Do you want to be able to see the world differently? Forensic accounting is applying accounting principles and techniques to legal matters.
This can include fraud investigations, dispute resolution, and even estate planning.
When you’re a forensic accountant, you need to be able to see the world differently. Because whether you’re examining a fraud case or auditing a business, you need to be able to separate yourself from your client and ask hard questions about the information they provide.
That’s why it’s important to know what types of forensic accounting exist so that when you’re interviewing for jobs or trying to decide which kind of work is right for you, you can make sure it aligns with your skillset and interests.
If this interests you, let’s begin by analyzing the various types of forensic accounting.
Here Are the 4 Types of Forensic Accounting:
One way to think about forensic accounting is to look at the different types of legal proceedings that fall under this broad definition.
There are different kinds of forensic accounting, and they are usually put together based on the type of legal case they are part of.
The following are some types that come up most often:
Economic damages are the costs associated with a crime or accident. For example, suppose a driver was driving under the influence and caused an accident that injured someone. In that case, they’d be liable for medical expenses associated with treating those injuries—as well as any lost wages and other monetary losses from being unable to work due to the damages.
This damage is commonly awarded in civil law cases where it has been proven that someone was negligent or at fault for causing harm to another person or their property. In criminal cases involving theft or fraud, economic damages may be awarded if enough evidence proves that a crime was committed against an individual or business entity.
Examples of Economic Damages:
- Medical Expenses: This includes any medical expenses you incur after being injured due to someone else’s negligence or misconduct. This could include the cost of physical therapy or long-term care services.
- Lost Wages: If you can’t work because of your injuries, you may be entitled to lost wages from your employer or workers’ compensation. If you were dismissed from your job as a direct result of your injuries, that amount of money would also be deemed lost earnings.
- Other monetary losses include child care, home health care, special medical equipment, or other miscellaneous expenses required to maintain your quality of life while you cannot work.
Securities fraud is a type of white-collar crime where companies or individuals commit fraud by making false claims about investments to gain money from investors. This may occur in various ways, including by exaggerating the value of stocks or bonds or engaging in insider trading.
Securities fraud can also occur when companies make false statements about their finances or business operations. If an investor has taken out a loan against their assets, they risk losing even more of their money if they are a victim of securities fraud and lose their entire investment.
They may also face legal problems if they do not report their investment as lost due to fraudulent activity within a specific time after discovering that someone else’s actions defrauded them.
Examples of Securities Fraud:
- Accountants Fraud: This type of securities fraud involves accounting practices that hide a company’s proper financial condition, such as misrepresenting assets or liabilities.
- Internet Fraud: Internet-related fraud occurs when someone uses the Internet to perpetrate a scam against another person or business. This can include fake websites or email solicitations for money not being used for charitable purposes.
- Insider Trading: When a person who has access to sensitive information about a publicly listed firm buys or sells shares based on such information before it becomes known to the general public.
- Microcap Fraud: Microcap fraud occurs when investors are misled about the value of microcap stocks by those who control them. Microcap stocks trade on small exchanges and have low liquidity, meaning they’re difficult to buy or sell without affecting the stock’s price.
- Mutual Fund Fraud: This occurs when investors are sold fraudulent mutual funds by those who control them, such as brokers or fund managers. This can happen through mismanagement of funds or improper sales practices (such as recommending products based on kickbacks).
Tax fraud involves evading taxes or defrauding the government by concealing or misrepresenting the value of goods and services. Tax evasion is illegal, but tax avoidance is not.
When people avoid taxes, they can do it legally by writing off legitimate expenses on their income tax returns. The IRS uses forensic accounting to investigate cases of tax fraud.
Forensic accountants are trained in forensic accounting techniques, which are used to detect fraud in financial records. Legal professionals use these same techniques to prove that a person has committed tax fraud.
Examples of a Typical Tax Fraud Scheme:
- Concealing Earnings Internationally: One common way to commit tax fraud is by hiding earnings overseas. This may involve transferring assets such as money or property out of the country. Hence, they are not subject to taxation, which may include making false claims about where these assets are located.
- Submitting False Documents: This tax fraud involves submitting false documents to make it appear that you have more deductions than you do. Some examples include submitting fake invoices or receipts for purchases that never happened or inflating business expenses on your tax return to claim more deductions than you have.
- Disguised Business Possession: This scheme involves an individual who creates a business that does not generate any profit but claims it as his primary income source on his tax return. The perpetrator can claim that he owns all or part of the company and receive a salary from it, even though no one employs him. He may also claim deductions for expenses related to running the company, even though they were never incurred.
- Filing a False Wage: Filing a false wage claim is one common tax scheme that forensic accountants can uncover. This scheme involves filing a false wage statement to get more tax deductions than they are legally entitled to. This type of scheme often takes place when people who have done some self-employment decide not to report all of their income and then try to hide what they did report on their taxes by filing false statements.
Money laundering is a complex process by which criminals or other individuals attempt to disguise the origin of their money so that it appears to have come from legitimate sources.
Money laundering can be done through various methods, including using shell companies and offshore accounts or selling assets at inflated prices. The purpose of laundering money is to make it impossible for investigators or other authorities in law enforcement to determine where the cash originated from in the first place.
In some cases, banks may be complicit in money laundering schemes; they may knowingly hold accounts used to launder money or accept deposits from shell companies with no real business purpose. A forensic accountant can help uncover evidence of money laundering by looking for patterns that indicate suspicious behavior.
Examples of Money Laundering:
- Bank Capture: This is a form of money laundering that involves the theft of customer information from banks and other financial institutions. The criminal will then use this information to create phony accounts, which they can use to launder money.
- Invoice Fraud: When a corporation falsifies its invoices to make it seem as if they are selling more things than they are, this is an example of invoice fraud. This can be done in many ways, such as adding fake items to an invoice or removing items from an invoice to make them seem smaller.
- Casinos: Casinos are used for money laundering because they have large amounts of cash and high levels of security, making it difficult for law enforcement agencies to detect suspicious activity at casinos. Casinos also offer anonymity and privacy because other players or casino staff members don’t always know players’ identities.
- Round-tripping: Round-tripping occurs when funds are transferred from one country to another via a third country to avoid taxes or other regulations in both countries. For example, if an individual receives income through tax evasion in one country and then moves it to another without taxing it there, they are engaging in round-tripping.
- Structuring: Structuring involves breaking up large sums of money into smaller transactions to avoid reporting requirements. This is often done with organized crime groups who move huge amounts of cash from one place to another without having to report it.
Forensic accounting is a field that requires diligence and patience.
Many cases can take years to investigate, so forensic accountants need to remain focused throughout the process.
The work is often done in collaboration with law enforcement and legal teams, so teamwork is necessary for these professionals.
With so many interesting case studies, forensic accounting will have plenty of material to cover in the future.
Although this field is broad, it has its critics as well.
But at the end of the day, forensic accountants are helping find answers—and that can be a powerful tool in an increasingly complex world.