What is forensic accounting, and how are businesses using it?
Forensic accounting is what businesses, large and small, use to investigate suspected financial crimes and other purposes, including the validity of insurance claims and the working out the fair market value of business valuations for sales or M&A (mergers and acquisitions) activity.
Understanding Forensic Accounting
Forensic accounting used to be carried out solely by CPAs (certified public accountants) and their teams with evidence limited to audit and compliance discovery.
Towards the end of the twentieth century, the Association of Certified Fraud Examiners (ACFE) was formed in 1987. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) gave more powers to widen the scope of financial crime investigation.
More auditing and compliance requirements followed significant business failures like Enron and WorldCom. There was evident the need for antifraud specialists and dedicated forensic accountants with duties that far extended beyond accounting audits.
Today, forensic accountants have expert accounting and legal knowledge. They are expected to have their CPA certification and CFE (certified forensic examiner) or CrFA (certified forensic accountant) qualifications. Their skills include great attention to detail, inquisitiveness and tenacity and clear written and oral communication.
Forensic accountants are hired by businesses to investigate suspected cases of fraud and other irregularities which may include financial reports that:
- under or overstate assets
- understate income
- hide or overstate losses
- hide liabilities
Where Are Forensic Accountants In Business?
Forensic accountants can be found in most industries as freelancers, consultants, employees or in private practice. If you were to consider a career in forensic accounting you may find yourself working with:
- Law Enforcement Agencies
- Insurance Brokers
- Government Agencies
- Financial Institutions
- Public Accounting Firms
- Consulting Practices
Financial crimes, such as identity theft, securities fraud or embezzlement, may require the use of forensic accounting. In such cases, a forensic accountant investigates the crimes to determine whether they were intentional and compile evidence against the offender.
Forensic accountants may also be used in divorce cases to determine whether one spouse was hiding assets from the other. Other civil cases, including breaches of warranty, breaches of contract or tort disputes, may utilize forensic accounting to ensure accurate asset valuation.
Some legal disputes that require the determination of compensation may involve forensic accounting. A forensic accountant may be necessary to determine the extent of damages and what is fair for each party.
The insurance industry often utilizes forensic accounting to determine whether claims are accurate, especially surrounding medical malpractice and vehicle accidents. Forensic accountants are used to determining whether or not economic damages are reasonable based on historical financial data.
Forensic accounting also has other uses in business beyond investigating financial crimes, including assessing true value, which is somewhere between what is perceived and what is real. Forensic accounting will provide discovery for consensus of fair market rate, e.g. salaries, mergers and acquisitions and sales.
For mergers and acquisitions, forensic accounting plays a vital role including:
- investigate and confirm the validity of background information
- accuracy of the financial statements
- financial growth projections
- confirm the terms of the agreement
Forensic accounting is a specialized field with supporting regulatory associations and legislation.
When businesses deal with suspected fraud, they may find out that their own financial teams are involved. As a result, it is necessary to bring in experts to investigate and present discoveries.
Even when fraud is not involved, businesses now like to have regular forensic audits done for peace of mind and security and compliance.
Regular forensic audits can identify vulnerabilities in processes, systems and apps that may be exploited by would-be criminals.
Preventing financial information from ending up in the wrong hands protects the business, and this is where forensic accounting is proving instrumental.