Recently a colleague of mine was introduced as a “forensic accountant” to someone new in her neighborhood. After a brief pause, my colleague’s new neighbor asked “so do you work with the dead bodies then?” While this is hardly a universal misconception, the term “forensic accounting” seems to be easily misunderstood, by accountants and people outside our industry alike. Even among those who know enough to be quite certain that no embalming is involved, there is still some uncertainty as to exactly what kind of work a forensic accountant spends the day doing. In fact, the term “forensic” simply means that something is related to the legal system, therefore forensic accounting includes any accounting that assists or is related to the law. This definition still casts a broad net, and we’ll talk more specifically about some of the more common services provided by forensic accountants. So before you launch your career in anticipation of becoming a Will Ferrell-style “forensic accountant” (see The Other Guys… on second thought, maybe don’t) - let’s talk about what this world often includes.
This is what most people envision when they hear the words “forensic accountant,” and it’s certainly a very real part of the job. Forensic accountants can be recruited when company management feels that something is fishy – or perhaps when management knows exactly what is amiss but needs someone well-versed to gather the evidence. Forensic accountants might also be involved in investigating fraud after-the-fact when the matter is being prosecuted in civil or criminal court. In my experience, this work is not as prevalent as other areas of forensic accounting simply because most companies prefer not to air their “dirty laundry” unless there truly is a lot at stake. Fraud may happen with some frequency, but many organizations prefer to fire the offending individual and move on rather than begin a long process of investigation and prosecution which may tarnish its reputation among customers, vendors, donors, or the general public. Also be aware that this work can be challenging and messy because some clients are upset when there is no clear evidence of fraud or the evidence simply isn’t strong enough. Yet, while not every case ends with that neat CSI “bow” on the top, the times when your work results in confessions, charges, or restitution are very rewarding!
Calculating economic damages
In the world of legal disputes, the root of a great deal of disagreements is money. The possible examples are almost endless. Perhaps one party of a contract backs out and both sides need to determine how much money was lost as a result. Maybe a manufacturing company experiences a fire caused by faulty equipment and must determine how much money it lost while operations stalled. There are countless other circumstances and nuances, but when the amounts get large or the calculations get complex, attorneys will call forensic accountants to determine the “economic damages” at stake and possibly testify before a judge or jury about their conclusion. More often, the work of the accountants on both sides of the matter will help each side to realize what is realistically at stake and often move the parties closer to a settlement that satisfies everyone involved.
Assisting with insurance claims
Before things get heated and the attorneys get involved, forensic accountants can be helpful to businesses working with their insurance carriers to have a claim covered. Many businesses have coverage to reimburse it for any money it lost due to “business interruption” caused by some accident or event, but determining how much money is owed can be tricky. Forensic accountants are adept at learning the critical drivers of a business, its industry, and any other factors to help businesses and its insurance company agree on the resulting claim.
Performing business valuations
While the art of business valuation is a niche onto itself, valuation skills have a lot of cross-over into the world of forensic accounting and many forensic accountants are credentialed in this area as well. Business valuations need to be performed for estate tax purposes (when a business owner dies), shareholder disagreements or buyouts, and even divorce matters where one or both spouses own a business. Valuation skills also have increasing relevance in the world of general accounting as the evolving standards continue trending towards fair value accounting.
While this list is far from all-encompassing, these areas comprise some of the major project types and practice areas within the world of forensic accounting. While some may be disappointed to learn that forensic accountants are not given a firearm with their 10-key, hopefully this glimpse sheds some light – and prevents an unnecessary sequel to The Other Guys.