Basics of Forensic Accounting

Basics of Forensic Accounting

Forensic accounting is the process of using accounting skills to investigate fraud, embezzlement, mismanagement and other irregularities disguised as financial transactions in an organization. The result of investigation is mostly used for legal support and resolving conflict.

It requires technical skills in accounting, investigation and legal (law). These are what drive it to become an attractive and highly paid career path. The investigation covers areas like fraud, crime, insurance claims and dispute among shareholders of a company.

Investigations and verification are done on the company’s financial statements, management accounts, and other related documents to the subject being investigated.

The common ways in forensic accounting are financial statement analysis, computer assistance, supporting document examination, investigation, verification and interview. Professional firms with experience, expertise in accounting standards and legal background carry out this engagement.

Generally, Forensic Accountants are to have adequate knowledge and experience in accounting and investigation. These are the most important requirements.

Why Forensic Accounting?

Forensic accounting is very important not only because they have special skills and training in investigations, and expertise in accounting records, but also because the evidence they find, plays a very important role in judicial decision-making. This job is quite different from auditing and can't be substituted.

Auditor's responsibility is not investigating and quantifying the fraud that happens in a company. The evidence found by the auditor are not used by the court. However, the evidence presented by a forensic accountant could be used by the court as expert evidence.

For example, the FBI has a forensic accounting team that will help to investigate any matter on accounting fraud.

1. Provide Litigation Support

This is a popular service provided by Forensic Accounting. Forensic Accountants prepare the report to support litigation in court in certain areas.

For example,

  1. Produce the Profit or Loss report of the company (income statement). This is simply finding how much profit or loss related to the company, project or related subject.
  2. Prepare reports related to lost in earnings of employee. The suitable instance for this point is, An employee sue his/her employer for wrongful dismiss and the court wants to find out the loss of this dismissal on the employee.
  3. Investigation of breach of contract of parties. This happens daily in business. Such investigation will study the detail of terms of the contract, and the 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 presented to the court.
  4. Patent and copyright violation reports.
  5. Fraud Investigation report: The court uses the report to understand and find out the amount of loss and the related parties.
  6. Business diminution report
  7. Professional malpractice report
  8. Wrongful termination report
  9. Others services

Sometimes the court requires to have someone who has the special skills in accounting and investigation to check and produce the report on the areas related to accounting.

These people do not only have special skills in accounting and investigation, they are also independent from all parties so that the report will be reliable and no objection from all the parties.

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2. Expert Witness Testimony

Since forensic accountants are independent and expert, they don't only prepare expert report, they can also be witnesses in court of law. This is why lawyers hire forensic accountants to investigate the subject and give report.

They can act as witnesses over the areas like profit and loss, fraud, patent and copyright, breach of contract, and many others.

For example, A company employed a Forensic Accountant to investigate fraud that happened in the purchasing department and present its findings to the court.

In this case, a Forensic Accountant could also be the expert witness testimony on the way that the fraud was committed, the person who committed it and the amount of loss. Such a witness will be part of the court decision-making.

They can also be witness over areas on accounting records on the dispute between shareholders.

Basics of Forensic Accounting

3. Fraud Investigations

Fraud is a major issue to companies, it is a virus and hard to eliminate. Fraud investigation is done in different organizations like corporate, public, or private organizations.

The investigation can also be performed in different areas like fraud over financial reporting and fraud over the company's assets but fraud investigation on employee is the most popular.

For example, Fraud on salaries, inventories, fixed assets or account receivables. In this case, a forensic accountant can investigate and find out how much loss were incurred.

The investigation report can also include the cause of fraud, the parties involved and how the fraud happened. This investigation is similar to audit.

4. Insurance Claims Analysis

Forensic accountant can help both policyholders and insurers to prepare and check the claim based on the terms and conditions that cover the insurance policies.

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

What Is The Difference Between An Audit And A Forensic Audit?

  1. Forensic accounting and auditing have some similarities and differences. For example, the purpose of an audit is to allow auditors to do independent review and then express an opinion. The auditor will only give reasonable assurance on the financial statements. However, forensic accounting investigates financial statements and quantifies the loss that might happen, they don't issue opinions.
  2. Auditors are required to hold CPA to enable them sign the audit report. But, forensic accountants are both CPA and CFE certified.
  3. Audit reports are not used for legal support, however forensic accounting reports are used as expert report in legal case.
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