A Career in Forensic Accounting
Preventing, detecting and prosecuting fraud has been an increasing focus for regulators and law enforcement agencies. High profile cases such as the Bernie Madoff scandal make us all wary. But it isn’t just these occasional headline grabbing frauds that we should worry about-fraud happens every day.
Organizations lose an estimated 5% of their revenues (roughly $3.5 trillion) to fraud.1 You can expect increased financial regulation and oversight, keeping forensic accountants in high demand. But many people wonder ‘what is forensic accounting’?
What is a Forensic Accountant?
A forensic accountant is a professional who conducts investigations of people and organizations with the goal of preventing, deterring and uncovering fraud. This is typically done through analysis of financial documents and statements of a suspicious entity for evidence of fraud such as embezzlement or white collar crime. But investigations can be launched using other skills like interviewing and interrogation.
What does a Forensic Accountant Do?
As mentioned, forensic accountants conduct investigations but also support litigation on behalf of a wide range of clients including law enforcement, attorneys and public companies. The goal is to protect the stakeholders of those clients, taxpayers and investors.
Forensic accountants also advise on various financial transactions as part of due diligence. They customize and design risk management procedures and processes and strengthen internal controls.
They also bridge their findings with the legal consequences. Once a fraud has been uncovered, they often assist the organization in the prosecution by preparing trial evidence or testifying as an expert witness.
Who Employs Forensic Accountants?
Large accounting and auditing firms are increasingly adding specialized fraud departments and staffing forensic accountants. Often irregularities can be detected for clients through detailed financial statement analysis, which is an auditor’s specialty. Auditors also ensure all the financial statements of their clients are in accordance with GAAP and IFRS. Sometimes companies will replace their auditors, which can be a red flag.
Fortune 500 companies
Increased regulations brought on by legislation (Sarbanes-Oxley, Dodd-Frank) have required significant resources be directed towards compliance and internal audit departments of companies. For example, both the CEO and CFO’s of publicly traded companies must ‘sign off’ on their SEC filings that they are truthful. They are personally liable for misrepresentations.
According to former FBI director Louis Freeh, “fraud prevention is immeasurably more cost-efficient than fraud investigation and prosecution”.2 It is much less problematic to catch an accounting or compliance issue early and cooperate than have to issue a restatement later, potentially costing millions of dollars in legal fees and market value from the stock loss.
Additionally, according to a survey of forensic accountants by the ACFE 48% of those surveyed felt employee embezzlement is on the rise.3 Deterring this behavior with proper policies and safeguards leads to better bottom line profits and better returns for stakeholders including shareholders and employees.
Local, state and federal government agencies are a large employer of forensic accountants. With the large number of government programs available for the public and lots of program and grant money gets thrown around. Tracking all this money is difficult and funds can easily get diverted by fraud. The Fraud Enforcement and Recovery Act of 2009 (FERA) aims to reduce fraud involving federal funds. Types of fraud range from a hospital overcharging Medicare to mortgage fraud involving a government assistance program to tightening up the county welfare department. Reducing fraud in these organizations stops the loss of taxpayer money.
Forensic accountants are also crucial in putting together cases for the FBI and SEC. The FBI follows the money trails for criminal and their forensic accountants recently spotted irregularities with the BP Gulf oil-spill claims process. They organizations also go after money laundering by organized crime and cybercrime in the Deep Web. For securities fraud, the SEC is takes the lead. Their Office of Enforcement has become dogged in their pursuit of insider trading by some high-profile hedge fund managers.
Forensic accountants are increasingly being drawn to consulting work for small businesses grappling with fraud and theft. Small businesses often operate on a shoe-string budget and simply can’t afford full-time in house fraud and audit staff. Fraudsters commonly target the inventory at retailers, warehouses and construction sites, which often goes undetected because it’s expensive to have sophisticated inventory management systems at small businesses. Consultants come in and put procedures in place to prevent and deter fraud and can conduct interviews and investigate financials to catch perpetrators. Consultants use forensic accountants to implement internal systems, including internal audits which can deter fraud from happening in the first place. Sometimes, forensic accountants are used for quantifying losses for insurers. Insurance companies employ the services of forensic accountants with claim investigations and litigations and they’re tasked with quantifying losses.
