How Forensic Accounting Is Used in the Judicial System

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The word “forensic” is often associated with crimes, but this interpretation does not fit all situations. “Forensic” simply means “suitable for use in a court of law.” Indeed, forensic accountants are responsible for gathering financial information that can be used in court. Forensic accountants may also be known as investigative auditors or forensic auditors.

Forensic accountants have a significant role in today’s judicial system. In an article for the American Institute of Certified Public Accountants (AICPA), Kenneth Neumann, CPA/CFE, and Mary O’Connor, ASA, explained, “The role of the forensic accountant has expanded significantly during the last several years for many reasons, including the requirement for greater scrutiny on corporate governance brought about by the Sarbanes-Oxley legislation and the widespread recognition of the risks and prevalence of financial fraud in today’s business environment.”

The Need for Forensic Accountants Is Growing

  • According to the Association of Certified Fraud Examiners, U.S. businesses will lose an average of 5 percent of gross revenues to fraud.
  • The North American Securities Administrators Association indicates nearly 30 percent of state securities regulators have seen an increase in elder fraud cases and complaints.
  • The FBI estimates the total cost of insurance fraud is $40 billion per year.

Major Responsibilities of a Forensic Accountant

Forensic accountants have a broad range of responsibilities. Work in forensic accounting may offer the ideal career choice for individuals who enjoy accounting but want to add an element of investigation to their daily work. Forensic accountants are similar to detectives, examining information to find the facts about financial cases. Consider the following essential tasks that a forensic accountant must perform:

Establishing the Foundation for a Case

Forensic accountants are responsible for helping clients prove that they have legal grounds for a case. A forensic accountant can achieve this objective in many areas. These professionals may assist in cases of:

  • Securities fraud
  • Bankruptcy
  • Embezzlement
  • Identity theft
  • Insurance fraud
  • Employee fraud
  • Divorce or matrimonial disputes
  • Professional negligence
  • Shareholders’ and partnership disputes
  • Personal injury claims
  • Motor vehicle accidents
  • Business interruption and other insurance claims
  • Mediation and arbitration

Evaluating the Case

Forensic accountants can work in a range of areas. The first step in any case is evaluating what is needed.

In cases of fraud and theft

The forensic accountant will carefully examine records for evidence that such actions have taken place. The accountant will attempt to provide the court with solid information that can lead to the determination of guilt.

Working with personal injury claims

Insurance claims, and claims of negligence, the forensic accountant will assist in determining the economic damages sustained in particular events. This determination could mean offering valuation associated with a business interruption or loss qualification associated with a particular instance of professional negligence.

In a case such as divorce

The accountant may help uncover hidden assets or properly assess the financial value of the assets that a couple possesses. In this type of case, no criminal activity may be present. However, the accountant’s investigative skills are still critical in determining what types of finances are being studied and what would constitute a fair and legal outcome for the dispute.

Conducting Interviews

Forensic accountants enjoy many opportunities to collaborate and connect with others. Forensic accountants may often work closely with individuals both on their own forensic investigative team and outside of the group. When ledgers, accounts, and other documents do not provide the necessary information for a case, forensic accountants may look beyond records and begin interviewing those who are involved in the case instead.

Witnesses who are interviewed in forensic accounting cases must meet the proper criteria for their statements to be usable in court. These individuals must:

  • Have a strong basis for all statements that are rooted in fact
  • Provide details that support their reasoning for all opinions supplied in regards to the case
  • Have strong professional qualifications that establish their suitability for testifying in such cases

Gathering Evidence

Forensic accountants have the job of collecting compelling fact-based evidence in support of their cases such that their determinations can hold up in a court of law. This work may include evaluating ledgers, analyzing financial reports, and examining account statements.

The forensic accountant collects this information and analyzes the finer points to make a solid fact-based determination on the issue in question. The accountant will supply lawyers and clients with the findings collected.

