Forensic Accounting

Forensic accounting is the investigation of fraud and misrepresentation. Forensic accountants conduct an in-depth analysis of financial data. They document the entire investigation and report findings to a court of law. Forensic accountants often testify to the veracity of their findings.

It is a widely applied accounting discipline that resolves financial conspiracies—money laundering, bankruptcy, embezzlement, insurance claims, securities fraud, asset misappropriation, tax evasion, divorces, family disputes, financial frauds, and debt defaults.

• Forensic accountants probe into financial information and other relevant details of a company or an individual to detect fraud or crime.
• A forensic accountant is a Certified Forensic Accountant (CRFAC). They collect evidence and study it. They discover legal violations and prove them in a court of law.
• In the investigation of financial allegations, the stakes are high—mere speculation of suspicion can cause massive business losses. The leaking of confidential information, therefore, is the biggest challenge faced by forensic accountants.

Forensic accounting applies scientific techniques and accounting principles to detect fraudulent activities. Due to technological advancement, corporate scams have increased tremendously—the need for forensic accountants has increased. 

A single person cannot execute forensic processes—it is carried out by a structured team of professionals—Certified Public Accountants (CPAs) and forensic accountants. The team is responsible for the following tasks:

1. The forensic team collects facts and evidence pertaining to hidden assets.
2. Forensic accountants interview associated parties and employees.
3. Then they verify the collected data.
4. This data is analyzed thoroughly.
5. The conclusions are summarized into reports.
6. The evidence is bundled into exhibits—to be presented in a court of law.
7. Sometimes, forensic personnel is required to testify, defending the veracity of reports.

The different types of felonies or misrepresentations that are investigated under forensic accounting are as follows:

#1 - Business Fraud

Business investigations comprise asset identification, asset recovery, due diligence reviews, tracing misappropriation, forensic intelligence, and suspect interviews. Forensic accountants strategize intelligence measures and identify offenders. These investigations require a detailed review of the documents.

#2 - Tax Fraud

Forensic accountants catch tax evasion. Often, businesses and individuals falsify income and other financial information to reduce tax liabilities. 

#3 - Securities Fraud

Misrepresentation of investments, commodities, and stocks is the most common white-collar crime. Late-day trading, pump and dump schemes, pyramid schemes, and Ponzi schemes are felonies.

#4 - Asset Misappropriation or Hidden Assets

Often, Individuals and companies hide assets from tax authorities. Forensic accountants detect asset misappropriations—property theft, embezzlement, and payroll fraud.

#5 - Partnership and Shareholding Dispute

Accountants also examine conflicts pertaining to compensations and benefits received by shareholders or partners. The investigation involves detailed scrutiny of accounting and financial records to quantify the issues brought out in the conflict.

#6 - Insurance Claims

Forensic accountants quantify economic damages in vehicular accidents and medical negligence cases. They review insurance policies, coverage issues, claim settlements, and the calculation of potential losses. On behalf of insurance companies and policyholders, they investigate property losses,  business losses, employee fidelity claims, and similar lawsuits.  

#7 - Economic Losses and Bankruptcy

Business losses typically include breach of contract, construction claims, trademark infringements,  patent infringements, product liability claims, and non-compete agreement breaches. Forensic accountants probe into the terms and conditions of the circumstances leading up to the dispute. They quantify the losses. In addition, accountants carry out recovery procedures in bankruptcy cases.

#8 - Money Laundering

Forensic accountants identify illegitimate sources of money - money laundering practices and undisclosed bank accounts.

#9 - Marital and Family Disputes

After quantifying losses, accountants assess financial compensation for divorces, property disputes, and family disputes. They quantify compensation for alimony and child support. For family and property disputes, accountants execute property distribution.

Benford's law (mathematical tool) is used to differentiate between a mistake and a deliberate fraud. Also, based on the  Relative Size Factor (RSF) technique, the outliers in records are subject to further investigation.

Data-mining programs automatically scan through vast volumes of data for new, unexpected, or implicit information or patterns. Forensic Accountants use various computerized software for data extraction and financial analysis.

Forensic accountants face the following challenges:

• Forensic procedures require a lot of technical and financial expertise.
• These investigations can potentially leak confidential details—can affect a suspect's reputation.
• Even mere speculation of an alleged felony generates unwanted negative publicity.
• Depending on the duration of the investigation, forensic accounting can become a very expensive process. 
• Even after proving suspects not guilty, employees remain suspicious.

Auditing and forensic accounting are two entirely different streams—the terms cannot be used interchangeably. The significant differences  are as follows:

Best Forensic Accounting Firms

According to the FIRSTHAND report in 2022, some of the best forensic accounting firms in the United States are as follows:

1. PwC (PricewaterhouseCoopers) LLP
2. Deloitte
3. Ernst & Young LLP (EY)
4. KPMG LLP
5. Grant Thornton LLP

Case Study

Jorge Alberto Garcia was recently investigated under a forensic accounting case. On November 22, 2021, Garcia was proven guilty of tax offenses and fraud. He was charged with wire fraud—he illegally acquired property and money under a home repair scheme—he made false representations and promises. In addition, Garcia failed to submit his income tax returns.

The US District Court sentenced Garcia to 12 months of imprisonment. He was made to pay $ 4,043,397.52 as compensation.

This has been a guide to what is Forensic Accounting and Its Meaning. Here we discuss forensic accounting firms, applications, techniques, and examples. You may learn more about accounting from the following articles -

• Careers in Accounting
• Forensic Accounting Careers
• What is Fund Accounting?
• Finance vs Accounting - Compare