What is Forensic Accounting? An Overview

Traditional accounting is a familiar topic for most people. Whether for professional or personal reasons, most people have interacted with an accounting firm at one point or another. Standard accounting firms are used for many services, including tax preparation, bookkeeping duties, audits, and much more.

Within the field of accounting, however, is a lesser-known category called forensic accounting. Forensic accountants are not needed far as frequently as traditional accountants, but when their services are required, the stakes are usually rather high. We’d like to use this article to explain the basics of what forensic accounting is, why it is so important, and when it might be needed.

If you have been searching the web for a “forensic accountant near me”, that search can come to rest now that you’ve landed on Space Coast Forensics. As an experienced financial investigation firm, you can be sure we will use all available data to arrive at accurate findings and help you take the next steps – whatever those steps may be. Reach out today to learn more.

The Definition of Forensic Accounting

Before you can be sure that you need the services of a forensic accountant, you first need to be clear on what this term means and what forensic accountants actually do day after day. As a starting point, we can offer this definition –

“Forensic accounting is a field within accounting that specializes in uncovering financial fraud, misconduct, and other irregularities.”

It’s a reality of our modern economy that financial fraud is happening constantly, all around the world. It takes on many shapes and sizes, and often the fraudulent activities are carefully crafted and concealed in an effort to avoid detection. The advanced techniques used by forensic accounting services are designed to sniff out impropriety so it can be stopped as quickly as possible, and whatever action is necessary can be taken against the offending party.

While professionals in this field often start their careers in traditional accounting, it’s important to note that specialized training is required to work as a forensic accountant. Starting with a foundation of knowledge in fundamental accounting principles, forensic accountants then go on to pick up other skills including advanced auditing techniques and various investigative methods. It’s also crucial for any forensic accountant to keep up with the latest trends in financial fraud. Thorough financial analysis performed by a qualified forensic accounting firm has the potential to save businesses or individuals significant sums of money in the end.

In summary, forensic accounting can track down fraud and misconduct that might be hiding in plain sight. It’s possible for fraudulent financial activity to be contained within a company’s accounting records, only no one has taken the necessary time or used the right techniques to uncover it. That’s what forensic accountants are for, and it’s why they occupy a unique space within the accounting world as a whole.

An Overview of Forensic Accounting Tools and Techniques

Now that we have a definition in place and we are on the same page regarding what a forensic accountant does, let’s move on to talk about how some of that work is performed. Of course, we can’t provide you with an in-depth, detailed understanding of the profession – it takes years of training and experience to get to that point – but we can offer up a general overview that highlights how forensic accounting services do what they do.

As a starting point, financial statement analysis is a fundamental technique in this field. When a business generates financial statements, it is effectively producing evidence of how that businesses operated over a given period of time. The trained eye of a forensic accountant can use those statements to look for any inconsistencies or discrepancies from one statement to the next. Income statements, balance sheets, and cash flow statements can all be used in this pursuit.

Thanks to high-tech advances in recent years, forensic accountants now have powerful data analysis tools at their disposal as part of their investigative process. Software used in this field can take in a massive amount of information to look for patterns and red flags that stand out amongst the numbers. One of the common tactics used by those committing financial crimes is to have their illicit transactions get lost in a sea of incoming and outgoing money. In a relatively large, busy company that racks up tons of financial data, the criminal can hope that their activities will get lost in the wash. Using proper forensic accounting tools makes it less like that this will succeed, as the software can point a forensic accountant in the right direction so they can carefully investigate further.

Speaking of further investigations, not all of the work done by a forensic accountant is done in front of a computer screen and a spreadsheet. Performing in-person interviews and interrogations is another key part of this job. Many fraud schemes are rather complicated by nature, and unraveling the plan and understanding how it works may require talking to many people from within and outside of the organization. Using forensic accounting services not only allows a business to examine the financial evidence on the books, but also makes it possible to dig into the details through impartial, neutral interviews of the people who are suspected to be involved.

A Few Examples of Forensic Accounting Applications

To better understand how a forensic accountant can be used, it might help to look at a few example applications for this type of service. The list below is certainly not exhaustive, as plenty of other applications exist for forensic accounting, but this is a good starting point.

Investigating Insurance Claims

This is a common task for forensic accounting services. When a claim is made by a policy-holder, the insurance company may engage with a forensic accountant to perform some due diligence on that claim and whether or not it should be paid. In some cases, the investigation will find that the losses claimed are being inflated by the policy-holder, or perhaps the claim was completely illegitimate from the start.

Employee Theft Investigations

Another frequent job for forensic accountants is to look into cases of employee theft. When embezzlement is suspected, an experienced accountant can be brought in to look over the data, interview suspected individuals, and track down any signs of a crime. In addition to performing investigations, a forensic accountant can also work with businesses to establish best practices that will make these kinds of crimes less likely and harder to execute.