Creating Reports

While the evidence itself is crucial for the cases involved in forensic accounting, so too is the proper analysis of this information. While forensic accountants provide account statements and other documentation to the legal team working on the case, they also draft reports that summarize what these documents mean.

Translating a vast amount of information into clear, concise facts is one of the most important tasks for a forensic accountant. It is crucial for these professionals to have strong analytical and communication skills that will equip them to take a massive collection of information and distill it into clear, understandable, and actionable evidence.

Testifying in Court

Forensic accountants are often called to testify in court. In this role, they provide a verbal testimony covering the information that was gathered throughout the course of the case. The accountant explains to the judge and jury how he or she conducted the investigation, what evidence was uncovered, and what this evidence ultimately proves.

In cases such as matrimonial disputes, forensic accountants may provide their testimony to the clients, explaining to both individuals the assets uncovered and their value. Not all forensic accounting cases are handled by a jury, but all have legal significance for the clients.

Essential Forensic Accounting Skills

For those who are interested in forensic accounting, it is important to understand the key skills that support this type of career. Many of these skills can be gained and refined through educational pursuits. A well-rounded degree program can equip students with the necessary understanding of finance, economics, and statistics. Graduates with a degree in accounting should have a thorough understanding of essential principles such as Generally Accepted Accounting Principles (GAAP), which will help them determine the legality and appropriateness of certain actions.

Those who have a strong background in economics, statistics, finance, and law are well-suited to a career in forensic accounting. For students who are interested in pursuing this area, evaluating these skill sets may help to identify areas where further focus is necessary to better prepare for this career path.

Computer Technology

Forensic accountants are responsible for recovering evidence from an increasingly broad range of devices and programs. Reviewing physical documentation is becoming obsolete as today’s forensic accountants are called to navigate smartphones, tablets, personal computers, external hard drives, and other devices.

Economics and Finance

It is not enough for a forensic accountant to have a theoretical knowledge of broad finance topics. These professionals need to thoroughly understand the operations of major corporations, investment firms, banks, and other such institutions. In order for forensic accountants to determine where accounting activities may have derailed, they must know how the business would manage its finances if it operated in a legal manner. To help lend perspective to a case involving a factor such as market manipulation, the forensic accountant must be able to demonstrate causation for losses as well as how these losses were sustained.

Valuation

Valuation is a difficult area to navigate, and many cases of financial fraud are buried in inaccurate valuations. As a forensic accountant, one must be able to correct these valuations and supply the accurate numbers to properly assess any criminal activity that may be rooted in misleading valuation.

Statistics

Financial crimes are typically obscured to a great degree. It is often impossible for even the most skilled forensic accountant to uncover all the necessary information to reconstruct the entire crime. Professionals in this field must have strong analytical skills and a thorough understanding of statistics. Statistics can help one understand the likelihood of a particular event taking place. This information makes it possible for the forensic accountant to point out how a particular series of events is unlikely to have occurred without criminal manipulation, even when the manipulation itself cannot be proven.

Legal Processes

While a forensic accountant does not have the same legal expertise as a lawyer, it is important for this professional to have a strong working understanding of the legal system. The forensic accountant must know what will qualify as evidence in court and what will not stand up to cross investigation.

Forensic accountants are central to many judicial proceedings. In the digital age, it is increasingly important for forensic accountants to assist in legal matters where their knowledge and experience can help uncover obscured information and help victims to understand the full extent of any losses, fraudulent activity, or misreporting.

A Master of Science in Accounting – Forensic Accounting degree can help prospective forensic accountants explore career possibilities. Visit New England College’s online Master of Science degree programs to learn more about the Master of Science in Accounting – Forensic Accounting concentration.

Sources:

ACFE

AICPA

Bartlett, Pringle & Wolf LLP

Bond Beebe Accountants & Advisors

Business Fraud Prevention, LLC

CNBC

Consumer Federation of America

FBI

Forensic Accounting Demystified

HG.org

North American Securities Administrators Association

US Legal