Financial Forensics

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 to try and win whistleblower awards.

Key Takeaways

  • Financial forensics is a field that combines criminal investigation skills with financial auditing to uncover criminal activities carried out by individuals or companies.
  • Financial forensics is used in the prevention, detection, and recovery related to criminal activities, such as money laundering, tax fraud, terrorism, and financial schemes.
  • To become certified in financial forensics, an individual must be a certified public accountant (CPA), pass the Certified Financial Forensics (CFF) exam, and meet certain requirements.
  • Financial forensics is also used by investors and traders to find investment opportunities.

Understanding 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.

Forensic accountants analyze the financial statements of companies and individuals to look for tax fraud, money laundering, insider trading, scams, market manipulation, and other financial crimes. The goal is to discover these crimes, report them, prevent them if possible, and prosecute the individuals responsible. If financial theft has taken place, financial forensics is also used to recover any stolen funds.

Financial forensics is significantly used by intelligence agencies as well, such as the Federal Bureau of Investigation (FBI) and the Central Intelligence Agency (CIA) to uncover terrorism. As terrorist groups need funding to exist, this is a very effective measure in discovering terrorist cells.

Forensic accountants can be employed by companies, the government, and agencies like the Securities and Exchange Commission (SEC) and the Internal Revenue Service (IRS).

Forensic accountants can also help companies design accounting and auditing systems to manage, identify, and reduce risk. This has become increasingly popular as companies are looking for ways to prevent crime before it happens rather than discover it after the fact.

How to Become Certified in Financial Forensics

An individual wishing to become a forensic accountant must first be a certified public accountant (CPA). They would then need to take and pass the Certified Financial Forensics (CFF) exam offered by the American Institute for Certified Public Accountants (AICPA) to be a certified accountant in the field of financial forensics.

The exam focuses on two areas: core forensic knowledge and specialized forensic knowledge. It is offered year-round and has either a pass or fail score.

After passing the exam, an individual must complete the CFF Credential Application. This comes with requirements, which include having a minimum of 1,000 business hours experience in forensic accounting within the five years prior to completing the CFF application and 75 hours of forensic accounting-related continuing professional development (CPD), also within five years of completing the application.

CPAs that become certified in financial forensics are typically paid higher salaries and have more job opportunities open to them than those without the certification.

Real-World Examples

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 generally accepted accounting principles (GAAP) on matching policy in the company's merchant banking operations. Enron eventually imploded, delivering a tidy sum to Chanos's 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 was sentenced to 150 years in prison, and passed away behind bars in April of 2021, at the age of 82.

Article Sources
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  1. American Institute of CPAs."Certified in Financial Forensics (CFF) Credential Overview." Accessed April 15, 2021.

  2. AICPA. "CFF Eligibility Requirements." Accessed April 15, 2021.

  3. U.S. Securities and Exchange Commission. "James Chanos, President, Kynikos Associates." Accessed April 15, 2021.

  4. U.S. Government Publishing Office. "Senate Hearing 111-368. Oversight of the Securities and Exchange Commission’s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance." Accessed April 15, 2021.

  5. CNBC. "The Madoff letters: Newly revealed correspondence shows the deceased con man’s efforts to shape his legacy." Accessed April 15, 2021.