Forensic Accounting

Forensic accounting applies accounting and auditing methods and procedures to legal matters of both a criminal and civil nature. Criminal cases often include the likes of fraud or illegal insurance claims, whereas civil investigations generally relate to family matters and business disputes. Throughout any investigation the accountant must be as discreet and efficient as possible to protect the reputations of their clients.

Most specialists are hired on a case-by-case basis, though some larger accounting firms employ their own forensic accountants. These may be assigned very particular tasks, such as fraud investigation or dealing with insurance or personal injury claims. Those hired individually are commonly called upon by law enforcement agencies, businesses, and insurance companies.

Fraud Detection
One of the primary matters involving forensic accountants is that of fraud. Fraud can be defined as an intentional deception in order to obtain undeserved or unlawful benefits. The accountant may be required to conduct a detailed analysis of the company’s accounts in order to ensure that the numbers reflect reality. The figures of the company accounts may have been altered to show less than their actual profits, manipulated so that the company can avoid paying certain taxes. Similarly, an employee may have manipulated figures to conceal the theft of company funds. If any anomalies and inconsistencies are found in accounts, all transactions must be traced in order to establish when funds were removed, to what account, and by whom. The malicious handling of funds may not be immediately obvious, as the individual responsible may have taken steps to ensure their actions are concealed. Part of the fraud investigation may be the observation and interviewing of employees suspected of embezzlement. One obvious sign of such behaviour is lavish spending by the suspected employee, such as new cars and holidays and starting additional businesses. The accountant may need to trace the transfer of sums of money using “paper trails” or “audit trails” and assist in recovering these funds. Some employees have been known to establish ‘dummy’ businesses in order to siphon off large sums of money for their own personal use. Following a fraud investigation, the accountant may provide the client with suggestions on developing a system to prevent further fraudulent activity. These measures may include environments in which people are deterred from committing fraud and internal controls to minimise the chance of it occurring.

Business Economic Losses
Companies may hire a forensic accountant to calculate business economic losses. These may include contract disputes, product liability claims, construction claims, and trademark and patent infringements. Similarly, they may often be employed in cases of alternative dispute resolution, acting in mediation and arbitration between two parties to resolve disputes quickly and with as little disruption as possible. Forensic auditing refers to the review of an organisation’s financial evidence. This may be conducted internally by an employee of the company, or externally by a hired professional. Litigation support offers assistance in the investigation of claims or damage quantification. This assistance may include obtaining the necessary documents to support or refute a claim, develop an assessment of the case, and reach the appropriate conclusion.

Insurance Claims
In civil cases, forensic accountants will often be employed by insurance companies to quantify losses and economic damages and ensure any claims made are not fraudulent, particularly in cases involving a potentially great payout. It is estimated that several billion pounds are fraudulently claimed each year in the UK alone, therefore insurance companies are often eager to employ such specialists to protect their businesses from falling for these claims.

Family Matters
Forensic accountants may be called upon in cases of divorce or other marital and family law matters. This may involve the tracing, locating and evaluating of assets in order to ensure an equitable division of funds between a separating couple, and determining the income available for child support.

Terrorism & Counter-Intelligence
Forensic accounting is increasingly being used in the investigation of terrorist activities. The methods are used to establish how terrorists utilise international banking systems to fund their activities, transfer funds, and conceal their actions. Such investigations can help trace terrorist groups and by whom they are being funded, potentially reducing such threats.

Computer Software
Due to the amount of data held by companies available during investigations, the analysis of this data can often be extremely time-consuming and extensive. More recently computer software has become available to forensic accountants, known as computer-aided tools and techniques (CATTs). These programs are more frequently used in the investigation of fraud and similar white-collar crimes to extract and analyse specific data. Software can also be used in database and statistical analysis to provide links to illegal activity.

The Investigation
Regardless of the type of case being investigated, a particular series of steps will most likely be followed. Initially the forensic accountant will meet with the client or representative in order to be given the specifics of the case. With this information, it is then possible to begin initial research and develop a plan of action for the investigation. The investigation itself can then be conducted, potentially including interviews, the examination of paperwork, and any relevant analyses to obtain results. Numerous records may be sifted through, including bank and credit statements, ledgers, journals, databases, emails, and any other relevant sources of information. Various computer programs are available to aid the analysis of financial data. However there may be a limit to the evidence available, as they may only have the power to seize and examine particular documents. Based on these findings, the accountant can reach his or her own conclusion regarding the case, and establish the steps to be taken by their employer to aid in the retrieval and protection of assets if necessary. Once the investigation is complete and a full report has been prepared, the accountant may be required to appear in court. During this duty, the details of the case, any analyses conducted, and the results must all be presented clearly to the court to aid the determination of the guilt or innocence of the accused individual/company. As the investigation may involve the complex analysis of figures, the process and results must be clarified in a way that can be understood by a layman.

Careers & Education
The forensic accountant generally obtains a Bachelor’s degree in accounting followed by further training in the forensics field. They are typically CPAs (certified public accountants), a status achieved following a CPA exam. The accountant may then be educated by becoming accredited as a certified forensic accountant (Cr.FA) or a certified fraud examiner (CFE), or obtaining a Master’s in forensic accounting. An understanding of Generally Accepted Accounting Principles (GAAP) is essential, as is knowledge of the relevant laws and business practices. At entry-level, the forensic accountant generally earns between £25,000 and £35,000 per annum, which increases steeply with experience.

Case Study

Forensic accounting proved fundamental in the conviction of gangster Al Capone. You can read more about the case here.

 

Forensic Accounting. Alan Zysman. [online] Available at: [http://www.forensicaccounting.com]

Singleton, A J. Singleton, T W., 2010. Fraud Auditing and Forensic Accounting. New Jersey: John Wiley & Sons Inc.