The word “forensic” immediately evokes the imagery of mystery novels and police procedural dramas. But forensic accounting is an important, specialized set of techniques with a variety of applications in the financial world. Many business schools even offer specialized degrees in forensic accounting.
If you serve as a financial controller, it’s important to be familiar with the practices and applications of forensic accounting. This post provides an overview of these practices and illustrates the ongoing need for forensic accountants in today’s financial market.
What is Forensic Accounting?
Forensic accounting is actually a constellation of accounting and investigative practices that are intended to uncover financial crimes and other bookkeeping irregularities.
A forensic accountant is both a puzzle-solver and a storyteller. On the one hand, they are trained to understand the raw data of a company’s accounting records. On the other hand, a forensic accountant must look beyond the numbers to tell the story of what happened, and oftentimes, this includes sharing the story with a court of law.
Forensic accountants are often employed by government agencies, insurance companies, banks, law enforcement, and private firms.
The Applications of Forensic Accounting
The Latin roots of the word “forensic” refer to public forums, but today, the word is more strongly associated with the legal realm. Forensic accounting has a variety of applications, and controllers should be familiar with each.
Forensic accounting plays a vital role in uncovering “white-collar” crimes such as embezzlement, fraud, and employee theft. A forensic accountant may be asked to investigate breaches within contracts, trace funds, uncover hidden assets, and provide a detailed evaluation of a company’s financial dealings.
Financial crime is usually well-hidden, and the criminals are both smart and deeply motivated to remain anonymous. For forensic accountants, this demands diligence and strategy to solve financial puzzles and bring perpetrators to justice.
Forensic accounting can also assist in litigation. Parties involved in a dispute often require the assistance of an accounting professional to determine compensation for damages or the value of assets during divorce proceedings.
In these cases, a forensic accountant may be asked to serve as an expert witness during legal proceedings.
The insurance industry relies on forensic accountants to tabulate the damages caused by insurance claims. These include auto accidents, medical malpractice, homeowners’ claims, and other insurance claims.
Traditionally, this role has been filled by insurance adjusters. There’s been some recent debate within the insurance industry as to which profession should make these sorts of decisions surrounding claims.
A forensic accountant usually has more training when it comes to raw numbers and historical data, but claims adjusters often bring a broader perspective to the situation, making different sets of assumptions about an individual case.
Understanding the Sarbanes-Oxley Act
Controllers should also be familiar with the impact of the Sarbanes-Oxley Act of 2002. This act introduced stricter rules surrounding recordkeeping, which directly impacts accountants, auditors, and other financial officers. It also imposed new criminal penalties for violating securities laws.
This increased regulation has translated into greater demand for forensic accountants. The corporate scandals of previous decades have pressured companies to perform due diligence and practice greater financial transparency. In the last two decades, forensic accountants have played a valuable role in the ongoing operation of many companies.
What Training is Required for a Forensic Accountant?
Forensic accounting is a lucrative profession, with many accountants earning a six-figure salary. What sort of training is required to be a forensic accountant?
At a minimum, forensic accountants should possess a bachelor’s degree in forensic accounting or a related field. In some sectors, a master’s degree is preferred. Beyond this, many forensic accountants pursue additional certifications such as the Certified Fraud Examiner (CFE), Certified Public Accountant (CPA), and/or Chartered Accountant (CA).
Some companies also favor those who have an additional background in criminal justice or law enforcement.
Forensic accountants are frequently asked to prepare reports and even testify in court. They are therefore expected to be skilled communicators, capable of distilling large bodies of data into digestible talking points.
Degrees of Investigation
Controllers that are concerned about fraud within their company don’t need to launch a full-scale investigation. A forensic audit can be a preliminary way to discover irregularities (such as padded expense reports) that warrant greater attention.
Outsourcing Your Accounting Needs
For reasons that may now be obvious, controllers should expect that their company’s forensic accounting needs will be outsourced to a third-party provider. Doing so ensures objectivity and impartiality, especially if a company is accused of financial misdeeds.
Forensic accountants can usually be hired from reputable accounting firms and can perform a variety of services, ranging from a forensic audit to in-depth investigations.
Finance in the Age of Transparency
Previous decades have revealed the costs of financial fraud. Today, corporations are seeking to restore public confidence through greater accountability and financial transparency. Financial accounting is one path toward this goal and will likely remain an important field for years to come.
Looking to Learn More About Forensic Accounting?
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