The Importance of Forensic Accounting in Financial Fraud Cases

What is forensic accounting?

Forensic accountants go through financial records looking for discrepancies or inconsistencies so they can determine if someone has committed financial wrongdoing. Forensic accountants might be involved with lawsuits related to criminal activity, divorce proceedings, insurance claims, bankruptcy issues, theft, embezzlement, tax evasion, investments, and other illegal acts. Forensic accountants use their knowledge of business practices to detect whether someone may have engaged in illegal activities or ethical violations.

Forensic accountants can also be called upon during collaborative divorce cases to determine whether suspicious transactions have occurred. "If there is evidence of financial wrongdoing, forensic accounting can help explain how it happened, what the motives were behind it, the intention behind the action taken, and how much has been defrauded."

What is financial fraud?

Financial fraud occurs when someone misrepresents the value of an asset or collateral to receive a personal financial benefit. Financial fraud also includes theft and embezzlement when someone takes financial resources for his own personal use. Some types of financial fraud include:

• false accounting
• inflating or deflating figures in balance sheets
• loss statements or other records
• conspiracy to commit fraud: planning with another person(s) to deceive the victim

In recent years, forensic accounting has become more and more prevalent in financial fraud cases. Nowadays, forensic investigators have a greater ability to investigate the financial aspects of a crime, forensic accountants have been able to uncover fraudulent or suspicious activity that would have remained hidden or undetected before forensic analysis became integral in criminal investigations. For example, forensic accountants may look at a company's general ledger and find unusual fluctuations in accounts. Some of which can be attributed to an individual or an outside party.

In addition to being used to directly determine guilt or innocence by finding evidence of malfeasance within a business's financial records, forensic accounting is also useful for insurance claims processing purposes. Forensic accounting plays an important role in identifying systemic problems related to property damage incurred during a natural disaster or man-made event.

How Forensic Accountants Operate

Forensic accounting is now becoming more prevalent as forensic accountants now have the tools and procedures available to uncover cases of fraud that would otherwise remain hidden. Since forensic accountants have the ability to investigate the financial aspects of a crime, forensic analysis has become an important part of criminal investigations

What do forensic accountants look at when investigating financial fraud?

Forensic accountants look at all aspects of business operations, including credit card transactions, inventory records, bookkeeping, bank statements, and other records. They scrutinize these records to determine whether any evidence exists to support an allegation of embezzlement.

Although forensic accountants are not detectives, they often must recreate the crime scene in order to provide comprehensive evidence. The forensic accountant will examine records and interview employees to determine where the money went and how it was spent.

During the investigation, forensic accountants may use software tools to cross-reference data for patterns that indicate fraudulent activities. Sophisticated forensic accounting tools allow forensic investigators working on complex financial crimes to use risk-based forensic analytics that can be tailored to identify financial anomalies in data. These tools can also be used to identify employees who are responsible for specific financial crimes.

What are some difficulties forensic accountants face during investigations?

Forensic accountants involved in financial fraud cases must maintain an objective perspective while they investigate the case. Often, forensic investigators experience stress on the job because of the negative effect on their client's businesses and reputations due to financial crimes. This leads them to become emotionally attached to the investigation.

As forensic accountants analyze data, they must be careful to not cause additional damage to the business by inadvertently releasing confidential information. Even if forensic accountants are unable to present sufficient evidence for a criminal prosecution, forensic accounting services can provide financial relief for victims of financial crimes by helping them recover lost or misappropriated assets.

The Role of Collaborative Divorce Attorney

A collaborative divorce attorney will be able to provide insight as to how best to prevent future financial misconduct from occurring during an upcoming case. They are also likely to have access to forensic accountants, which can help identify any suspicious transactions that may have occurred during the collaborative divorce process—before dissolution is granted.

Collaborative attorneys can also work with forensic accountants to create collaborative divorce agreements which address potential sources of financial misconduct and make attorneys aware of issues related to hidden assets.

As you can see, forensic accountants and collaborative attorneys play an important role in protecting the public interest by conducting financial forensic investigations. Thanks to forensic accounting, businesses and individuals have a better chance of uncovering financial crimes that may have gone undetected without forensic analysis.