Forensic Accounting – Police Work By The Book

By on November 21, 2012

What is a Forensic Accountant?
What if the nature of the crime was a financial dispute rather than murder or assault? The evidence coming in the form of financial irregularities rather than blood splatters or fingerprints? A forensic accountant would be the detective dispatched to investigate such a crime and identify the culprits.

Many associate the word “forensics” with chemical analysis, and may be surprised to see it applied to accounting. In fact, forensics simply means “suitable for use in a court of law”. The reason it’s often associated with lab evidence of the kind seen in shows like Dexter and CSI is that such evidence is usually definitive.

A forensic accountant simply seeks definitive evidence of a different form, such as credit card purchases, bank statements, emails and databases, with the accountant relying on knowledge of economic and business practices, data analysis and investigative techniques and litigation procedures to put the pieces together. The data mentioned is all highly sensitive; therefore forensic accountants must abide by the same laws that govern police practices.

Calling in the Forensic Accountant
Forensic accountants can be called on by police forces, businesses and even married couples to provide their expertise and sleuthing skills. According to forensicaccounting.com, assignment types include:

  • Criminal investigations: Forensic accountants can aid the police in apprehending criminals that may not have committed financial crimes but can be tracked through financial methods. Forensic accountants were used by the FBI and CIA post 9-11 to locate terrorists via money trails.
  • Insurance claims: Insurance companies will call on the services of a forensic accountant to evaluate claims.
  • Injury claims: In motor vehicle accidents and medical malpractice, etc., a forensic accountant’s role is to determine the extent of economic damages owed
  • Fraud: whether it’s a business accused of fraud or a business accusing an employee of fraud, forensic accounting services are required to ascertain whether fraud actually occurred and the extent to which it occurred.
  • Negligence: In the case of accounting negligence, a forensic accountant can determine whether the accused party has failed to comply with accounting standards. In other cases of negligence, their role is to help determine the compensation required.
  • Lawsuits.
  • Marital disputes.

Common Forensic Accounting Methods
Forensic accounting methods generally fall into two categories: direct (which involves analyzing companies’ official records, similar to standard auditing methods) and indirect, which is used when the more traditional direct methods fail and the books cannot be relied upon.

Indirect methods are geared towards determining whether the accused has reported less income then they actually received. According to msgcpa.com, it includes methods such as:

  • Cash T: Determining if there is unreported income by comparing cash spent to cash received. If cash spent exceeds cash received, the excess may point the way to unreported income. Of course, loans and other such factors are taken into account.
  • Net worth: The net worth is an individual’s or business’s total income minus their total expenditure, and is calculated at the beginning and end of a time period. The net worth method compares the difference between the beginning and ending net worth to the total reported income. Once nontaxable income and other factors are taken into account, what’s left over is unreported income.
  • Bank deposit: Analyzes bank deposits through taxable receipts.

Forensic accounting is an essential practice in any criminal investigation. Criminals can conceal fingerprints, they can hide their face, they can clear their tracks, but they can’t completely eliminate the need for money.

There’s always a money trail, and with advances in technology and the investigative skills of a forensic accountant, the trail is difficult to conceal. Forensic accountants are unlikely to get their own TV series, but they’re likely to get the job done.

Attached Images:
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Written by Matthew Flax on behalf of Now Learning, which promotes online and classroom-based accounting courses in Australia.

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