Every day, individuals and businesses engage in financial misconduct. 

This is as true in major cities like Austin as it is in rural areas throughout the country, and it may be something as simple as hiding assets during a divorce or as complex as engaging in a large-scale money laundering scheme. 

Whatever the scope, these offenses can lead to significant losses—and not just monetary, but the loss of trust and reputation as well. 

When financial wrongdoing is suspected, forensic accounting plays an important role in identifying the transgressions and providing the critical insight and guidance needed to quickly resolve the issue and safeguard financial integrity. 

What is forensic accounting? 

 

Forensic accounting is simply investigative accounting. From the Latin word forensis, meaning “in open court,” forensic refers to the investigation of criminal activity for the purpose of holding someone accountable in a court of law. 

Forensic accountants are certified public accountants (CPAs) who use their accounting, auditing, and research skills to meticulously analyze financial data and look for evidence of misconduct. Unlike auditors, who generally perform planned audits on a set schedule, forensic accountants are typically called in when there is a specific problem or issue that requires additional insight. 

While the headlines tend to focus on only the most egregious crimes committed, in reality a large portion of financial misconduct goes unnoticed or undetected. This has become especially true as technology has grown more and more sophisticated—increasing the need for qualified forensic accountants. 

What does a forensic accountant do? 

 

When fraudulent activity is suspected or help is needed with a complex financial issue, forensic accountants have the training and skills necessary to handle the job. 

Forensic accountants are often asked to collaborate with attorneys and law firms to provide their unique perspective on cases involving potential financial wrongdoing. They may also work with insurance companies as well as business owners and CEOs. 

As a litigation consultant, a forensic accountant will have expert knowledge of current laws and procedures and may provide a broad range of services to assist legal teams with dispute resolution in both civil and criminal investigations; the list below offers a brief overview of those tasks. 

  • Reviewing and analyzing financial records
  • Identifying and investigating irregularities
  • Compiling evidence and preparing detailed reports
  • Performing damage calculations
  • Evaluating financial processes (risk assessment)
  • Verifying compliance with regulatory standards
  • Providing expert witness testimony 

According to the U.S. Bureau of Labor Statistics, “Globalization, a growing economy, and a complex tax and regulatory environment are expected to drive strong demand for accountants and auditors.”

In addition to being a CPA, a forensic accountant will likely have additional training and certification. This includes a CFE (Certified Fraud Examiner) credential, requiring at least two years of professional fraud prevention experience, and a CFF (Certified in Financial Forensics) credential, which denotes additional training in forensic accounting. 

Red flags in forensic accounting: What experts are looking for

 

When investigating a business or corporation, there are a number of things forensic accountants will look for to identify financial misconduct. These “red flags” spotlight behavior or actions that differ from the norm, indicating something may be amiss. 

The following is a list of common red flags a forensic accountant will look for. 

Lack of internal controls

Internal accounting controls are the policies, procedures, and best practices that are put in place to ensure accurate financial reporting. They include scheduling periodic internal audits, implementing strong security measures (both manual and automated), regularly reviewing account activity, and creating standardized documents and approval systems. Without proper controls in place, businesses are more vulnerable to fraud and other financial crimes. 

Financial irregularities

This may include unusual accounting activity or transactions that seem out of the ordinary as well as missing financial documents, a discrepancy between reported revenue and actual cash flow, the appearance of unknown vendors in accounting records, duplicate payments or invoices, differences between physical and recorded inventory, excessive write-offs, an unexpected increase in sales, payroll issues, and other common signs of financial misconduct. 

Employee behavior

Finally, unusual employee behavior is often a big red flag when searching for evidence of financial wrongdoing. A good example is if an employee has a significant lifestyle change that does not match their income, denoting a sudden increase in funds. However, smaller behavior patterns can also indicate an issue, such as increased secrecy about their activity or a close association with a regular customer or vendor. A separation of accounting duties within an organization can help to mitigate the risk of employee misconduct.

Get trusted financial guidance from certified experts.

 

Mangold Anker Phillips is a business advisory firm with more than 100 years of combined experience as CPAs. Our forensic accounting professionals have both the investigative expertise and necessary credentials to help identify suspicious activity or behavior and safeguard businesses from financial wrongdoing. 

As your litigation consulting partner, we will thoroughly analyze all financial documents provided by opposing counsel and evaluate complex calculations to uncover any hidden facts or missing information. Our team will then present the findings in a manner that nonfinancial persons can readily understand. 

Contact us today to find out more.