A Primer on Forensic Accounting

Very few people I have met understand what I do when I tell them I am a forensic accountant. They either have never heard of forensic accounting, or their experience is limited to the stories of a relative who hired a forensic accountant to help with a divorce or investigate a fraud in a small business. While forensic accounting is a niche practice of accounting, it is a fairly broad niche that encompasses fraud examinations and divorce proceedings and a host of other services and practices areas.

To understand the role of the forensic accountant, it helps to understand the evolution of the practice of accounting in general. From the time of the pharaohs, accountants were tasked with keeping ledgers of transactions, and keeping the records of a business is still the primary purpose of an accountant’s role. The Industrial Revolution ushered in the need for accountants to acquire a new skill set – accounting for internal transactions that impact management decisions – that we now call management accounting or cost accounting.

Following World War II, Americans were enjoying a booming economy, but the impacts of the Great Depression were still fresh on their minds. The fear of another economic turmoil prompted the US government to begin creating and enforcing laws meant to curb fraud and abuse by corporations. Esteemed accounting professional Maurice E. Peloubt saw this regulatory scrutiny and the government agencies it was creating as the herald for a new branch of accounting – the forensic accountant. Peloubt wrote in a 1946 issue of the Journal of Accountancy that the growth of forensic accounting would mirror the increase in new legislation and regulation. The decades since have seen Peloubt’s prediction become reality.

Today, forensic accountants can be found in a wide variety of niches providing support and expertise to their clients and employers. I have been practicing forensic accounting for almost 18 years, and my engagements have run the gamut:

  • I started in martial law, providing valuation and investigative services in divorce and child support cases.
  • I have worked on several engagements involving economic damage valuations and business interruption assessments, including catastrophic responses such as in the aftermath of the BP oil spill in the Gulf of Mexico.
  • I have led hundreds of internal investigations into fraud, waste, and abuse for clients in a variety of industries including manufacturing, retail, financial services, healthcare, and non-profit.
  • I have worked with investors to conduct business valuations and financial statement analysis both pre- and post-transaction.
  • I have advised clients on responding to and mitigating government claims of fraud, such as violations of the Foreign Corrupt Practices Act.
  • I have worked with defense counsel for dozens of white-collar criminal cases.
  • I have helped support financial troubled businesses through turnarounds, bankruptcies and reorganizations.

And this is just a small sampling of some of the engagements a forensic accountant my take on.

In the last few years, forensic accounting has grown to include the practice of digital forensics. Forensic accountants versed in digital forensics can use those skills against computer and internet fraud schemes, as well as organizational threats such as industrial espionage, insider trading, and cyber attacks.

An emerging practice area many of my clients are now seeking is operational forensics, mining the vast fields of big data that organizations generate to identify inefficient and ineffective processes. These types of engagements can help organizations better position themselves for emerging changes in the business landscape and support innovative new ways of doing business.

If you are curious about the applications of forensics in your business, reach out to me at info@hoganforensics.com.