What Is Forensic Accounting? Examining a Unique Accounting Field

Few financial stories capture public attention quite like accounting fraud and financial scandals. While the downfall of companies like Enron or individuals like Bernie Madoff grabs headlines, they also serve as famous examples of an ongoing and serious issue that can jeopardize a company’s bottom line. According to a 2018 report compiled by the Association of Certified Fraud Examiners (ACFE), American businesses lose an average of 5% of their annual revenues to fraudulent activity.

The risk of loss underscores the importance of forensic accounting in keeping an organization’s books secure and protected from fraudulent activity. Thanks to legislation such as the federal Sarbanes-Oxley Act, which reformed accounting regulations to encourage a more thorough search for fraud within publicly-traded companies, forensic accounting has emerged as a growing field that may interest individuals seeking an advanced accounting role. It’s important to have a thorough understanding of what forensic accounting is before determining if it is the right field for you. Students enrolled in an academic program such as a Forensic Accounting concentration offered through an online Master of Accounting can develop a firm knowledge of the specialty, which will prepare them to pursue a career in the field.

An Overview of Forensic Accounting

What is forensic accounting? Essentially, the concept combines accounting techniques with the methodologies of a criminal or other legal investigation. Forensic accountants use their accounting and analytical skills to solve complex financial puzzles where the “pieces” are key bits of financial data. For example, accountants scrutinize changes in a company’s fund allocation and net worth. Forensic accounting techniques can detect fraudulent activity by all kinds of entities, including government agencies. Facts uncovered through the forensic accounting process are usable as key evidence in many types of legal proceedings.

In addition to the work forensic accountants do relating to organizations, they can investigate transactions by individuals. Forensic accountants use their skills to detect fraudulent activity in the context of divorce settlements, bankruptcies, and contract disputes, for example. Because of the wide range of potential fraud scenarios that exist, forensic accountants can work with a company, independently, or with federal, state, or local law enforcement agencies.

Like auditors, forensic accountants review a company’s financial transactions. However, auditing and forensic accounting are separate disciplines. Auditors apply analytical skills to confirm a company’s compliance with federal regulations as well as its internal policies. Although auditors search for discrepancies that may uncover noncompliance, they aren’t specifically looking for fraudulent activity. Conversely, searching for fraud is a forensic accountant’s primary objective. 

Common Types of Fraud Examined by Forensic Accountants

Before pursuing the forensic accounting field, individuals should understand some of the key types of fraud associated with the role.

Securities Fraud

A well-known type of fraudulent activity is securities fraud, that involves the use of false or manipulated information involving the value of stocks or commodities to take advantage of investors. One of the most famous examples of securities fraud is the Enron case. Forensic accountants revealed that the energy trading company underreported expenses, which caused profits to appear larger than actual numbers. The scandal bankrupted Enron and is credited for inspiring the passage of the Sarbanes-Oxley accounting reform law.

Money Laundering

Another form of financial fraud that forensic accountants may encounter is money laundering, a process that attempts to conceal the source of illegally-obtained money by filtering it through legitimate businesses or banks. Money laundering scandals can ensnare banks as well as the parties that originate from the schemes. For instance, authorities ordered British bank Standard Charter to pay $1.1 billion to the United States and British agencies when forensic accountants revealed the bank processed transactions originating from sanctioned countries such as Iran.

Ponzi Schemes

Ponzi schemes are another common type of fraud. Perpetrators induce people to invest in a nonexistent company with the guarantee of lofty returns, then pay off the “returns” with funds secured from later investors. The most famous Ponzi scheme in recent history involved Bernie Madoff, whose investment firm collapsed while owing billions of dollars to thousands of clients, including high-profile investors such as Steven Spielberg.

Hidden Funds

Some other types of fraud that a forensic accountant may encounter relate to an individual’s assets, such as hidden or unreported funds uncovered amid a divorce settlement or a bankruptcy claim.

White Collar Crime

Fraud involving individuals also could include instances of white-collar crime, such as insider trading, in which a person receives information that could affect the price of a company’s stock and buys or sells the stock before the information is announced to the public.

