When it comes to specialty practices, one surrounded in mystery is often forensic accounting. However, we’re going to clear up some of the confusion regarding forensic accounting and explain just how much this practice has changed over the years. With this being said, here’s a look at forensic accounting and how much this occupation has developed as of late.
What Is Forensic Accounting?
Forensic accounting is a specialty practice that results whenever litigation or anticipated/actual disputes are on the horizon for a business. The “forensic” term translates to “suitable for use in a court of law”, meaning that forensics are the standard (and possible outcome) in which the forensic accountants have to work with. Forensic accountants are also known as investigative auditors and forensic auditors. No matter what you call them, their occupation is to give expert evidence in the event of a trial.
Many police, government agencies, boutique firms, and large accounting firms have their own forensic accounting department. However, these groups normally have sub-divisions that specialize in areas such as royalty audits, construction, Anti-Money Laundering, fraud, personal injury claims, and insurance claims. It should also be mentioned that forensic engagements regarding financial matter can often fall into different categories such as:
- E-Discovery/Computer Forensics
- Business valuation
- Money laundering
- Tax fraud
- Securities fraud
- Reorganization, insolvency, and bankruptcy
- Post-acquisition such as breaches of warranties or earn-outs
- Economic damage calculating, whether they be suffered through breach of contract or tort
What Events Would Constitute Forensic Accounting?
In the event of professional negligence claims, forensic accountants comment and assess the work of the professionals in a business. In addition to this situations, forensic accountants are also utilized for family and marital law. When forensic accountants are engaged in such situations, they help determine equitable distribution, income available for child support, and spousal support. For criminal matters, forensic accountants are brought typically brought in for situations regarding fraud. For instances of fraud, forensic accountants are needed to assess the accounting systems to make sure funds reflect reality.
Some accountants specialize in the analytics department of forensics, in which they claim, detect, or reconstruct electronic data to detect fraud. The steps for forensic analytics include:
- Data Analysis
- Data Preparation
- Data Collection
A great example of forensic analytics would be reviewing the activity of a business purchasing card to determine whether or not purchases made on the card were made for personal use.
Differences Between Forensic Accounting & Internal Auditing
The fraud investigation methodologies of forensic accounting and internal auditing are fairly different in comparison. In situations of crime scenes, forensic accounting practices and services must be handled by forensic accounting experts… meaning that they cannot be done by internal auditing experts (for obvious reasons). In addition to this, forensic accounting experts can easily translate numerical data and complicated financial transactions into terms that the ordinary person can easily understand.
The importance of forensic accounting translation is based on the fact that when the fraud case comes to trial, the people in the jury will understand the layman terms to make a decision regarding the case. In addition to this, internal auditors go by checklists in which the event of fraud (or the possibility of covering up the fraudulent case in question) can easily be ignored when presented to the jury. With this being said, there’s many legal risks that come with internal auditing checklists (as opposed to information presented by a forensic accountant) which can result in a very serious malpractice case.
How Forensic Accountants Operate Today
The forensic accountants of today operate on a simple set of rules and regulations for their occupation. Such rules and regulations are:
- Litigation procedures and processes
- Evidence gathering
- Investigative techniques
- Data analysis techniques to detect fraud
- Electronic discovery
- Data management
- Auditing and accounting procedures and standards
- Financial reporting systems
- Business information
- Economic theories
- Over time, the role of forensic accounting has evolved and applied more proactive risk reduction methods to their service. These other roles include assisting with investment analyst research, fraud deterrence engagements, advising audit committees, and designing the extended procedures for statutory audits.