What is Forensic Accounting?
It’s the specialty practice area of accounting that describes engagements that result from actual or anticipated disputes or litigation. “Forensic” means suitable for use in Court, and it is to that standard and potential outcome that forensic accountants generally have to work.
Forensic accountants give expert evidence at the eventual trial by utilizing their accounting and auditing skills, and using their investigative skills to determine when and what events actually took place in a certain financial setting.
Forensic Accounting encompasses two main broad areas:
- Litigation Provision – Litigation represents the factual presentation of economic issues related to existing or pending litigation. In this capacity, the forensic accountant quantifies damages sustained by parties involved in legal disputes and can assist in resolving disputes before they reach the courtroom. If a dispute reaches the courtroom, the forensic accountant may testify as an expert witness. Knowledge of the courtroom sets the forensic accountant apart from a typical accountant.
- Investigation – Investigation is the act of determining whether criminal matters such as employee theft, securities fraud (including falsification of financial statements), identity theft, or insurance fraud have occurred. Investigation may also occur in civil matters. A forensic accountant may be hired to search for hidden assets in a divorce case.
Engagements relating to Forensic Accounting may fall into several categories;
- Absence of a complete set of financial records – Forensic Accounting assists to reconstruct financial information when complete set of financial records are not available. For instance, when the financial records have been destroyed and when converting cash basis accounting records to accrual basis accounting and so forth.
- Shareholders’ and Partnership Disputes – These assignments often involve a detailed analysis of numerous years accounting records to quantify the issues in dispute. For example, a common issue that often arises is the compensation and benefits received by each of the disputing shareholders or partners.
- Business Interruption / Other Types of Insurance Claims – Insurance policies differ significantly as to their terms and conditions. Accordingly, these assignments involve a detailed review of the policy to investigate coverage issues and the appropriate method of calculating the loss. Examples of these types of forensic accounting assignments include; business interruptions, property losses and employee dishonesty (fidelity) claims.
- Business/Employee Fraud Investigations – Business investigations can involve funds tracing, asset identification and recovery, forensic intelligence gathering and due diligence reviews. Employee fraud investigations often involve procedures to determine the existence, nature and extent of fraud and may concern the identification of a perpetrator.
- Criminal Investigations – Engagements relating to criminal matters typically arise in the aftermath of fraud. They frequently involve the assessment of accounting systems and accounts presentation – in essence assessing if the numbers reflect reality. Forensic accountants may be involved in recovering proceeds of crime and in relation to confiscation proceedings concerning actual or assumed proceeds of crime or money laundering.
- Matrimonial Disputes – Matrimonial disputes from a Forensic Accounting point-of-view often involve the tracing, locating and evaluation of assets. The assets may be businesses, property or other assets and were owned or were under the management of the partners.
- Business Economic Losses – Examples of assignments involving business economic losses include; contract disputes, construction claims, expropriations, product liability claims, trademark and patent infringements and losses stemming from a breach of a non-competition agreement.
- Professional Negligence – Forensic accountants often assist in professional negligence claims where they are assessing and commenting on the work of other professionals. These investigations are often approached from two different but complimentary perspectives, these being:
- Technical – This is when the professional in question has a breach of Generally Accepted Accounting Principles or Generally Accepted Auditing Standards or other standards of practice occurred; and
- Loss Quantification – If the professional in question is an accountant then a Forensic Accountant could be involved with both perspectives. If the matter involves some other profession a Forensic Accountant will normally be retained to perform only a loss quantification.
While forensic accounting and fraud auditing are related, fraud auditing is more anticipatory. Fraud auditors try to control a situation before something happens, whereas a forensic accountant may be hired after the fact. A forensic accountant is usually hired after a company suspects’ theft, fraud or embezzlement. Forensic accountants are suspicious. They must be able to apply their accounting knowledge to legal issues. A forensic Certified Public Accountant will be asked to write expert reports, assist in depositions, testify as an expert witness, conduct fraud investigations and assist in civil and criminal investigations.
About the Author
Thank you for reading this article. The author, James Ndambiri is an avid Business Advisor and Consultant: A Tax Surgeon, Proficient Accountant, Skilled Auditor, a Guru in Financial and Investment management, Expert in Business Strategy Formulation, Business Transformation Wizard, Family Business Advisor, Lecturer, Business Coach and a Family Man.
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