What is Forensic Accounting? Definition, Types, and Services


Forensic Accounting is an art of investigation over accounting records, financial statements, and other related financial records. The result of the investigation is mostly used 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 covers certain areas, including Fraud, crime, insurance claims, and disputes 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 investigated subject matter.

The common procedures would be financial statement analysis, computer assistance, supporting document examination, investigation, and interview. This engagement involves professional firms with 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, knowledge in those related industries is considered important to perform its works efficiently and effectively.

Related: The List of Forensic Accounting Procedures

Why Forensic Accounting?

Forensic accounting is essential not only because they have a special skill and are trained in the investigation and expertise in accounting records, but also because of the evidence found playing a significant 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 to investigate and quantify the Fraud that happens in the company, and also, the evidence found 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.

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Provide Litigation Support

So basically, this is the popular service provided 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 loss or earn of the employee. The best example for this point is that, for example, there is the employee sue their 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 an investigation related to death whether it is criminal or civil.
  • Patent and copyright violation reports.
  • Fraud Investigation report: This report used by the 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, the lawyer or court must 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 have special skills in accounting and investigation and independence from all parties so that the report will be more reliable and no objection from all the parties.

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Expert Witness Testimony

Because forensic accountants are independent and expert, they are preparing the expert report, but they also could be the witness used by the court. So that is the reason why a most forensic accountant is hired by a lawyer or court to investigate the subject meter and produce the report. They can witness 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 committed Fraud, and the amount of loss. Such a witness will be part of the court’s decision-making. They could also be witnessed over the accounting records related to the dispute between shareholders.

Fraud Investigations

Fraud is a major expense to the company, and it is a virus that is hardly investigated and eliminated. 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, which involves with, and how the Fraud happens.

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Such an investigation is also similar to the audit.

Insurance Claims Analysis

The forensic accountant can help both policyholders and insurers prepare and review the claim based on the term and conditions that cover the insurance policies.

The claim will prepare based on the deep and detailed 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 allows the insurance company to review the claim submitted by the policyholder to quantify the claim amounts.

Difference between forensic accounting and audit:

Forensic accounting and audit have some form of similarities and differences. For example, the purpose of a financial audit statement is to let auditors perform an independent review and then express an opinion. The auditor will only provide reasonable assurance on the financial statements. However, forensic accounting typically investigates the financial statements and quantifies the loss that might happen. They will not issue the opinion.

Auditors are generally required to hold a CPA to sign the audit report. But, forensic accountants typically need both CPA and CFE. The audit report usually is not used for legal support; however, forensic accounting reports are typically used as an expert report to deal with the legal case.