Definition:
Forensic Accounting is the art of investigating 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 shareholder disputes.
The investigation and verification are normally done on the company’s financial statements, management accounts, and other related documents, data, and information related to the investigated subject matter.
The common procedures include 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 important to perform its work 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 the evidence found plays 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 tests 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 accounting-related matter.
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 relates to the company, project, or subject matter.
- Lost earnings/wages prepare reports related to the employee’s loss or earnings. The best example for this point is that, for example, an employee sues their employer for wrongful dismissal, and the court wants to figure out the subsequent loss of this dismissal for the employee.
- Investigation of breach of contract of parties. This typically happens in daily business activities. Such examination will study the detail of the terms of the contract and the way how parties in the contract. The report on those who respect, disrespect, and lose due to the breach of contract will be calculated and presented to the court.
- A wrongful death report results from an investigation related to death, whether criminal or civil.
- Patent and copyright violation reports.
- Fraud Investigation report: This report is used by the court and lawyer to determine 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 special skills 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 have no objection from all the parties.
Expert Witness Testimony
Because forensic accountants are independent experts, 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 matter 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 in a company’s purchasing department 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 the 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 shareholder dispute.
Fraud Investigations
Fraud is a major expense to the company, and it is a virus that is hardly investigated and eliminated. The fraud investigation could be performed in many 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 collections. In this case, forensic accounting could provide the investigation services and determine the loss for those cases. The investigation report could also include the cause of Fraud, which involves, 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 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 are two important fields of accounting that are often confused with each other. While they share some similarities, they also have significant differences.
Forensic accounting is a specialized area of accounting that focuses on investigating financial crimes, disputes, and other irregularities.
Forensic accountants are trained to analyze financial data and identify fraudulent or illegal activities using their accounting and investigative skills.
They often work with law enforcement agencies or attorneys and may be called upon to provide expert testimony in court.
Some of the common services provided by forensic accountants include fraud investigations, litigation support, insurance claims investigations, and asset tracing.
On the other hand, an audit is a systematic and independent examination of an organization’s financial statements and records to ensure that they are accurate, reliable, and comply with relevant accounting standards.
The primary objective of an audit is to provide an opinion on the financial statements, highlighting any material misstatements or weaknesses in internal controls.
An audit is typically carried out by an external auditor independent of the organization being audited.
The key differences between forensic accounting and audit are summarized in the table below:
| Aspect | Forensic Accounting | Audit |
| Objective | Investigate financial crimes, disputes, and other irregularities | Provide an opinion on the financial statements |
| Focus | Investigative | Compliance |
| Scope | Narrow and specific | Broad and general |
| Nature of work | Reactive | Proactive |
| Reporting | Varied (reports, expert testimony, etc.) | Formal opinion (auditor’s report) |
| Auditing standard used | Generally Accepted Auditing Standards (GAAS) | International Standards on Auditing (ISA) |
The objective of Forensic Accounting
Forensic accounting aims to investigate financial crimes, disputes, and other irregularities. Forensic accountants use their accounting and investigative skills to analyze financial data and identify fraudulent or illegal activities.
They are often called upon to provide expert testimony in court or to assist law enforcement agencies or attorneys in their investigations.
The primary goal of forensic accounting is to uncover evidence that can be used in legal proceedings. Forensic accountants may be asked to investigate a range of financial crimes, including fraud, embezzlement, money laundering, and bribery.
They may also be called upon to investigate disputes related to intellectual property, bankruptcy, or insurance claims.
Forensic accountants typically work in a variety of settings, including law firms, accounting firms, government agencies, and corporations.
They may work on a single case or be part of a team that investigates multiple cases at the same time. In some cases, forensic accountants may be called upon to provide litigation support, helping attorneys to prepare for trials or settlement negotiations.
The key objectives of forensic accounting can be summarized as follows:
- Identify financial crimes: Forensic accountants use their knowledge and skills to identify financial crimes such as fraud, embezzlement, and money laundering. They analyze financial data, review accounting records, and look for inconsistencies or irregularities that may indicate illegal activities.
- Gather evidence: Forensic accountants collect and analyze financial data to gather evidence that can be used in legal proceedings. They may also conduct interviews with employees or other individuals who may have information relevant to an investigation.
- Quantify damages: In cases where financial harm has been done, forensic accountants can quantify the extent of the damages. They can calculate the amount of money that has been lost or stolen and provide a report that can be used in court.
- Provide expert testimony: Forensic accountants may be called upon to provide expert testimony in court. They can explain complex financial concepts to judges and juries and provide an opinion on the validity of financial evidence.
