By Carol Wiley, Accountingedu contributing writer
Updated April 2013
Thanks to all the popular crime-investigation shows on TV, the public perception of forensics often revolves around the investigation of crime scenes. Forensics actually refers to any investigative technique that produces results that a court of law will accept as evidence.
Forensic accounting has been around for years - the IRS reportedly used a forensic accountant to catch Al Capone for tax evasion when the FBI was unable to convict Capone of other crimes. More recently the fraudulent financial statements that led to the Enron, WorldCom, and other corporate scandals of the early 2000s began to focus the public's attention on what forensic accountants can do in uncovering financial irregularities and tracing illegal financial activities.
In the recent Bernie Madoff scandal, a federal court appointed forensic accountants to reconstruct Madoff's financial records. In recent years forensic accountants have also helped track and disrupt the financial activities of terrorist organizations.
Forensic accounting has two major components: litigation support and investigative accounting. Forensic accountants can be involved in either one or both of these areas.
In litigation support, forensic accountants act as expert witnesses or consultants for parties involved in a lawsuit. Litigation support often involves determining financial damages or valuing businesses or assets. Both sides in a lawsuit may retain forensic accountants to testify as expert witnesses.
The services that forensic accountants provide during a lawsuit include:
Investigative accounting involves using auditing, quantitative methods, and related skills to reconstruct financial records and determine if fraud or other illegal financial activities have occurred. Investigative accountants are sometimes called fraud auditors or fraud examiners.
For example, an investigative accountant might reconstruct a business's financial records, as in the Madoff case, or a business might call in an investigative accountant if it suspects an employee is embezzling money. Investigative accountants also work for law enforcement during fraud investigations.
The job of a forensic accountant working on any given case generally consists of the same three parts:
Forensic accountants may be involved in either civil disputes or criminal investigations. Civil matters might include:
For example, in divorce cases forensic accountants may value marital assets, calculate and testify to the reasonableness of alimony or child support payments, determine cash flow from a spouse's business operations, or search for a spouse's hidden income or assets.
In criminal investigations, forensic accountants often work closely with law enforcement personnel. Areas that forensic accountants might investigate include:
Common areas of specialization for forensic accountants include:
Forensic accountants also help to prevent fraud or proactively identify the potential for financial problems. For example, a business may hire a forensic accountant to review financial records and processes so as to identify areas that might permit fraud or financial problems. This practice has become more common as accounting scandals have increased the demand for financial transparency.
Problems that forensic accountants look for include misleading financial reporting, personal gain of corporate insiders, and violations of the law or tax codes. Forensic accountants may serve as advisers to audit committees or assist in investment analyst research.
Forensic accountants also conduct compliance audits. A compliance audit reviews how well an organization is complying with legal and regulatory guidelines. Forensic accountants review organizational polices, documentation management, user access controls, compliance and risk management procedures. This type of audit includes interviewing corporate management as a component of the investigation, which is a practice unique to forensic accounting.
In the past, public and management accountants often became forensic accountants through their experience working in the area of forensic accounting. As forensic accounting has evolved, so has the education and training that prepares these specialized accountants for the challenges unique to forensic accounting. A growing number of forensic accounting specific educational programs are now available. Options include:
Students enrolled in bachelor's degree programs in general accounting or related areas that intend to ultimately pursue a career in forensic accounting get a head start by taking elective courses in areas such as:
Forensic accountants work for accounting firms that retain these professionals and contract out their services. The Big Four, Deloitte, KPMG, Ernst and Young, and PricewaterhouseCoopers, all employ forensic accountants. They also are employed by smaller firms that offer forensic accounting services, as well as government agencies such as the FBI, the IRS, the SEC, or the Bureau of Alcohol, Tobacco and Firearms. Banks and insurance companies also employ forensic accountants.
A common path to becoming a forensic accountant is to work as a general accountant for a few years, while getting experience and additional training that leads to specialization.
The Bureau of Labor Statistics expects the demand for all accountants and auditors to grow by 22 percent between 2008 and 2018.
Almost all forensic accountants are CPAs, and becoming a forensic accountant today almost always requires a CPA license. Forensic accountants can also obtain other credentials that enhance their professional status.
The American Institute of Certified Public Accountants (AICPA) is a national, professional organization for all CPAs. The AICPA offers a Certified in Financial Forensics (CFF) credential to CPAs who meet the following qualifications:
For accountants who work in business valuation, the AICPA also offers the Accredited in Business Valuation (ABV) credential. The main requirements for securing ABV status are:
Another organization that offers a forensic accounting certification is the American College of Forensic Examiners International (ACFEI). This independent, professional association represents forensic examiners, including forensic accountants, worldwide. The Certified Forensic Accountant (Cr.FA) credential requires a current CPA license, experience in forensic accounting, and passing their certification exam.
Other credentials available to forensic accountants include:
Forensic accountants are public accountants first who have an understanding of accounting principals and procedures, and who are able to distinguish accounting mistakes from willful fraud or other illegal activity. However, a white paper from the American Institute of Certified Public Accountants (AICPA) states that, "Being an effective accountant does not necessarily translate into being an effective forensic accountant."
Forensic accounting analysis goes beyond audits that look for adherence to standard accounting practices. Forensic accountants must trace transactions from beginning to end and review supporting documentation to identify telltale signs of fraud or theft. Forensic accountants interview and interact with clients as part of forensic reviews, so the ability to read people well is vitally important to the job.
Objectivity and impartiality are paramount to fairly determining the facts in a case and describing the results of the investigation. Other important traits listed in the AICPA's white paper include:
Forensic accountants also need to understand the legal process and have the communication skills (both verbal and written) to explain complex financial information to people who may have little understanding of finance, such as lawyers, judges, and juries.
Computer skills and understanding financial software are also important, given that most accounting systems today are computerized. Forensic accountants need to be able to follow a digital trail just as well as a paper trail.