Forensic accounting is investigating fraud or financial manipulation by conducting very detailed investigations and analyses of financial information. Forensic accountants are often hired to prepare litigation involving insurance claims, insolvency, divorce, embezzlement, fraud, licensing, and all forms of financial theft.
Understanding Forensic Accounting
Forensic accountants analyze, interpret and synthesize complex financial and business issues. These could be employees of insurance companies, banks, law enforcement agencies, government agencies, or accounting firms. Forensic accountants compile financial evidence, develop computer applications to manage the information gathered, and communicate their results in the form of presentations or reports.
In addition to testifying in court, a forensic accountant may be required to prepare visual aids to support evidence. Forensic accounting involves traceability funds, asset identification, asset recovery, and due diligence analysis for business investigations. Forensic accountants may need additional Alternative Dispute Resolution (ADR) training due to their high level of involvement in legal matters and their familiarity with the court system.
Types of forensic accounting
Different types of forensic audits can be performed, and they are usually grouped according to the types of legal proceedings to which they relate. Here are some of the most common examples:
Bankruptcy
Business valuation disputes
Debt default
Divorce proceedings
Economic damages (different types of lawsuits for damage recovery)
Financial theft (customers, employees, or strangers)
M&A related lawsuits
Money laundering
Privacy information
Professional negligence claim
Securities fraud
Tax evasion or fraud
Preparing for litigation
You may have heard the term "forensic evidence," which means evidence that can be presented in court. Therefore, forensic accounting is a term to describe an analysis of financial information that can be used to support a case in court.
The process of investigating all of a business or individual's financial information can take months or even years and requires a team of specialist accountants who act like detectives trying to solve a mystery.
Usually, an accounting firm is hired by a client trying to defend themselves or sue someone. Most medium and large companies have a forensic accounting department, which may be made up of several forensic auditors.
Forensic accounting to support litigation
Forensic accounting is used in litigation when it is necessary to quantify damages. Parties to the dispute should use quantification to help resolve disputes through settlements or court rulings. For example, this may be due to disputes over pay and benefits. The forensic accountant can be used as an assessor if the dispute escalates into a court decision.
Forensic accounting for criminal investigations
Forensic accounting is also used to determine if a crime has taken place and assess the likelihood of willful misconduct. These offenses can include employee theft, securities fraud, falsification of financial statements, identity theft, or insurance fraud.
Forensic accounting is often applied to complex and notorious financial crimes. For example, the scope and mechanics of Bernie Madoff's Ponzi scheme are understood today because forensic accountants dissected the scheme and made it easy to understand for court cases.
Forensic accountants can also help find hidden assets in divorce cases or provide services for other civil matters, such as breach of contract, tort, business supply disagreements, breach of warranty, or legal business valuation disputes.
Forensic accounting engagements may include the investigation of construction claims, expropriations, product liability claims, or infringement of trademarks or patents. And, if all that wasn't enough, forensic accounting can also be used to determine the economic results of a breach of a non-disclosure or non-compete agreement.
Forensic accounting in the insurance sector
The insurance industry commonly uses forensic accounting. As such, a forensic accountant may be called upon to quantify the economic damage resulting from medical malpractice, traffic accident, or any other claim. One of the concerns about adopting a forensic accounting approach to insurance claims, as opposed to a valuation approach, is that forensic accounting relates primarily to historical data and may lack relevant current information that modifies the assumptions about the claim.
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