Forensic accounting is a specialized field that uses accounting, auditing and investigative skills to investigate and examine financial statements and records to uncover irregularities or fraudulent activities and identify and analyze financial data patterns, providing valuable insights to legal professionals.
Forensic accountants are experts in detecting financial crimes and fraud, including money laundering, embezzlement and insurance fraud.
Forensic accounting is critical for identifying crimes that have been conducted or proving someone’s innocence. Forensic accountants work alongside legal professionals to conduct financial investigations. They are usually private investigators specializing in forensic accounting and have the proprietary software technology to analyze complex financial data quickly, easily and efficiently.
They use various techniques and tools to identify and analyze financial data, including tracing financial transactions, analyzing financial records and preparing reports that can be used in criminal and civil legal proceedings.
In the corporate world, forensic accounting helps companies identify fraud, embezzlement and other financial crimes committed by employees or third parties. Forensic accountants can help identify fraudulent transactions, locate hidden assets, and support litigation or criminal prosecutions.
Forensic accounting can benefit a wide range of individuals and organizations:
Companies
Companies can use forensic accounting to detect and prevent fraudulent activities by employees or third parties. Forensic accounting can help companies identify the root cause of financial irregularities and take appropriate action, such as terminating employees or implementing preventive measures to avoid future financial crimes.
Case study: In one case, forensic accountants discovered that the one-third owner/manager of a company used four different schemes to embezzle $2.2 million over eight years from the other partners. The arbitration judge and the defense agreed that the partner had embezzled $1.7 million. IRS Criminal Investigation prosecuted the partner for unreported income of $870,000 over four years.
Legal professionals
Forensic accounting can also provide critical support to legal professionals through litigation support. Forensic accountants assist in building cases, analyzing financial statements and transactions, and providing expert testimony in court.
Case study: In another case, a federal prosecutor and IRS CI charged the owners of a bar with structuring and conspiracy. Because of the deposits to his bank account, one of the bar owners was identified by the IRS, and he and his brothers were indicted on violations of the Title 31 structuring and Title 18 conspiracy laws. The structuring charge resulted from his depositing just under $10,000 to his company bank account daily over a period of months. Conspiracy was charged because he and his brothers operated other bars in the past with similar deposits, but an overt act was not alleged in the indictment. The attorney worked with a forensic accounting investigator, who reviewed the accounting records down to the cash register tapes and found the combined revenue for the nights charged in the indictment was just under $10,000 daily. During discovery, records were reviewed, which the government requested be stipulated into evidence. The meaningful records were identified as less than an inch thick out of the one-foot-thick pile of documents. It was proven that there was no evidence of an overt act of conspiracy, and all charges were dismissed.
Insurance companies
Insurance companies frequently use forensic accounting to investigate claims filed by individuals and companies. Forensic accountants can help insurance companies determine claims’ validity, locate hidden assets, and identify fraudulent activities.
Case study: In another case, a coastal restaurant and bar operator filed a lawsuit and submitted a claim for $550,000 for loss of revenue, inventory, cost of goods sold and retail store sales, saying improper construction caused the business to shut down. The contractor’s insurance company hired a forensic accountant. After examining the books and records provided, they determined the loss was half of what was claimed.
Individuals
Forensic accounting can benefit individuals victimized by financial crimes, such as embezzlement and investment fraud. Forensic accountants can help individuals recover assets lost to financial crimes and provide expert testimony in court. Forensic accounting can perform tracing to determine separate and community property to help individuals going through a divorce obtain the settlement they deserve.
Case study: This case concerned a doctor who created a medical device that was being tested. Investors contributed in excess of $30 million to the venture. An individual alleged the venture was a Ponzi scheme and attempted to get the FBI, the IRS and the SEC involved in an investigation but was turned down. The individual then contacted the investors, prompting concern about what happened with the investor funds. A lawsuit was filed for the return of invested funds. After a forensic investigation reviewed the flow of investor funds and the books of the venture, a report that followed the money and traced the funds proved the investor funds were not misused, and the lawsuit was dismissed and settled in favor of the doctor.
In conclusion, the most important thing when hiring someone to conduct forensic accounting is to take the time to interview them to learn about their experience, skill set, education, the tools they use, if they are an expert witness, have testified, and if they have worked similar cases.
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