What does a forensic accountant do?
In 2016, Warner Bros. Pictures released one of the most groundbreaking movies in the past twenty years, the movie was aptly titled “The Accountant” starting Ben Affleck. Okay, maybe I am a little biased in this proclamation, but hey Hollywood finally released a movie with an accountant as the hero!
All kidding aside, the great thing about the movie is it allows me to easily explain what forensic accounting is and what types of forensic accounting services are out there.
If you have watched the movie, you can see different aspects of the forensic accounting profession (and no, we don’t generally have weapons and secret military training). I’m referring to how Ben Affleck’s character investigated embezzlement.
Most forensic accountants have some sort of financial training and most, if not all, are certified public accountants (CPA). But being a CPA is merely a starting point. Most good forensic accountants have an auditing background.
This is a form of accounting, outside of the tax department of a firm, that focuses on compliance for businesses and organizations.
Why is auditing background important?
In auditing, an accountant receives the training not only to identify transactions or trends that look unusual, but also how to identify the ‘opposite’ side of a transaction.
Also, when auditing an accountant reviews internal controls and identifies company financial weaknesses.
As a forensic accountant, when I investigate an embezzlement case, the first thing I do in the investigation is understand the internal controls of the company. The weakness in the controls will lead me to the low hanging fruit of my investigation.
From there the investigation will expand.
How long does an accountant have to work in an auditing office before they can get certified as a forensic accountant?
There really isn’t a set amount of time. But the accountant should have enough experience in the auditing world to be able to quickly identify weaknesses and issues.
Why is understanding internal controls so important to forensic accountants?
Well, most people who steal from an employer do so because they see an opportunity.
In forensic accounting there is the concept of the fraud triangle. Like any triangle, there are three major areas that protect against fraud.
Those areas are:
- The pressure to commit fraud happens when the perpetrator is either living beyond their means or, in some cases, there are unexpected bills—possibly medical expenses.
- This is often related to the perpetrator rationalizing in their head that it is ‘okay’ to commit fraud. Thoughts occur like, “I should have gotten a raise for all of my hard work so it is okay for me to take this extra.”
- Opportunity or Perceived Opportunity
- Most organization cannot reasonably control the first two areas: Pressure and Rationalization. But they can control opportunity
All three of these items are required for fraud to occur.
Companies can control the opportunity for fraud by putting in sound internal controls to prevent any perceived opportunity for theft.
To think of it another way, a simple internal control would to be putting cash in a locked box or safe.
If an employee knows that the cash is stored in an unlocked area, the perceived opportunity would be to have access to the cash without anyone preventing you from getting the cash.
Internal controls over the accounting records would act in a similar way. As a forensic accountant, I will look to where the weaknesses are in a company’s internal controls. Those weaknesses will help me identify the perceived opportunity for the possible thief.
Embezzlement is the ‘sexy’ word used in the industry that usually has the generic meaning of fraud. Most embezzlement is focused around cash and how the perpetrator gained access to the cash. When a forensic accountant investigates for embezzlement, they are tracing through the transactions to ultimately see where the cash went. While we do hear about the famous accounting fraud cases such as Enron, most fraud involves theft of cash.
What is forensic accounting?
Forensic accounting has as one of its core services the investigation of embezzlement, however over the years forensic accounting has encompassed other services areas:
- Lost profits
- Litigation support
- Economic damages
- Lost earnings
- Punitive damages
Some of these services do not necessarily involve fraud or embezzlement. However, the unique skills of a forensic accountant are well suited to analyze many of these transactions, so they fall into our workload.
The services tend to revolve around understanding a transaction or the impact of a proposed financial event. In forensic accounting, we not only look at the actual accounting entry, we also look outside of just the accounting of a transaction. We evaluate the transaction to determine how it will impact our clients— not only now, but in the future.
Forensic accountants also provide their expertise for litigation support.
Many times, an attorney will hire the forensic accounting expert to aid in determining the dollar amount of a case. The forensic accountant will also provide background knowledge to the attorney and possibly even the jury. Some forensic accountants will act as expert witnesses and provide testimony at trial. They’ll explain the investigation and help the jury to understand the complex transaction.
Steven D Hovland is a Certified Public Accountant and a Certified Forensic Accountant. He has 20+ years experience in auditing, accounting, and forensic investigations. He is the founder of Hovland Forensic and Financial, a virtual CFO service company as well as forensic litigation services.
For a free consultation https://hovlandforensic.com/scheduling