What is Forensic Accounting?
Forensic accounting is the investigation of fraud or financial manipulation by performing extremely detailed research and analysis of financial information. Forensic accountants are often hired to prepare for litigation related to insurance claims, insolvency, divorces, embezzlement, fraud, skimming, and any type of financial theft.
Preparing for Litigation
You might have heard the phrase “forensic evidence” before, which simply means evidence that is able to be presented in a court of law. Hence, forensic accounting is an analysis of financial information that can be used to support a case in a court of law.
The process of digging through all of a company’s or individual’s financial information can take months or even years and requires a team of specialized accountants that act like detectives, trying to solve a mystery.
Typically, an accounting firm will be engaged by a client either looking to defend themselves, or one looking to prosecute someone. Most medium- to large-sized companies have a forensic accounting department, which may consist of various forensic auditors.
Types of Forensic Accounting
There are various types of forensic auditing that can take place, and they are typically organized by the types of legal proceeding that they fall under. Below are some of the most common example:
- Financial theft (customers, employees, or outsiders)
- Securities fraud
- Defaulting on debt
- Economic damages (various types of lawsuits to recover damages)
- M&A related lawsuits
- Tax evasion or fraud
- Corporate valuation disputes
- Professional negligence claims
- Money laundering
- Privacy information
- Divorce proceedings
Forensic Accounting Careers
There is a broad range of career options that exist for accountants who want to go into forensic auditing. Depending on the client being represented and the nature of the trial, the work and responsibility can be distinctly different. For example, working on a personal divorce versus Enron scandal would be vastly different.
The types of activities performed by these specialized accountants include investigating fraud, quantifying damages, valuing a company, or assessing tax bills.
Career paths into the position can also vary, but they typically require several years of tradition audit experience at a public accounting firm. There are various professional accreditations that auditors can obtain, in addition to their accounting designation.
- Chartered Financial Analyst® (CFA®) certification
- Certified Public Accountant (CPA) certification
- Chartered Alternative Investment Analyst (CAIA®) designation
- Certified Financial Planner® (CFP®) designation
- Financial Risk Manager (FRM®) certification
- Financial Modeling & Valuation Analyst (FMVA)™ certification
Thank you for reading this guide to forensic accounting, what it is, and the important function it serves it the legal system. CFI’s mission is to help you advance your career, and with that goal in mind, these additional resources will be a big help: