Table of Contents
Table of Contents

Forensic Accounting: What It Is, How It's Used

Forensic Accounting

Investopedia / Dennis Madamba

What Is Forensic Accounting?

Forensic accounting utilizes accounting, auditing, and investigative skills to examine the finances of an individual or business. Forensic accountants are CPAs that look for evidence of crimes and commonly work for insurance companies, financial institutions, and law enforcement agencies.

Forensic accountants analyze financial records and accounts that may be used as legal evidence and often testify in court cases as expert witnesses. They may work on cases such as fraud and embezzlement and explain the nature of a financial crime in court.

Key Takeaways

  • Forensic accounting is a combination of accounting and investigative techniques used to discover financial crimes.
  • Forensic accountants explain the nature of a financial crime to the courts.
  • Forensic accountants trace funds, identify assets and conduct asset recovery, and perform due diligence reviews.
  • Forensic accounting is used by the insurance industry to establish damages from claims.

Career as a Forensic Accountant

Forensic accountants analyze, interpret, and summarize complex financial data. They compile financial evidence, develop computer applications to manage the information collected, and communicate their findings in the form of reports or presentations.

The accountant's tasks include tracing funds, asset identification, asset recovery, and due diligence reviews. Forensic accountants may also train in alternative dispute resolution (ADR) due to their high level of involvement in legal issues and familiarity with the judicial system.

Litigation Support

Forensic accounting is utilized in litigation when quantification of damages is needed. Parties involved in legal disputes use the findings of a forensic accountant to resolve disputes via settlements or court decisions, such as compensation or benefit disputes. The forensic accountant may be utilized as an expert witness if the dispute escalates to a court decision.

Criminal Investigation

Forensic accountants analyze whether a crime occurred and assess the likelihood of criminal intent. Such crimes may include employee theft, securities fraud, falsification of financial statement information, identity theft, or insurance fraud.

The scope and mechanics of Bernie Madoff's Ponzi scheme are understood today because forensic accountants dissected the scheme and made it understandable for the court case. Forensic accountants search for hidden assets in divorce cases and investigate breaches of contracts, tort, or disagreements relating to company acquisitions like breaches of warranty, or business valuation disputes.

Forensic accountants may investigate construction claims, expropriations, product liability claims, or trademark or patent infringements or determine the economic results of the breach of a nondisclosure or non-compete agreement.

Insurance Industry

Forensic accounting is routinely used by the insurance industry. A forensic accountant may be asked to quantify the economic damages arising from a vehicle accident or a case of medical malpractice or other claims. One of the concerns about taking a forensic accounting approach to insurance claims as opposed to an adjuster approach is that forensic accounting is mainly concerned with historical data and may miss relevant current information that changes the assumptions around the claim.

Article Sources
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  1. Forensic CPA Society. "What Is a Forensic Accountant?"

  2. Forensic Accounting. "2. What Is Litigation Support?"

  3. Association of International Certified Professional Accountants. "Forensic Accounting: Fraud Investigations."

  4. LinkedIn. "When Does an Insurance Claim Need a Forensic Accountant?"