is. We hope we were able to clarify it here for you.

A lot goes into forensic accounting, but not all of the required skills can be taught. There are several soft skills that one must have to be successful in the field. Perhaps the most important one being attention to detail. Forensic accountants have to have the ability to pick up even the smallest error in the largest piles of information. Other qualities you should have are strong computer skills, analytical and critical thinking skills, and written and oral communication skills.

Three main areas utilize forensic accountants, but by no means does this mean that there are only three jobs for forensic accountants, or that there are only three types of businesses for forensic accountants to work in. Litigation, a criminal investigation, and the insurance industry are the main areas that utilize forensic accountants. 

Within these main areas, forensic accountants can work on cases from finding hidden assets in a bad divorce to dealing with a trademark infringement to having to go through the books of a high-profile company on Wall Street. There are plenty of exciting cases that you can imagine yourself working on. If you start your own business, you’ll be able to pick and choose which cases you take on. Though, we don’t recommend doing this just as you’re starting.

There are several reasons why forensic accounting is important; some might list staying out of jail as number one. It all comes down to money. Either someone stole some, someone owes some, someone is missing some, someone hid some, or someone didn’t pay the government some. Which makes a lot of sense when you think about it. After all, an accountant’s job is all about money in one way or another, no matter which field of accounting they choose. 

Having a career in forensic accounting is a profitable one. Not only are they in high demand and only becoming even more in demand, but they get paid handsomely as well. They easily earn $150,000 at some point in their careers. While you won’t start with that salary, the starting salary is pretty good too.

Most people in their everyday life won’t come across a forensic accountant. Honest, tax-paying citizens have nothing to worry about. Even if you work in a corporation that employs a forensic accountant, there are not many people within the company that needs to be in contact with them.

The field of forensic accounting may have changed over the years to keep up with the times, but it remains the same at the core. This field investigates and analyzes the financial dealings of businesses to ensure that everything is done in compliance with rules and regulations. For the most part, we’ve gotten rid of the two and three-column ledgers and replaced them with software like QuickBooks and Wave, but the purpose for recording the transactions remains the same.

Those who are caught by forensic accountants breaking the law no longer look like Al Capone, the majority of them are corporate board members. The crimes were considered to be white-collar crimes after the corporate men’s three-piece suits they wore. Now, with most of them changing to financial technology or fintech crimes, one would picture someone on their coach in sweatpants, so we’re not sure if they will continue to refer to them as white-collar crimes. Nonetheless, the forensic accountants will be out there looking for any small mistake they make.

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