The Role of Forensic Accounting in Discovering Financial Crimes

The idea of forensic accountants discovering financial crimes may lead you to visualize a new CSI spin-off. Although the job role is not as glamorous as you may be picturing, forensic accountants do indeed play vital roles in uncovering financial crimes. Forensic accountants utilize auditing, accounting, and investigative skills to examine a company or individual’s finances. Their findings provide accounting analyses for legal proceedings. Find out more about how forensic accountants discover financial crimes by reading the following insightful sections.

What do forensic accountants do?

Forensic accounting is much more than just looking at the numbers. The accountants are highly trained to analyze, interpret, and summarize complex business matters. They compile financial evidence and then develop computer applications to analyze and manage the information they have collected. They then communicate their findings through presentations or reports. Forensic accountants can become employed by various types of organizations, such as insurance companies, police forces, government agencies, banks, and public accounting companies. With such a wide range of potential employers, forensic accountants can enjoy a very lucrative career. They have to work hard to become forensic accountants, though. They will need to possess a thorough knowledge of business practices, applicable laws, and the Generally Accepted Accounting Principles. They also need to pass the challenging CPA exam first to become a Certified Public Accountant. Thankfully, prospective CPAs can obtain specialized study materials to help them with their CPA exam preparation.

What types of criminal investigations do forensic accountants handle?

When it comes to criminal investigations, forensic accountancy is used to find out whether a crime occurred and to assess the likelihood of criminal intent. Crimes commonly investigated by forensic accountants include:

• Securities fraud.
• Employee theft.
• Insurance fraud.
• Identity theft.
• Falsification of financial statement information.

There are plenty of other investigations handled by forensic accountants. They can assist in divorce cases to find hidden assets. They can also deal with other civil matters like breaches of contracts, breaches of warranties, disagreements regarding company acquisitions, and business valuation disputes. Other assignments include investigating expropriations, construction claims, patent or trademark infringements, product liability claims, and determining the financial results from breaching an agreement or nondisclosure.

Examples of Forensic Accounting Cases

There are not many case studies of forensic accounting at work for one simple reason: companies do not like to publicize details of financial misconduct. However, there are some high-profile cases to use as examples of forensic accountancy in action.

In 1996, a city manager of Contra Costa County in California became suspicious when the local disposal service firm Orinda-Moraga Disposal Services asked for financial assistance to stay afloat. The company wanted to raise the rates it charged its customers and required the approval of the Contra Costa Sanitation District. Upon further investigation, a forensic accountant found the company had sent checks to nonexistent people at several fake firms. Orinda-Moraga Disposal Services’ owner had created these companies to siphon funds illegally. Orinda-Moraga inflated its business costs to justify its increased customer rates. The owner of Orinda-Moraga and his partner had civil and criminal suits filed against them, and they were found to be guilty as charged.

In 1997, a company that manufactured small appliances, called Sunbeam, followed a practice known as “bill and hold.” This term means companies record sales of their products as profits before those products are delivered. At Sunbeam, this wasn’t just one or two items. The company sold massive amounts of its products to other companies at a discounted rate while keeping the products in its warehouses. While the bill and hold practice is not actually illegal, it is certainly bad practice. On paper, Sunbeam appeared to have high sales, but forensic accounting eventually uncovered that this was not the case. At first, an accounting firm’s audit reported that Sunbeam’s books were in order and followed federal guidelines. However, when another accounting firm held investigations, it found proof that someone had manipulated Sunbeam’s figures. The company’s CEO was not only fired, he was also banned from serving as an officer in a public firm. As if that were not bad enough, he also had to pay $500,000 in fines, and millions of dollars to settle investment lawsuits. Without an excellent forensic accountant at the helm of the investigation, the truth would never have become uncovered.