You might have heard of forensic accounting and wondered what it is and how it gets used by businesses.
Businesses, large or small, use forensic accounting to examine suspected financial crimes and other ideas, including insurance claims validity and working out the fair market value of business valuation for sales or mergers & acquisitions activity.
In this business blog, we explain what forensic accounting is and where forensic accountants are within a business.
Understanding Forensic Accounting
Before Certified Public Accountants, CPAs, and their teams with limited evidence concerning audit and compliance determination were the only ones who would carry out forensic accounting.
At the end of the twentieth century, in 1987, the Association of Certified Fraud Examiners (ACFE) was created. Furthermore, the financial crime investigation industry’s reach became higher because of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).
Many significant businesses like Enron and WorldCom failed because of the frequent auditing and compliance requirements. It became obvious that there was a need for antifraud specialists and dedicated forensic accountants with duties that went far higher than only accounting audits.
In the twenty-first century nowadays, forensic accountants need to have expert accounting and legal knowledge. Moreover, they are also required to have the following qualifications: CPA, CFE (Certified Forensic Examiner), or CFA (Certified Forensic Accountant. They need to have various skills like great attention to detail, curiosity, perseverance, and great written and oral communication.
Businesses hire forensic accountants to help them investigate areas where they suspect fraud cases and any other irregularities that might include financial reports consisting of:
- Assets got under or overstated
- Understated income
- Losses got hidden or overstated
- Liabilities got hidden
Different Qualifications of Forensic Accountants
Pursuing a career as a forensic accountant requires meeting education and certification requirements to be considered qualified for conducting complex financial investigations.
Typically, forensic accounting roles mandate minimum credentials like a bachelor’s degree in accounting or finance, although employers can prefer higher qualificaMaster’ske an MBA or Master’s in Accounting employers can prefer. This foundational training covers areas like audit processes, data analytics, tax codes, and business law that apply to later examinations.
Many accountants supplement education with niche certifications, specifically in forensic accounting methodologies, before joining this specialty. For example, the Certified in Financial Forensics (CFF) credential from the American Institute of CPAs denotes specialized skills in identifying financial irregularities. The Association of Certified Fraud Examiners (ACFE) also offers coveted certifications like the Certified Fraud Examiner (CFE) to validate expertise across essential domains like evidence collection, interrogation procedures, and data protection protocols when investigating white-collar crimes and financial fraud.
Where are Forensic Accountants within Businesses?
Forensic accountants can be obtained in many industries, including freelancers, consultants, employees, or in private practice. Anyone working in the forensic accounting industry will find themselves working with:
- Law Enforcement Agencies
- Insurance Brokers
- Government Agencies
- Financial Institutions
- Public Accounting Firms
- Consulting Practices
Criminal Investigations
Forensic accounting is required in various financial crimes, like identity theft, securities fraud, embezzlement, etc. In financial crimes, a forensic accountant investigates the crime to ascertain if it was done intentionally and gather evidence against the offender.
Another place where many people do not think forensic accountants get used in divorce cases is Why? They get hired to determine if one spouse is hiding any assets from the other. Forensic accounting is also used in other civil cases, like warranty breaches, contract breaches, or tort disputes, to ensure specific asset valuation is done.
Litigation
Any legal disputes requiring the determination of compensation could involve forensic accounting. A forensic accountant is needed to determine the size of the damages and what will be fair for each party.
Insurance
Insurance companies often employ forensic accounting to determine whether the claims made are accurate or not, especially when it concerns medical malpractice and vehicle accidents. They also get used to determine if the economic damages are feasible or not based on historical financial data.
M&A
There are many other uses of forensic accounting in business apart from investigating financial crimes, like assessing the true value of assets; it can be somewhere between what gets seen and what is authentic. The discovery of consent fair market rates for various things, like salaries, mergers and acquisitions, and sales, is provided by forensic accounting.
When it comes to mergers and acquisitions, forensic accounting performs a crucial role, including:
- Investigating and confirming the background information validity
- Financial statements accuracy
- Financial growth projections
- Confirming the terms of the agreement
Final Thoughts
Forensic accounting is a specialized industry that assists regulatory organizations and legislation. If a business, whether small or big, suspects fraud, it might get the assistance of a forensic accountant to see the financial teams also involved. An expert can help investigate and find various discoveries.
It is not limited to fraud. Businesses now prefer to have frequent forensic audits for their peace of mind, security, and compliance. Vulnerabilities within processes, systems, and apps can be recognized with regular forensic audits as they could get exploited by turning criminals.
Forensic accounting is important and has proven to be instrumental as it helps protect your business from various things, including preventing important financial data from getting into the wrong hands.
