Forensic Accounting Explained
When most people hear forensic accounting, they may think of a highly trained professional with a lab coat, analyzing a blood stain on the floor by the windowsill.
But forensic accounting has more to it than what meets the eye.
What Is Forensic accounting?
Today’s news broadcasts will likely include a story about fraudulent activity. As thieves and con artists adapt to a world centered on the Internet, committing fraud has gotten much easier. According to the Global Fraud and Identity Report, 33 percent of organizations suffered greater fraud-related losses than the previous year.
This is where forensic accountants come in.
Combining accounting, auditing, and investigative abilities, forensic accounting examines the finances of an individual or corporation. Forensic accounting offers accounting analyses that can be used in legal procedures. Forensic accountants are equipped to consider the commercial reality of a situation beyond the statistics. In fraud and embezzlement situations, forensic accounting is commonly used to explain the nature of a financial crime in court.
The Duties of Forensic Accountants
Accountants specializing in forensic accounting evaluate data to establish where lost funds are and how to recover them. During hearings, when they frequently serve as expert witnesses, they may also provide reports of their financial findings as evidence. This job is essential for public accounting and consulting firms, law firms, law enforcement organizations, and insurance companies.
In each of these contexts, a forensic accountant plays a distinct role. Each company handles finances in a unique manner, and con artists target businesses depending on their responsibilities. Some accountants, such as those employed by law enforcement agencies or legal firms, work on a larger range of fraud situations. Typically, accountants working in more specialized sectors, such as public accounting or insurance, concentrate on particular types of fraud, such as insurance fraud. Certain agencies are more likely to have forensic accountants testify in court.
Forensic Accounting to Support Litigation
In litigation, forensic accounting is applied when quantifying damages is required. The quantifications are used by parties involved in legal disputes to assist in settling disputes through settlements or judicial judgements. For instance, this could result from compensation and benefit conflicts. If the dispute leads to a court ruling, the forensic accountant may be called upon as an expert witness.
Forensic accounting in criminal investigation
In addition to determining whether a crime has happened, forensic accounting is also used to determine the likelihood of criminal intent. Theft by employees, securities fraud, manipulation of financial statement information, identity theft, and insurance fraud are examples of such offenses.
Frequently, forensic accounting is utilized in complicated and high-profile financial crimes. For example, the extent and mechanics of Bernie Madoff’s Ponzi scheme are now recognized because forensic accountants analyzed it and made it accessible for the court case.
In addition to assisting in the hunt for hidden assets in divorce proceedings, forensic accountants may also aid in other civil actions, such as breach of contract, tort, disagreements about firm acquisitions, warranty breaches, and business valuation disputes.
Assignments in forensic accounting may involve researching construction claims, expropriations, product liability claims, trademark or patent infringements, and expropriations. In addition, forensic accounting can be utilized to evaluate the economic consequences of a breach of a nondisclosure or non competition agreement.
Misappropriated or hidden assets
The misappropriation of assets may manifest as embezzlement, payroll fraud, or theft of property. Individuals and organizations can also conceal their assets by excluding them from their balance sheets in order to conceal them from a third party. Financial accountants endeavor to expose these disparities and hold individuals and businesses financially accountable.
Family problems
It is also possible for fraud to occur within marriages and families. Forensic accountants are able to assist in getting to the bottom of a variety of financial mysteries, including the concealment of funds and the abuse of personal connections in order to steal money. Even though the magnitude of these conflicts is often far lower than that of scandals involving larger firms, family and marital discord can nonetheless cause a great deal of harm.
Insurance claims
False insurance claims are a popular strategy for people to profit from a falsehood involving asset protection. Examples include faking claims that are difficult to disprove, such as a home fire or a theft. Accountants specializing in forensic accounting examine the facts behind these claims in order to assess their legitimacy.
Famous forensic accounting investigations
From Al Capone’s trial to recent scandals, forensic accountants have been involved in a number of high-profile cases. These significant events illustrate the need for this profession and serve as a reminder to businesses of the importance of contacting out as soon as red flags appear. Review the summaries of the main scandals listed below to see why businesses consider forensic accounting crucial to their financial security.
Enron Controversy
This Texas energy corporation was involved in one of the world’s largest audit scandals. Enron deceived investors by concealing billions of dollars in debt and failing projects through a variety of illegal activities. When the business’s share price went from $90.75 per share to less than $1, stockholders were outraged and sued the company for $40 billion, prompting an inquiry by the U.S. Securities and Exchange Commission. In 2001, Enron eventually filed for bankruptcy.
AIG’s Bailout
The American International Group received a $180 billion government bailout and played a key part in the financial crisis of 2008. Following dubious financial actions, the company became entangled in a life insurance fraud. forensic accountants assisted in the discovery of these misconducts.
Conclusion
By now, you should have a good idea on how a forensic accountant works and how they are involved in different cases. Remember that a forensic accountant is not able to work on their own without the help of other professionals. They need the help of attorneys, social workers and law enforcement officials to get the job done.