What does a Forensic Accountant Do?

What does a Forensic Accountant Do?

Is your small business not making as much profit as you expect? Are you earning profits but always falling short on cash? Forensic accounting services investigate the disappearance of cash in a business, document definitive proof, and assist in the recovery of cash including negotiation, prosecution, and expert witness testimony. Since internal accountants are the most likely employee to be stealing from the company, businesses rely on forensic accounting consultants to investigate potential fraud.

Business owners begin suspecting fraud months or years after it has begun. Even if you have a strong feeling fraud is taking place, a business executive often cannot document definitive evidence needed for HR purposes, claims with insurance companies, or legal proceedings. Thus, we encourage business owners with any suspicion of fraud to hire a forensic accounting investigation right away.

Read on to learn more about situations that call for a forensic investigation, what the process is, and what you should expect when you hire forensic accountants.

When should business owners engage forensic accounting services?

Imagine you own a 7-year-old business. Growth has been good the last several years and you have built a strong team: a talented operations manager to manage the staff, a brilliant technical expert to lean on, and a loyal administrative team to send invoices, take calls, and pay bills.

Business Fraud Examples

The most common fraud in small businesses include:

    • Payroll and overtime fraud.
    • Ghost employee schemes.
    • Fake vendor fraud.
    • Credit card fraud.
    • Inventory and asset fraud.
    • Inventory and asset theft.

Check out our article on business fraud examples to learn more about these forms of fraud.

But recently, business has not been as profitable as normal despite steady sales. Or maybe the P&L shows a profit, but cash keeps dwindling. You know if takes cash to grow a business, but something feels different about this. What’s going on?

When you ask your bookkeeper for their opinion, they may point to higher material costs, wages, or inventory, but their answers are vague and do not pass your gut check. Your business has faced cost pressure before – there is no reason why things would be any different right now. Something does not add up, you can feel it.

Now is the time to perform forensic accounting.  Although you have never experienced forensic accounting and fraud before, your CEO intuition is likely correct. Your books need to be investigated to discover where the numbers diverge from reality.

What are the duties of forensic accountants?

Forensic accounts are hired to investigate potential fraud and embezzlement, typically by one or more members of a business’ internal accountants. The fundamentals of forensic accounting include:

  • Analyzing the company financial statements, subledgers, and support schedules.
  • Investigating irregular or unsupported credits and debits.
  • Documenting findings to be used as legal financial evidence.
  • Advising business owners on how to confront fraudsters.
  • Assisting in resolving disputes between business owners and staff.
  • Being an expert witness in subsequent legal proceedings, if needed.

The forensic accountant you hire will spend several days diving into your accounting system and meeting with your bookkeeper to untangle the complex web of accounting in search of stolen money. Experienced forensic accountants do this without being adversarial or ruining your relationship with your bookkeeper (after all, if everything is ok you hope they will stick around as an employee!) At CFOshare, we approach forensic accounting investigations with a friendly but firm process of uncovering the truth in the numbers and identifying fraud or embezzlement.

So, what does a forensic accountant do? Forensic accountants are your guide through the difficult journey of discovering, reporting, and recovering from fraud. Check out our Forensic Accounting Services page for more details.

What happens if forensic accounting finds fraud?

If fraudulent activity is discovered in your business, the forensic accountant will meet with you to share their findings and advise you on next steps. Next steps may include:

Not all investigations end in firing an employee.

For example, one of the most common forms of fraud is your business partner abusing their company credit card for personal gain. In these situations, it is more practical to discipline the partner and setup a repayment agreement rather than force them out of the organization.

A third-party forensic accounting investigation give you negotiating power to force the partner into a fair agreement without resorting to expensive lawyers.

  • Confronting the employee committing fraud.
  • Negotiating a repayment agreement.
  • Terminating employment with the employee.
  • Filing criminal or civil charges.
  • Filing an insurance claim for fraud losses.
  • Consulting attorneys for additional advice.

Forensic accounting is a profession specially trained in documenting evidence which may be handed over to law enforcement for legal prosecution. Professional forensic accounting investigations proceed with discretion, document evidence properly, advise owners on best confrontation options and report criminal activity to government agencies if needed.

What is the difference between a CPA and forensic accountant?

Although a certified public accountants’ audits are a good assurance on financial statement accuracy, they are not a replacement for a forensic accounting investigation. Financial statement audits are intended to test for accuracy, and most fraudsters know how cover their tracks sufficiently to pass audit. Similarly, although the CPA exam tests for basic fraud prevention skills, it is not a test for specialized fraud examiner knowledge or skills.

Who are forensic accountants?

A forensic accounting career often begins in traditional financial accounting or as a CPA but turns toward a specialty in white collar crime and internal auditing. Forensic accounting requires a unique combination of:

    • Auditing and investigative skills
    • Detail oriented instincts
    • Analytic skills
    • Deep accounting knowledge
    • Ability to assist in resolving disputes

Although there are several forms of fraud (including insurance fraud, securities fraud, money laundering, etc.) forensic accountants are focused on fraud committed by a company’s employees – typically its accounting staff.

A fraud investigation is commonly performed by someone with a CPA certification, but it is equally important forensic accounting to cover non-CPA topics including:

  • General business management.
  • HR Regulations.
  • Relational investigative skills when interviewing internal accountants.
  • Advising on the proper involvement of law enforcement in criminal matters.
  • Advising and applying for insurance claims for losses from fraud.
  • Acting as a credible expert witness.
  • Advising on potential legal proceedings and expected financial outcomes.

Public accounting is mainly focused on standard practices like income tax filings and financial statement audits. Financial forensics are outside of most CPA agencies’ experience.

When should I hire forensic accountants?

Forensic accounting should be performed if you are seeing any of the red flags of fraud, including:

  • A bookkeeper or accountant who never takes time off.
  • Regular inventory shortfalls at physical counts.
  • Unreconciled cash transactions over 30 days old.
  • Continuously shrinking cash despite profitable financial reporting.
  • A bookkeeper who always seems too busy or overwhelmed.

If you suspect fraud is occurring in your business, odds are you are correct. We recommend having a phone consultation with one of our CFOs to analyze your situation and advise on proper course of action. Book your appointment now to find out if your business would benefit from forensic accounting.

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