In the 1920s, Al Capone headed up an organized crime scheme that included gambling, prostitution, robbery, drug trafficking and murder. Law enforcement officials couldn’t collect the evidence they needed to convict him on many of his more notorious crimes. However, Frank Wilson, an IRS accountant, combed through stacks of Capone’s financial statements and records and found evidence that led to his conviction on 23 counts of tax evasion. In the process, he invented the field of forensic accounting.1
Forensic accounting is a specialized branch of accounting that uses investigative techniques to uncover fraud and other financial crimes. Forensic accountants analyze the financial records of organizations and individuals to uncover evidence of inaccuracies, anomalies and fraudulent transactions. They may work for lawyers, financial institutions or law enforcement agencies, and are often called upon as expert witnesses in civil and criminal cases.2
This post will discuss techniques, case studies, and careers in forensic accounting.
Fraud Examination Techniques and Tools in Forensic Accounting
According to the Federal Trade Commission, fraud cost US consumers $8.8 billion in 2022, an increase of 44% from 2021,3 making forensic accounting an important profession to countering these losses. Fraud detection in accounting uses a combination of accounting, investigative and cutting-edge analytical techniques and tools to unearth and expose fraud.
Financial Analysis Methods
Financial analysis methods use data analysis techniques to investigate financial data, uncover patterns, and identify outlying data to track down misconduct and financial fraud. Trend analysis, for example, allows forensic accountants to examine financial data over time, identifying inconsistencies or deviations from expected patterns. They can use this data to reveal hidden fraudulent activities, such as embezzlement or revenue manipulation.4
By comparing financial ratios, such as profit margins or liquidity ratios, against industry norms or historical data, forensic accounting professionals can detect anomalies indicating financial misrepresentation or fraud. They also use techniques like Benford’s Law or statistical models to identify unusual patterns in large datasets that flag potential fraud or accounting errors.4
Data Forensics and Digital Analysis
With the digital transformation, cybersecurity and forensic accounting issues often overlap. Data forensics and digital analysis techniques allow forensic accountants and professionals to leverage digital data to uncover financial fraud or irregularities. They use digital footprint tracing to examine digital records, from transaction histories to online behaviors, to trace the origins and flow of funds.5
E-discovery techniques, such as extracting data from emails, databases and other digital platforms, help forensic accountants collect, preserve, analyze and present data from digital devices in investigations. Because so many financial transactions are digital, these accountants also need to be well-versed in cybersecurity to analyze and protect sensitive data.6
Interview and Interrogation Techniques
Forensic accounting professionals don’t just examine records and run statistical models. They also interview employees and key witnesses in an investigation. These forensic interviews can provide additional facts or solicit confessions.
A forensic accountant builds trust and rapport with the people they’re investigating to encourage their cooperation. They start by asking questions they know the answer to, so they can establish baseline behavior. When they ask questions they don’t know the answers to, they can draw on this baseline behavior to determine if they’re telling the truth.7
Fraud Case Studies in Forensic Accounting
Forensic accounting is used to uncover many different financial crimes, from corporate and investment fraud to money laundering. The following fraud examination case studies illustrate how forensic accounting skills were used to uncover significant financial crimes.
The Enron scandal was one of the largest corporate fraud cases in history. The company used off-balance-sheet special purpose entities (SPEs) to inflate profits and hide debts. Forensic accountants analyzed Enron’s complex financial records, tracing transactions and debts concealed through these SPEs. Their expertise revealed the extent of key executives’ financial manipulation, leading to criminal charges and new legislation designed to prevent similar crimes in the future.8
Panama Papers Leak
The Panama Papers leak was the largest data leak in history, exposing millions of documents from the law firm Mossack Fonseca. These documents revealed emails, financial spreadsheets and corporate records that allowed forensic accountants to trace hidden wealth, tax evasion and money laundering activities. The leak revealed how politicians, including Russian President Vladimir Putin, and other wealthy individuals used offshore tax havens to commit financial crimes.9
Bernie Madoff’s Ponzi Scheme
A Ponzi scheme is a type of investment fraud that pays returns to existing investors with money collected from new investors. Bernie Madoff committed the largest Ponzi scheme in history, defrauding investors out of billions of dollars. The financial analyst Harry Markopolos first discovered the fraud in 1999, but the SEC ignored his reports until 2005. As more of his investors started cashing out, Madoff was unable to keep paying investors. Madoff was arrested in 2008, tried, and sentenced to 150 years in prison.10
Training and Careers for Forensic Accountants and Fraud Examiners
Forensic accountant careers require at least a bachelor’s degree, but a forensic accounting master’s degree will give you a competitive edge in applying for jobs. A forensic accountant can also obtain professional certifications such as Certified Public Accountant (CPA) and Certified Forensic Examiner (CFE). Forensic accountants work for accounting firms, law enforcement organizations, the federal government and financial institutions.11
Advance Your Career With an Online Forensic Accounting Degree
An Online Master of Accounting from William & Mary can help prepare you for a career in forensic accounting through a rigorous curriculum taught by our highly regarded faculty. Our graduates have a pass rate in the 90th percentile on the CPA exam on their first try, attesting to the quality of their education. The faculty experts and robust curriculum of the program instill more than skills. They shape you as a decision-maker and a business leader. You’ll learn from innovative scholars and experts with deep experience teaching online students to assess a company’s processes and think critically to solve problems.
This distinguished online program empowers you to complete your coursework, interact with faculty and fellow accounting students and stay connected with the William & Mary community—all in a way that seamlessly integrates with your life and schedule.
Schedule a call with an admissions outreach advisor today to learn more.
- Retrieved on January 1, 2024, from intheblack.cpaaustralia.com.au/accounting/how-al-capone-caught-out-forensic-accountant
- Retrieved on January 1, 2024, from investopedia.com/terms/f/forensicaccounting.asp
- Retrieved on January 1, 2024, from cnbc.com/2023/03/01/ftc-fraud-cost-consumers-8point8-billion-in-2022.html
- Retrieved on January 1, 2024, from linkedin.com/pulse/from-pieces-patterns-intricacies-evidence-analysis-forensic-pandey-1c/
- Retrieved on January 1, 2024, from researchgate.net/publication/370954322
- Retrieved on January 1, 2024, from cyfor.co.uk/how-ediscovery-complements-forensic-accounting/
- Retrieved on January 1, 2024, from marcumllp.com/insights/uncovering-the-truth-mastering-the-art-of-forensic-interviews
- Retrieved on January 1, 2024, from investopedia.com/updates/enron-scandal-summary/
- Retrieved on January 1, 2024, from theguardian.com/news/2016/apr/03/what-you-need-to-know-about-the-panama-papers
- Retrieved on January 1, 2024, from investopedia.com/terms/b/bernard-madoff.asp
- Retrieved on January 1, 2024, from indeed.com/career-advice/careers/what-does-a-forensic-accountant-do