Forensic accounting entails examining the finances of an individual or business. Specialists in the field ensure finances are in order and secure. They are also employed to look for financial improprieties in business transacting.
Here’s an overview of forensic accounting and what your business needs to know about it.
Importance of Forensic Accounting
Demand for forensic accounting has increased dynamically. This is due to the growth of entrepreneurship, which continues to boom. With this rise, forensic accountants have become invaluable for uncovering activity that threatens business stability. They play important roles at law firms and insurance companies where a single financial misstep can destroy a business.
Exactly What Do Forensic Accountants Do
The underlying mission will always be to find where the money is or went. Excessive or unexplained payments, under reported income, ghost employees and unsubstantiated debt are a few situations requiring forensic investigation. Forensic accountants look into inheritances, litigation, insurance claims, and marital, divorce and will disputes.
The internet has broadened the field. Cybersecurity breaches have made counterintelligence and terrorism common.
Prominent Examples of Forensic Accounting
What follows are the scandals uncovered or managed through forensic accounting.
Lehman Brothers. Lehman disguised a real estate hedge fund as an investment bank to process distribution of home loans. The mortgage crisis in the late 2000s saw the company fall apart. A federal forensic accounting investigation unveiled illegal manipulation.
Enron. Investors lost billions of dollars and saw failed projects, all initiated through financial improprieties and illegal practices. Shares dropped to $1. Stakeholders sued the company. The Securities and Exchange Commission led the forensic investigation.
AIG. American International Group was the recipient of $180 billion, a bailout to keep the company afloat. AIG got involved in life insurance schemes. Forensic accountants discovered the malpractices.
Why Your Business Wants Forensic Accounting
Forensic accountants uncover critical problems, discrepancies and inaccuracies. Examining a business takes time and effort, and an expertise for discerning the truth. They help owners manage their credibility and to retain a reputable reputation.
Often, a specialist is brought in when it’s too late. This doesn’t have to be the case. Not all financial issues are criminal. But the aftermath of discrepancies or fraud leaves the business reeling. This is especially true of startup and smaller businesses who may not have the financial standing to recover.
Protecting Yourself with Forensic Accounting
No one wants a governing body storming their offices to review the books. Organizations, especially smaller businesses, should consider validating their bookkeeping. Use an expert to verify financial statements and show they are not materially misstated. Fraud and even gaffes are typically hiding where the non-expert won’t look.
While you can have an accountant on staff, an independent accounting has to be a consideration. Objectivity and skepticism has to be part of the program. The primary concern of third parties will be to show business owners and stakeholders all matters are above board.
You want to know if there are financial improprieties in your books and trust they won’t be front and center. Forensic accounting and examinations will find them. Fraud risk assessments are essential due diligence as they pinpoint where you’re at risk. Forensic accountants can find fraud and help you determine how the business can recover.
What if Fraud is Uncovered?
Businesses need to understand the repercussions of being financially endangered. Forensic accountants prepare them for it. The process provides discipline, helping the company make right choices and – finding out a wrong choice has been made – deploying solutions.
When fraud is uncovered, businesses can get to work. They can develop action plans. And they can establish credibility. Advance planning saves valuable time and prevents financial disasters.
The need for this form of accounting has changed with technology. Evolving technology hasn’t just made incredible revolutions for the global market, it’s made it easier than ever to manipulate the system for illegal purposes.
Without forensic accounting, it will just get easier to get away with financial improprieties.