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What is Forensic Accounting?

Forensic accounting has gained recognition in the past few decades with the publicity of high-profile criminal cases. However, the profession is anything but new, with evidence dating back to its presence in the 16th century. As the field continues to expand, the need for educated professionals is growing too, and for those looking for a more exciting path within an accounting career, forensic accounting is proving to fill that void. Forensic accounting is also making its debut in educational venues across the country, sparking the interest of many intrigued students and causing them to ask, ‘What is Forensic Accounting?’

Forensic Accounting

‘Forensic,’ by definition, means “suitable for a court of law.” Forensic Accounting is a type of accounting that can be used in presentation before a legal forum. It can be described as the act of identifying, settling, sorting, extracting, recording, reporting and verifying financial data in question, as well as clearly organizing and analyzing to make proper conclusions about the state of financial matters that have fallen under criminal observation. Maurice Peloubet, a New York CPA, first coined the term “Forensic Accounting” in 1946, and its inspiration came from the responsibility of reconstructing financial enigmas to prove fraud and embezzlement.

A History of Forensic Accounting

Although the definition was not set in stone until years later, the birth of Forensic Accounting is credited to Frank Wilson, who in 1930, while working as a CPA for the Internal Revenue Service, was placed on a task force to investigate the secret dealings of Al Capone, one of America’s most infamous Chicago gangsters. Capone was well-known for a series of illegal activities, many of them violent crimes, but it was his failure to report Federal Income Tax that was his undoing, and all at the hands of Forensic Accountants. In 1931, thanks to Wilson’s diligent analysis of Capone’s financial records, the notorious Al Capone was indicted for Federal Income tax evasion, owing the government $215,080.48 from illegal gambling profits. Capone was found guilty and sentenced to 10 years in Federal Prison. The importance of Forensic Accounting was cemented.

Famous Forensic Accounting Cases

Embezzlement and fraud often take the forefront of media attention, and forensic accountants are there behind the scenes putting together the pieces of the illegal financial puzzle. Some notable criminal cases that relied on forensic accounting for investigation and prosecution include:

  • Charles Ponzi: Known as one of America’s most famous financial criminals, whose illegal investment scam made over $420,000 by 1920 (which is closer to $5 Million today), and officially placed him in history as the namesake of the Ponzi Scheme, which can still be seen today in such famous cases as that of Bernie Madoff. The Ponzi scheme involves paying returns to investors from their own money or from other investors, without ever paying them from an actual profit.
  • Enron: The Enron financial scandal was exposed in 2001, earning its place in history, at the time, as the biggest business bankruptcy on record and sparking (along with the WorldCom scandal) the creation of the Sarbanes-Oxley Act of 2002, which set new regulations for all public company boards and accounting firms. Shareholders lost $74 billion dollars, and thousands of employees lost their jobs and retirement accounts.
  • Worldcom: In 2002, the company was discovered to have inflated their assets by $11 billion dollars, and when audited by their own internal auditing department, $3.8 billion dollars in fraud was uncovered. $180 billion of investor money was lost and 30,000 jobs.
  • Tyco International: In a case of extreme greed, in 2002, the Tyco International scandal consisted of the CEO and CFO stealing $150 million dollars and inflating the company income by $500 million.
  • Bernie Madoff: In 2008, Madoff’s fraud was the largest (financially) and longest-running Ponzi scheme of all time. Madoff was a former chairman of NASDAQ, but will instead always be remembered as the man who swindled $64.8 billion dollars from innocent personal investors, many of whom lost everything they had. He was brought down by forensic accounting and sentenced to 150 years in prison.

The Role of the Forensic Accountant

Over the years, Forensic Accountants have taken part in a variety of different types of criminal financial investigations. These include:

  • Arson For Profit, such as Insurance Fraud
  • Bank Fraud
  • Embezzlement
  • Health Care Fraud
  • Insurance Fraud
  • Money Laundering
  • Mortgage Fraud
  • Organized Crime Business Enterprises
  • Ponzi Schemes
  • Securities & Commodities Fraud
  • Tax Evasion
  • Terrorist Financials

The value of the Forensic Accountant is clear, and while their presence is reputable within their partnership with law enforcement, many other needs exist for their work, such as:

  • Shareholders and partnership disputes
  • Personal injury claims, such as those resulting from motor vehicle accidents
  • Business interruption or other insurance claims
  • Internal fraud investigations, businesses or corporations
  • Business economic loss
  • Professional negligence
  • Disputes recognized in divorce proceedings
  • Arbitration and mediation

Forensic Accountants are responsible for investigating and analyzing financial evidence, creating and implementing computerized applications to aid in the presentation and analysis of evidence, reporting findings through either standardized reports or collection of legal evidentiary documents, and appearing in court to provide testimony as an expert witness. Their services are typically retained by lawyers, law enforcement organizations, insurance companies, government agencies (such as the FBI or SEC), courts, businesses, and banks.

The types of information and documents Forensic Accountants are charged with reviewing and analyzing include:

  • Real Estate Possession
  • Automobile Registrations
  • Professional Licenses
  • Cashier Check Attainments
  • UCC Filings / Liens
  • Business Rights and Ownership
  • Judgments / Garnishments
  • Investments (stocks/bonds)
  • Filings of Bankruptcy
  • Retirement Funds
  • Government Benefits
  • Litigation Settlements
  • Safe Deposit Boxes (Cash, Jewelry)
  • Boat / Aircraft Ownership
  • Insurance Policy Ownership
  • Inheritance
  • Gambling / Lottery / Powerball Winnings
  • Foreign Bank Accounts
  • Credit Reports
  • Insurance Payments
  • Domestic Bank Accounts
  • Collections (Art, Antiques, Sports Memorabilia, etc.)
  • Employment History
  • Tax Liens

The financial systems of the United States are complex and ever-changing. Because greed for money will always cause financial crime, and because personal and business monetary affairs will always require specialized analysis, the need for Forensic Accountants will continue to grow. Many of these positions require a Certified Public Accountant degree, and some will require other certifications and focused knowledge, such as the Certified Forensic Accountant® program, the Certified in Financial Forensics credential, or the Certified Fraud Examiner designation. The field can be exciting and prove very successful for someone with excellent accounting knowledge and diligence in discovery.