Forensic Accounting: Definition | Types | Services | Explanation

Definition:

Forensic Accounting is an art of investigation over accounting records, financial statements, and other related financial records. The result of investigation mostly use for legal support, and resolving conflict.

This job requires technical skills in accounting, investigation and legal. These are what drive forensic accounting to become more attractive and highly paid.

The investigation is cover certain areas include fraud, crime, insurance claims as well as a dispute among shareholders.

The investigation and verification are normally done to the company’s financial statements, management accounts, and other related documents, data, and information related to the subject matter being investigated.

The common procedures would be financial statement analysis, computer assistance, supporting document examination, investigation, and interview.

This engagement is engaged with the professional firms that have professional experiences, expertise in accounting standards, and legal background.

In general, Forensic Accountants are required to have knowledge and experience in accounting and investigation skills. These are the most important requirements.

Also, to be able to perform its works efficiently and effectiveness, knowledge in those related industries that being investigate also consider to be important.

Related: The List of Forensic Accounting Procedures

Why Forensic Accounting?

Forensic accounting is very important not only because they have a special skill and trained in the investigation, and expertise in accounting records, but also because of the evidence that found is playing a very important role in judicial decision making. This job is quite different from the auditor and can not substitute by them.

As we know, the auditor performs its testing in the accounting records against accounting standards like US GAAP or IFRS.

Their responsibility is not investigating and quantifying the fraud that happens in the company and also the evidence found in by the auditor might not be used by the court. However, the evidence found by forensic accounting could be used by the court as expert evidence.

For example, the FBI also has a forensic accounting team to work for them in investigating any matter related to accounting.

Provide Litigation Support

So basically, this is the popular service that provides by Forensic Accounting. The Forensic Accounting report is prepared to support the litigation in the court in certain areas. For example,

  • Produce the Profit and Loss report of the company. This is simply figuring out how much profit or loss related to the company, project or related subject matter.
  • Lost earnings/wages prepare reports related to lost or earn of the employee. The best example for this point is that, for example, there is the employee sue its employer for wrongful dismiss and the court wants to figure out what is the subsequent loss of this dismissed for the employee.
  • Investigation of breach of contract of parties. This normally happens in daily business activities. Such examination will study the detail of terms of the contract, and the way how parties in the contract. The report on those who respect, disrespect, and loss as the result of the breach of contract will be calculated and present to the court.
  • A wrongful death report is the result of investigation related to death whether it is criminal or civil.
  • Patent and copyright violation reports.
  • Fraud Investigation report: This report used by court and lawyer to understand and figure out the amount of loss and who are related parties.
  • Business diminution report
  • Professional malpractice report
  • Wrongful termination report
  • Others services


Sometimes it is required by the lawyer or court to have someone who has the special skill in accounting and investigation skills to examine and produce the report on the areas related to accounting.

These people do not only have a special skill in accounting and investigation, but also independence from all parties so that the report will be more reliable and no objection from all the parties.

Expert Witness Testimony

expert-witness-testimony

Because forensic accountants are independence and expert, they are not only preparing the expert report, but they also could be the witness used by the court. So that is the reason why most of the forensic accountant is hired by a lawyer or court to investigate the subject meter and produce the report.

They can be the witness over the areas like profit and loss, fraud, patent and copyright, breach of contract, and many others.

For example, the Forensic Accountant is engaged to investigate fraud that happens in the purchasing department of a company and present its report to the court.

In this case, a Forensic Accountant could also be the expert witness testimony on how the fraud is committed, who commit fraud and the amount of loss. Such a witness will be part of the court decision making.

They also could be the witness over the accounting records related area on the dispute between shareholders.

Fraud Investigations

Fraud is the major expenses to the company and it is the virus that hardly to investigate and eliminate. The fraud investigation here could be performed in many different types of organizations like corporate, public, or private organizations.

The investigation could also perform in many different areas like fraud over financial reporting and fraud over the entities’ assets. Yet, employee fraud investigation is the most popular service.

For example, Fraud over salaries, inventories, fixed assets or cash collects. In this case, forensic accounting could provide the investigation services and figure out how much the loss for those cases.

The investigation report could also include the cause of fraud, who involve with and how the fraud happens.

Such an investigation is also similar to the audit.

Insurance Claims Analysis

The forensic accountant can help both policyholders and insurers to have prepared and reviewed the claim based on the term and conditions that cover the insurance policies.

The claim will prepare based on the deep and detail analysis of the coverage in the policies on behalf of policyholders. In this case, a forensic accountant might work closely with the accounting assurance team that knows clearly about financial loss.

In some cases, this service also provides the insurance company to review the claim that submits by policy’s holder to quantify the claim amounts.

Difference between forensic accounting and audit:

Forensic accounting and audit have some form of similarity and difference. For example, the purpose of an audit financial statement is to let auditors perform an independence review and then express an opinion. The auditor will only provide reasonable assurance on the financial statements.

However, forensic accounting normally performs an investigation on the financial statements and quantifies the loss that might happen. They will not issue the opinion.

Auditor normally required to hold CPA to enable them to sign the audit report. But, forensic accountant normally required both CPA and CFE.

Audit report normally not use for legal support however forensic accounting report is normally used as the expert report to deal with the legal case.