What Is Forensic Accounting And Fraud Examination?

The terms forensic accounting and fraud examination are often used in place of each other, but are they truly the same? This article explains the meaning of forensic accounting and fraud examination, their similarities and differences.

Before we begin, there are some terms we should know their meaning, so we can have a deep understanding of the subject.

Sometimes referred to as the fraudulent act, fraud is an act of intentional deception, either by omission or commission, that causes its victim to suffer an economic loss and/or the offender to realize a gain. It can simply be defined as “theft by deception”.

Its legal definition is the same whether the offense is criminal or civil; the difference is that criminal cases are accompanied by a higher burden of proof.

There are three major categories of fraud, they are explained below;

These involve the theft or mismanagement of an company’s assets. (Common examples of assets misappropriation include skimming revenues, stealing inventory, and payroll fraud.)

This implies the unlawful or wrongful abuse of influence in a business transaction to get personal benefit, contradicting an individual’s duty to his or her employer or the rights of another. (Common examples of corruption include accepting clandestine payment in return for a favor and engaging in conflicts of interest.)

Financial statement fraud and other fraudulent statements involve the intentional misinterpretation of financial or non-financial information to misguide people who are relying on it to make financial decisions. (Common examples of financial statement fraud in an organization include overstating revenues and assets, window-dressing financial statements, understating liabilities or expenses, or making false claims about the safety and prospects of an investment.)

Fraud examination is the field of resolving fraud allegations from tips, complaints, or accounting clues. It involves getting documentary evidence, interviewing  eye witnesses and potential suspects, writing investigative reports on fraud cases, testifying to findings during investigation, and helping in the general detection and fraud prevention.

A Fraud Examiner is someone who examines or investigate fraud. He or she must know how to appropriately and legally gather evidence (documents or statements by witness), and must know how to write a clear, correctly, and unbiased report which reflects the fraud examination results. He is just a gatherer of evidence, not the final judge thereof. However; he is expected to testify his findings before judicial panel or a competent court.

A fraud examiner is primary responsible for the prevention of fraud lies with a company's management or other appropriate authority. He or she is expected to actively follow and recommend appropriate policies and methods to prevent fraud.  However, as soon as evidence of fraud is presented, he is expected to perform adequate procedures, as highlighted in the fraud manual, to resolve the problem.

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Accounting is the systematic process of recording and interpreting financial information to help in making decisions. Hence, Forensic Accounting is a litigation support involving application of accounting principles and theories to facts or hypotheses at issue in a legal dispute. It consists of two primary functions:

Forensic accountants measure economic damages, business or asset valuations by combining their accounting knowledge with investigative skills, and offer varying levels of support ranging from technical analysis and data mining, to a broader approach that may include creating litigation strategies, arguments, and testimony in civil and criminal cases.

They may be hired by public accounting firms’ forensic accounting divisions, by firms specializing in risk consulting and forensic accounting services, or by lawyers, law enforcement agencies, insurance companies, government organizations, or financial institutions. Due to society’s elevated awareness and increasing intolerance of fraudulent activity, there is a rapid increase in the demand for forensic accountants.

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Forensic accounting and fraud examination are different but they are related. Forensic accounting is done by accountants in anticipation of litigation. They include investigation, valuation, bankruptcy, and a host of other professional services. On the other hand, fraud examinations can be done by either accountants or non-accountants and refer only to anti-fraud matters and often help in fraud prevention and deterrence efforts.

Fraud examinations generally fall under forensic accounting category because the majority of examinations, investigations, and reports on fraud are done with the aim of litigation. In other words, fraud examiners are taught to oversee their examination with the assumption that the case may end in litigation.

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How does fraud examination differ from forensic accounting? The differences are stated below:

Fraud examinations are conducted only with enough prediction while forensic accounting engagements are conducted only after allegation of misconduct.

The goal of fraud examinations is to decide whether fraud has occurred and who is responsible while forensic accounting's goal is to decide whether the allegations are reasonable based on the financial evidence and, if so, the financial impact of the allegations.

Fraud examinations involve efforts to attach blame which are hostile in nature while forensic accounting calculates financial impact based on formulaic assumptions.

The method of fraud examinations are by;

While forensic accounting is conducted by gathering the required financial and non-financial evidence to independently check the allegations and determine their financial impact.

A fraud examiner's approach is to resolution a fraud by attempting to gather enough evidence to support or refute a fraud allegation while forensic accountant will attempt to gather enough evidence to support or refute the allegation and related damages.