Key Skills in Forensic Accounting

Advanced analytical skills are a crucial element of forensic accounting. Those in the role must know how to scrutinize and interpret the meaning of vital numbers accurately as even the slightest error could compromise results.

Forensic accountants also must possess well-developed research skills. Because fraudulent activities are commonly concealed within financial transactions, forensic accountants must dig deep into records to detect examples of financial behaviors that don’t jibe with other reported behaviors. Advanced problem-solving skills are another core competency as they enable forensic accountants to see the short- and long-term ramifications of a transaction that may appear out of place. Finally, forensic accountants should have strong communication skills to discuss findings with company executives or investigative entities with clarity that minimizes the chance of ambiguity or misinterpretation.

The Forensic Accounting concentration offered through Norwich University’s online Master of Accounting program can help individuals develop the knowledge and skills needed to thrive in this growing segment of accounting. The master’s program strengthens expertise in the accounting principles needed to be a trusted leader in a forensic accounting role.

Some of the courses offered through the Norwich Master of Accounting program and its Forensic Accounting concentration include:

• Income Taxation—Those enrolled in this core course will learn how tax laws apply to various types of organizations including S corporations and partnerships. Students also learn about taxable events such as distributions and liquidations.
• Theory in Accounting—This core course breaks down the elements of accounting principles within the context of policy and regulation.
• Accounting Ethics—This core course focuses on key values in accounting, such as integrity and objectivity, and how those values can govern the accounting process.
• Fraud Examination—This concentration course concentrates on several core concepts related to forensic accounting such as accounting-related fraud, detection methods, and fraud types.
• Advanced Auditing—Those enrolled in this concentration course will study the elements of external audits as performed by a team of auditors.
• Civil Litigation for Accountants—This concentration course explores the role of a forensic accountant in situations that may arise in civil litigation, including serving as a witness.

Forensic Accountant Salary

The median annual salary for forensic accountants is about $68,000, according to data from PayScale as of March 2020. However, this number can vary based on education, experience, and job location. While some forensic accountant roles only require a bachelor’s degree, advanced forensic accountant positions may demand an advanced degree. These advanced roles often come with higher salaries.

Compensation for forensic accountants typically increases with on-the-job knowledge and work reputation. For example, forensic accountants with 10-19 years of experience earn a median annual salary of about $94,000, according to PayScale data from March 2020.

Jobs in parts of the country with a high cost of living such as New York City or San Francisco usually offer higher salaries than those in cities or regions with a lower cost of living.

Become a Guardian of Good Financial Practice

Fraudulent financial behavior doesn’t have to be on the scale of the Enron case to damage companies’ bottom lines or hurt individual investors. By investigating, analyzing, and detecting fraud, forensic accountants can mitigate the potential damage. These activities not only protect businesses and investors but allow them to thrive in financial confidence. Learn how Norwich University’s online Master of Accounting and its Forensic Accounting concentration can help equip individuals with the knowledge and skills required to enter the forensic accounting field and succeed in this vital role.
 

Recommended Readings

Changing Business Skills for the Future of Finance
Director of Finance Salary and Job Market Opportunities
5 Methods for Capital Budgeting

Sources:

Fraud Statistics, Business Fraud Prevention, LLC
Uncovering a Career in Forensic Accounting, Investopedia
Sarbanes-Oxley, Inc.
What Is a Forensic Accountant? American Bar Association
Forensic Accounting Methods, Houston Chronicle
Forensic Accounting Analysis vs. Audit, Houston Chronicle
Forensic Accountant, Association of Certified Fraud Examiners
Securities Fraud Awareness & Prevention Tips, Federal Bureau of Investigation
Enron Fast Facts, CNN
Standard Chartered Fined $1.1bn for Money-Laundering and Sanctions Breaches, The Guardian
Bernard Madoff Fast Facts, CNN
Forensic Accounting: A Value-Adding Skill for the CPA, The CPA Journal
Bachelor of Science (BS / BSc), Forensic Accounting Degree, PayScale
Master of Science (MS), Forensic Accounting Degree, PayScale
Average Forensic Accountant Salary, PayScale