Bankruptcy Proceedings

The stakes can be high in bankruptcy proceedings. Even if accounting books are available and presented as part of the process, those numbers can’t necessarily be taken at face value. If there is reason to suspect fraud, forensic accountants can be used to review all financial evidence and see if those records appear to be legitimate. Also, they can serve as expert witnesses in the case based on their research and existing knowledge in this field.

Corporate Fraud

Unraveling cases of corporate fraud can be challenging, to say the least. Following the flow of money as it moves through a large corporation is a complicated task, but one that can be managed by an experienced forensic accountant. It’s possible for large sums of money to go missing if this type of work isn’t performed regularly and properly, so this is yet another important role that can be filled by an accounting firm in this industry.

Who Hires a Forensic Accountant?

Nearly everyone has a use for a standard accountant. It could be a business that has a CPA on staff to manage their ongoing accounting needs and to track every dollar that moves in and out of the company. Or, it could be an individual who works as an employee and just wants some assistance with filing taxes each year. Accountants are hired for countless reasons for countless different individuals and businesses.

With a forensic accountant, however, the situation is a little more specific. Most people will never hire a forensic accountant, but those who do will badly be in need of these specialized services. The list below touches on a few possible entities that might choose to hire this type of accounting firm.

Insurance Companies

You probably could have guessed this one from the discussion we had above about investigating insurance claims. For an insurance company, bringing in a forensic accountant early in the claims process can help to sniff out any suspicious signs and make sure the claim they are paying out is a legitimate one.

Individuals

While they don’t use these services as often as businesses, it’s certainly possible for an individual to regain forensic accounting services, especially in the case of a divorce. If an accurate determination of the marital property needs to be established, or if it is suspected that hidden assets are held by the other party, a forensic accountant could be called on for help.

Large Corporations

The financial activities of large corporations can be incredibly complex and even messy. With so much money moving in and out, it can be hard to track what commercial damages might be incurred by fraudulent activity. By using forensic accountants regularly, corporations can keep track of any issues that might be coming up and then have them investigated properly to determine if a legal dispute is needed. Also, corporations regularly find themselves in court for one reason or another, and litigation support is another service offered by this kind of accounting service.

Law Firms

In this case, a forensic accountant might be hired by a law firm or an individual lawyer to serve as an expert witness. For instance, if a lawyer is trying to prove the financial damages that were suffered by their client, it could be the input of a forensic accountant that speaks to the specific damages experienced and why the numbers are accurate. Whether it’s business litigation or a personal case involving individuals, the words of the expert in this arena can carry a lot of weight.

The Inherent Forensic Accounting Challenge

Standard accounting is a complicated task. While most transactions completed by a business will fit nicely into an existing line on the accounting ledger, it’s the unusual entries that tend to cause problems. When you think about forensic accounting services, it’s important to keep this baseline challenge in mind – regular accounting is hard enough when everyone is being honest and forthright, so it should be clear just how hard it is to sort things out when not everyone is playing fair.

Basically, the challenge that comes with this field is that the people committing some type of fraud are doing their best not to be caught. They are going to deploy various deceptive techniques like forging records, recording complicated transactions, executing fake returns, and much more to avoid detection. Whether it is cloudy personal finances in divorce proceedings or messy business books when an employee is trying to get away with embezzlement, the forensic accountant is always fighting an uphill battle.

Not only are forensic accountants battling an opponent that is focused on getting away with a crime, but the techniques used to execute those crimes are constantly changing. Certified fraud examiners have to always be on the cutting edge of what tricks are going to be up the criminal’s sleeve. This is necessary to be able to provide useful litigation support, and it’s important when a business has a reason to suspect fraud but can’t yet prove it. By knowing what is going on in the world of white-collar crime, a professional in this field can protect business assets and deliver valuable results to the companies they serve.

Forensic Accountants Face a High-Tech Future

The world of accounting has changed in a dramatic way over the past couple of decades. For generations, most accounting was done by hand, whether that meant writing the numbers down or typing them into a spreadsheet. However, as more and more advanced technology gets involved in the accounting world, everything speeds up and the task of a forensic accountant continues to get a little more complicated.

No longer is there necessarily going to be a paper chain that a forensic accountant can follow to get down to the bottom of a case effectively. Rather, there will be a long list of digital transactions to unravel, and they may be tricky to follow. For this reason, it’s important that modern forensic accounting services keep up with the latest tools and technologies – like the data analysis tools we discussed earlier – to make sure they aren’t lagging too far behind the criminals.

Space Coast Forensics Offers Professional Forensic Accounting Services

As a leading forensic accounting practice, Space Coast Forensics has the tools, techniques, and experience needed to get to the bottom of even the most complex cases. We are located in Florida and are proud to serve our local community, but also are able to take on clients located elsewhere. To get started, or to ask any questions you may have for us, simply reach out today and we’ll reply promptly. We look forward to serving you.

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