BY Preeti Shah | March 16, 2022
In the past few years, business activities have changed considerably. And it has happened due to technological advancements and the globalization of economies. All these have led to the massive growth of the existing businesses and helped new ventures climb the ladder of success quickly. However, it has also led to an increase in financial fraud.
Several organizations appoint in-house accountants to keep track of all accounting and business activities to avoid manipulating the business and financial data. However, fraudsters are constantly devising innovative ways to commit a crime, and hence despite all the efforts, fraud might occur.
To tackle these issues in-depth analysis of business and financial records is required. These types of fraud have led to the growth of forensic accounting, a combination of accounting knowledge and investigation skills.
Learn more about this upcoming niche and how it can prove to be a fruitful career option for accountants.
It involves presenting the company’s annual financial statements and representing its current working condition. This audit information is usually made public to help shareholders and investors make appropriate future investment decisions.
The significant difference between forensic and financial audits is that the audit results can be presented in the court of law to convict the suspect. To carry out a forensic audit of a firm, you must possess legal framework understanding and extensive auditing and accounting experience.
Several frauds need to be investigated by forensic accountants. A few of them are:
Business Fraud: It involves formulating a strategy and carrying out an in-depth documents review by the forensic accountant. Asset identification and recovery, interviewing suspects, and tracing misuse of the resources are a part of the investigation.
Tax Fraud: Many times, businesses and individuals try to present false income and financial information to save tax. Forensic accountants investigate to identify such tax evasions.
Securities Fraud: Various white-collar crimes related to commodity trading, stocks, and investments fall under this category. It also involves Ponzi schemes, late-day trading, and pyramid schemes.
Hidden Assets: Hiding assets by individuals and organizations from tax authorities is a common practice. Payroll fraud, property theft, fake invoice creation, cash misappropriation, inventory theft, etc., are a few common asset frauds investigated by forensic accountants.
Partnership Fraud: Conflict might also arise due to inappropriate distribution of benefits and returns among the partners or the shareholders of the company. The forensic accountant does an in-depth examination of financial and accounting records.
Insurance Frauds: Forensic accountants review insurance policies, claim settlements, property and business losses, employee frauds, medical carelessness, etc., on behalf of policyholders and insurance companies to detect fraud.
Bankruptcy: Trademark and patent infringements, incomplete agreements, contract breaches, construction claims are a few business losses that might occur. Forensic accountants study the conditions that led to disputes and implement recovery measures in bankruptcy cases.
Money Laundering: Individuals and companies might have illegal inflow or outflow of money and undisclosed bank accounts. All this falls under money laundering that forensic accountants identify.
Family Disputes: Disputes might arise over property distribution and financial compensation for divorce and child support. Forensic accountants calculate losses and execute proper distribution among the members.
A forensic audit is more than a simple auditing process, and a few additional steps need to be implemented to complete the process.
When you get hired by an organization as a forensic auditor, you need to clarify the main objective behind the audit. The investigation plan the forensic auditor follows involves the following:
- Identifying the type of fraud
- Time of the fraud occurrence
- How the fraud occurred
- Identifying fraud committers
- Calculating the loss due to fraud
- Collecting evidence that is admissible in the court
- Suggesting measures to minimize the occurrence of similar frauds in the future
Once the audit is complete, you must have a clear understanding of the fraud type and how it took place. The evidence must be sufficient to be presented in the court and should uncover fraud details, amount of financial loss, and people affected by it to prove the fraudster's identity.
Also, you must ensure that the evidence collected follows a logical sequence and is not altered or harmed by anyone.
A few techniques to collect evidence in a forensic audit are:
Analytical: It involves comparing developments in a given period or data from diverse divisions.
Substantive: It involves reviewing documents, financial records, etc.
Surveillance: It involves analyzing all the emails and messages sent by people within an organization.
Computer-based: It involves examining software programs to identify fraud.
Understanding Internal Controls: It involves gaining knowledge about the policies and activity of people at each level of the organization.
Suspects’ Interview: It involves interviewing suspects and observing their behavior.
Once you have collected enough evidence, you need to present it logically to the client. It is done by preparing a comprehensive report of your investigation findings. The report should include:
- The type of fraud
- The time during which the fraud occurred
- Method of fraud execution
- Who was responsible for its occurrence
- Damages caused by the scam
- Brief of evidence
- Preventive measures to reduce their occurrence
The report presentation is mandatory as the client can use it if he plans to file a legal case against fraudster(s).
As a forensic auditor, your presence might be required to describe the evidence and the steps involved in identifying the suspect during court proceedings. You should not use complex accounting terms and explain the entire process in simplified language to help people with no accounting knowledge understand how the fraud occurred.
Forensic accounting combines forensics with accounting to unfold several financial crimes. If you want to make a career in this field, you must have specific characteristics to portray a forensic accountant's role effectively.
Detail Conscious: You must be detail conscious as you need to analyze a vast amount of data to identify fraud. You cannot overlook even a minute detail as it can change the case's final result.
Tech Savvy: All businesses use technology to maintain their financial data. So, you must be at ease with the latest working methodology of accounting software as you need to handle such devices and software to detect fraudulent accounting activities.
Honest: Forensic accounting requires unbiased investigation. So you must be honest whether you work for a firm or as a private consultant, and it is the only way to gain clients and establish a positive market reputation.
Tolerant: Frauds cannot be detected at once, and the investigation process might take time to complete, leading to frustration. So to be successful as a forensic accountant, you must act patiently and analyze every detail carefully.
Problem-Solving Skills: Financial crimes are not straightforward. You must have a problem-solving mindset and an understanding of using the best available resources and techniques. It is essential to figure out various aspects that led to the occurrence of the crime or prevent it from occurring in the future.
- Many times adequate data and facts, such as access to financial information of the associated companies, are not available that are required to conduct the investigation and reach a conclusion.
- Forensic accountants often do not have access to interview people who could help them connect the broken links and throw light on misleading transactions to conclude the investigation.
- All companies do not follow proper data management policies. Adequate data backup and data security measures are not present, leading to easy transfer of data out of the company.
Forensic accounting requires combined expert knowledge of accounting, auditing, and legal framework. To be a forensic accountant, you must know about different frauds that can take place and how to collect evidence to unfold those crimes.
Businesses hire skilled professionals to provide the best bespoke solution to their problems. It is an exciting career option for students interested in accounting and criminal justice. However, to become a sought-after forensic accounting professional, you need to undergo proper training.
SIFS India, a Govt. registered forensic science laboratory and training academy has transformed the lives of thousands of students worldwide by providing quality and professional education. You can opt for an online or offline certificate, diploma, and post-graduate diploma courses as per your requirement.