What is 'Financial Forensics'

Financial forensics is a field that combines criminal investigation skills with financial auditing skills to identify criminal financial activity coming from within or outside of an organization. Financial forensics may be used in prevention, detection and recovery activities to investigate terrorism and other criminal activity, provide oversight to private-sector and government organizations, and assess organizations' vulnerability to fraudulent activities. In the world of investments, financial forensics experts look for companies to short or try to win whistleblower awards.

BREAKING DOWN 'Financial Forensics'

Financial forensics is similar to forensic accounting, which utilizes accounting, auditing and investigative skills to analyze a company's financial statements for possible fraud in conjunction with anticipated or ongoing legal action. Two forensics experts made their names exposing two of the largest frauds in recent history. Jim Chanos, noted short-seller at the helm of hedge fund Kynikos Associates, dug into the financial statements and other filings of Enron Corporation and uncovered irregularities regarding mark-to-market practices of its energy derivatives and violations of GAAP rules on matching policy in the company's merchant banking operations. Enron eventually imploded, delivering a tidy sum to Chanos' fund.

Harry Markopolos, an obscure securities professional in the early 2000s, attempted for several years to warn the Securities and Exchange Commission (SEC) and others about the Ponzi scheme perpetrated by Bernie Madoff. Markopolos finally gained recognition as the lone whistleblower when Madoff's scheme collapsed. He details his saga in his 2010 book, No One Would Listen: A True Financial Thriller. Markopolos continues his fraud-seeking craft to the benefit of investors at large. Madoff will sit in a jail cell until he dies.

Other Uses for Financial Forensics

Other applications for financial forensics exist. Forensic accountants may also work with government agencies, including tax authorities, to recover illegally obtained funds or help prosecute money laundering. Forensic accountants can also help companies design accounting and auditing systems to manage and reduce risk.

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