Since I’m just starting my career, I am often presented with the question, “What are you doing for work now?” When I explain that I am a forensic accountant, most respond with a comment related to their love for crime scene shows and forensic sciences.
Typically, I would refute their answer, explaining that I investigate fraud. However, there is so much more to forensic accounting than fraud investigation, and the capabilities of forensic accountants are often overlooked.
Let’s get you up to speed on forensic accountants, so you’ll be ready to hire one if your situation calls for this type of expertise.
What a Forensic Accountant Does
Put broadly, forensic accountants “utilize accounting, auditing, and investigative skills to examine the finances of an individual or business.”[1] While this is technically correct, it neglects to provide a clear picture of what we do.
Of course, forensic accountants examine the finances of an individual or business, but for what reason? The answer depends on why the forensic accountant was engaged. An assortment of skill sets allows the forensic accountant to engage in matters such as fraud investigations, divorce, lost profits and economic damages, and insurance claims.
Let’s take a closer look at the engagements forensic accountants typically work on.
Types of Engagements
Fraud Investigation
Forensic accountants are, first and foremost, the detectives behind fraud. When companies begin to notice discrepancies in their accounting records, a tip comes in from a whistleblower or cash outflows seem unusually high, a forensic accountant is the person to unravel the mystery. The forensic accountant then summarizes their findings internally for stakeholders or law enforcement, or for litigation purposes. Many of these engagements lead to the forensic accountant’s report and testimony being used in a trial.
Divorce
Forensic accountants are often hired by family law attorneys or individuals who are in the midst of a divorce proceeding. They can be used in a variety of ways but most frequently will be hired to uncover hidden assets, identify potential waste of marital funds, and calculate marital and separate portions of assets subject to division. Forensic accountants can also assist with calculating income for support purposes.
Lost Profit and Economic Damages Calculations
Forensic accountants are also instrumental in estimating economic damages and lost profits. Similar to insurance claims, lost profits occur when a business suffers a loss due to wrongful acts, such as breach of contract or shareholder disputes. As a result, the business may be entitled to economic damages. Economic damages calculations require the forensic accountant to determine the level of profits that would have been achieved had the business interruption not occurred. The forensic accountant does so by analyzing industry and economic data, paired with the financial statements, tax returns, and sales reports of the business. The calculation of economic damages is more than a routine calculation. Although each engagement is unique, a forensic accountant’s expertise promotes efficiency, credibility, and simplicity, especially in a court setting.
Insurance Claims
There are times when insurance companies require the assistance of a forensic accountant. When a business suffers a loss, like a fire, flood, or has an employee dishonesty claim, the organization will likely go to their insurance company for loss reimbursement. It is often assumed that the insurance company only covers the physical damage to the property. However, the insurance company also covers the loss of income suffered by the business — this is when the forensic accountant comes in.
Insurance companies hire forensic accountants to perform these calculations since it often involves using financial records such as tax returns, payroll reports, and business financial statements. Hiring an outside accountant to perform this work also lends more credibility to the result for all parties involved.
Legal Proceedings
As previously mentioned, a forensic accountant’s work often results in the issuance of a report or in testimony. In fact, the term forensic accounting implies the communication of findings in a court setting, as the definition of forensic is “used in, or suitable to, courts of law or public debate.” Forensic accountants often act as an independent third party in litigation and dispute settings, resulting in more efficient and credible outcomes.
When To Hire a Forensic Accountant
Because forensic accountants have a broad set of accounting skills, they are uniquely qualified to be able to interpret financial data from a variety of sources and draw conclusions from their analysis of that data. This can save valuable time and money over the course of an engagement. Their work can also add credibility to the findings of a case. Particularly in litigation matters, a report or testimony sourced by a third-party forensic accountant can improve the chances of a favorable outcome.
Now that you have a better idea of what a forensic accountant does, you will be better prepared to know when it is time to hire one.
Need Help?
Do you think you may need a forensic accountant? Contact us here or call 800.899.4623.
[1] https://www.investopedia.com/terms/f/forensicaccounting.asp
