Image by Dmitry Demidko on Unsplash
The United Nations Office on Drugs and Crime approximates that between 2% and 5% of the global GDP, or about 2 trillion in current U.S. dollars, is laundered globally each year. Cybercrime will be particularly rampant this year, says Moody's Analytics director Nicola Passariello, in a projection made more striking by a World Bank (WB) study.
According to the financial organization, two-thirds of adults worldwide engage in digital payment transactions. While the surge is related to the pandemic, it remains relevant today as financial crimes impact geographies and generations in various ways.
A recent IBM-commissioned report found credit card fraud to be the most widely reported global financial crime, with Brazil being one of the hardest-hit countries. Brazilians are also, curiously, the most financially conscious people globally, followed by Singaporeans.
For millennials and Gen Zers, fraud typically occurs with digital payment apps, while Gen Xers and Baby Boomers think credit cards are the most vulnerable targets.
Financial crime is, clearly, a multifaceted war we've been fighting since 300 BC. If we're going to win it, we need to be armed to the teeth with strategies that intercept attacks, mitigate their impact, and hold responsible actors accountable. Today, forensic accounting can be one of our weapons.
Getting to the Bottom of Forensic Accounting
Forensic accounting is an area of accounting that focuses on investigating and analyzing financial transactions and data for legal purposes. It has two key areas of focus, namely, litigation support and investigative accounting. Forensic accountants can specialize in either or both of these two areas.
Being a forensic accountant requires an amalgam of auditing, accounting, and investigative skills to expose mismanagement, fraud, or other suspected anomalies. The goal may be to collect and establish evidence for financial legal disputes or to serve a business purpose.
Forensic accounting goes back to the early civilizations that performed the most ancient accounting and auditing methods. The modern approach, however, did not make its way until the second half of the 20th century, a time marred by white-collar crimes and corporate fraud.
Accompanying the rise of increasingly complex financial crimes was the need for a standard body of knowledge and skill for investigating and exposing schemes and their perpetrators. When high-profile gangster Al Capone fell into the hands of authorities for his financial crimes, then-accountant Frank J. Wilson exposed him. Wilson ultimately became known as the father of forensic accounting.
Another infamous financial crime in history is the Mississippi Bubble, which caused a speculative frenzy and brought the French economy to its knees in the 18th century. The 1990s also saw the collapse of Enron Corporation, then one of America's biggest energy, commodities, and services companies. Enron's scheme involved attracting investors by padding up their financial books.
Forensic accounting covers various activities to gather financial evidence for legal proceedings. Here are some examples:
In investigating financial fraud, forensic accountants look into financial records to determine irregularities such as manipulation, asset misappropriation, etc. They examine the money trail using data analysis techniques and conduct interviews with parties as part of the evidence-gathering process. The job also includes determining the extent of any discovered anomalies.
Forensic accountants perform asset tracing when looking for illegally stored or transferred assets. The process is handy for cases such as bankruptcy, money laundering, or divorce. In performing asset tracing, forensic accountants zero in on the flow of funds, hidden assets, and their true owners.
Forensic accounting principles can also serve a business purpose, such as asset valuation for mergers, acquisitions, etc. While combing through financial statements, forensic accountants also consider market conditions to provide accurate value assessments.
Forensic accountants may assess financial losses experienced by an organization or individual in legal disputes or litigation. Forensic accountants are also experts in quantifying the economic impact of specific acts of commission or omission, such as embezzlement or negligence.
Forensic accountants play a crucial role in ensuring compliance with AML laws in the face of an increase in financial crime cases and a growing regulatory clampdown. These professionals can collaborate with private individuals, entities, governments, or intergovernmental organizations to implement AML programs, risk assessments, and investigations into money laundering.
Anti-money laundering (AML)
Expert witness testimony
Acting as expert witnesses in legal proceedings is another role forensic accountants are qualified to play. They can present their investigation results, conclusions, and suggestions to judges, juries, or arbitrators. In so doing, they educate legal professionals about the financial issues surrounding the case and help them in their decision-making.
Vulnerability detection and compliance
Forensic accountants don't only act after a financial crime has been committed. They also assess an organization's internal systems to identify vulnerabilities and install the necessary controls to prevent fraud and other financial anomalies. When working with individuals, forensic accountants review their financial documents to determine where the anomalies lie and how they can be prevented from recurring.
Playing an Important Role
Indeed, forensic accounting plays a central role in maintaining the global financial order in modern times. Forensic accountants possess all the necessary knowledge and skills to uncover financial crimes, attach a monetary value to the resulting losses, and hold those responsible.
Beyond criminal investigations, forensic accounting contributes to creating a transparent, reliable, and trustworthy financial environment. This role helps build and maintain business and legal stability, both in financial spheres and in all the areas of life they influence.