Law enforcement agencies
Forensic accountants are often retained by law enforcement to assist criminal investigations. They can go to crime scenes and gather data or access information from a cubicle and turn complex information into understandable evidence to prosecute cases. Sometimes, forensic accounting can help law enforcement solve particularly difficult cases. After all, it was forensic accounting that eventually locked up Al Capone for tax evasion.
Forensic accountants often work with attorneys on many cases where detailed financial expertise is needed. Divorce attorneys use forensic accountants when combing through documents to evaluate spousal assets including businesses and property. A growing area is construction dispute litigation for small businesses. If a fraud is detected, they can also provide litigation support for legal proceedings. This may involve testifying as an expert witness or preparing visual aids as trial evidence.
The crossover between financial and legal worlds naturally lends itself to hiring forensic accountants as arbitrators who mediate disputes and quantify damages awarded for medical malpractice and insurance claims.
What are the Required Skills and Credentials of a Forensic Accountant?
Critical thinking skills might be the most important skill for a forensic accountant because you need to be looking through a cynical lens. The financial statements tell an experienced examiner a story other analysts may miss. Forensic accountant needs a deep understanding of financial statements and often the way they interact with each other.
Because finding fraudulent activity isn’t always easy you’ll also need lots of patience. Since the crimes are often hidden, these investigations can be very time consuming and may last longer than normal projects during a major investigation.
A forensic accountant must have strong communication skills. Everything from writing reports to interview and even interrogation skills are also widely used by forensic accountants. Once a fraud is detected, the examiner must relay the findings in a manner that others can use to prosecute the case.
Academically, a bachelor’s degree is typically required and a Master’s degree in finance or accounting is highly preferred. There are specialized programs including Master’s in Fraud Management Programs and also an MS in Financial Crimes and Compliance Management. The Certified Fraud Examiner (CFE) designation the credential many pursue. Many forensic accountants are CPAs, but that is not required.
What is the Compensation for Forensic Accountants?
The compensation is attractive for these specialists. The median annual pay of a forensic accountant is $74, 624, according to the Association for Certified Fraud Examiners.3 Compensation is typically higher for professionals with higher related degrees or designations. These include a Masters in forensic accounting or earning a Certified Fraud Examiner (CFE) designation. For example, the ACFE reveals that median annual pay increases by 23% to $90,634 with the CFE designation.4
Some of the highest paid forensic accountant jobs are as ‘special agents’ at the federal level working for agencies such as the IRS, FBI and SEC. The median pay for these is $84,370 and is over $100,000 with higher education and designations like the CFE. Federal benefits such as pensions should also be considered.5
There are ancillary opportunities as well. With the passing of Sarbanes-Oxley in 2002, boards of directors are required to have financial experts on their audit committee. CFE’s have the critical thinking and a healthy dose of skepticism that adds and independence to many boards. These positions are competitive but the average board of director member at a publicly traded company made $168,270, according to Fraud Magazine.6
How do I Become a Forensic Accountant?
The largest employment opportunities in forensic accounting are in auditing. One of the best ways to land a full-time position is to start with an internship. Try getting one at the local level first, at a law enforcement agency or local business.
Networking can be very important. Trying to secure a forensic position at the federal level is extremely difficult. These are highly competitive positions and only about 5% of fraud examiners make the cut according to the ACFE. A Master’s degree in forensic accounting or advanced designation is typically required for these spots.7
A career in forensic accounting is an exciting junction crime prevention and fin. But it’s also a rewarding one, both financially and morally. Stay in the field long enough and you’ll be compensated handsomely but more importantly, you’ll be preventing fraud which affects us all while servings as an advocate for victims.