What is Forensic Accounting?
The integration of accounting, auditing and investigative skills yields the specialty known as
Forensic Accounting.
"Forensic", according to the Webster's Dictionary means, "Belonging to, used in or suitable to
courts of judicature or to public discussion and debate."
It provides an accounting analysis that is suitable to the court which will form the basis for
discussion, debate and ultimately dispute resolution.
It encompasses both Litigation Support and Investigative Accounting.
What is Litigation Support?
"Litigation Support", provides assistance of an accounting nature in a matter involving existing or
pending litigation. It deals primarily with issues related to the quantification of economic damages. A
typical litigation support assignment would be calculating the economic loss resulting from a breach of
contract.
What is Investigative Accounting?
"Investigative Accounting", is often associated with investigations of criminal matters. A typical
investigative accounting assignment would be an investigation of employee theft. Other examples
include securities fraud, insurance fraud, kickbacks and proceeds of crime investigations.
Forensic Accountants
Utilize accounting, auditing and investigative skills when conducting an investigation. Equally critical is
their ability to respond immediately and to communicate financial information clearly and concisely in a
courtroom setting. They are trained to look beyond the numbers and deal with the business reality of
the situation.
What is the Role of Forensic Accountants?
Forensic Accountants are often retained to analyze, interpret, summarize and present complex
financial and business related issues in a manner which is both understandable and properly
supported.
They can be engaged in public practice or employed by insurance companies, banks, police
forces, government agencies and other organizations.
Forensic Accountants are often involved in the following:
Investigating and analyzing financial evidence;
Developing computerized applications to assist in the analysis and presentation of financial
evidence;
Communicating their findings in the form of reports, exhibits and collections of documents; and
Assisting in legal proceedings, including testifying in court as an expert witness and preparing
visual aids to support trial evidence.
In order to properly perform these services Forensic Accountants must be familiar with legal
concepts and procedures. In addition, Forensic Accountants must be able to identify substance
over form when dealing with an issue
What types of assignments do Forensic Accountants perform?
Forensic Accountants become involved in a wide range of investigations, spanning many different
industries. The practical and in-depth analysis that Forensic Accountants bring to a case helps uncover
trends that bring to light the relevant issues.
Below are various areas in which Forensic Accountants will often become involved:
1. Criminal Investigations
Forensic investigations often relate to criminal investigations on behalf of police forces. For example, a
Forensic Accountant may be retained by the R.C.M.P., the O.P.P., as well as by regional or local police
forces and organizations such as the Law Society.
A Forensic Accountant's report is prepared with the objective of presenting evidence in a professional
and concise manner.
2. Shareholders' and Partnership Disputes
These assignments often involve a detailed analysis of numerous years accounting records to quantify
the issues in dispute. For example, a common issue that often arises is the compensation and benefits
received by each of the disputing shareholders or partners.
3. Personal Injury Claims / Motor Vehicle Accidents
A Forensic Accountant is often asked to quantify the economic losses resulting from a motor vehicle
accident. A Forensic Accountant needs to be familiar with the legislation in place which pertains to
motor vehicle accidents.
Cases of medical malpractice and wrongful dismissal often involve similar issues in calculating the
resulting economic damages.
4. Business Interruption / Other Types of Insurance Claims
Insurance policies differ significantly as to their terms and conditions. Accordingly, these assignments
involve a detailed review of the policy to investigate coverage issues and the appropriate method of
calculating the loss.
A Forensic Accountant is often asked to assist from either an insured or insurer's perspective in the
settlement of a case.
Examples of these types of assignments include; business interruptions, property losses and employee
dishonesty (fidelity) claims.
5. Business/Employee Fraud Investigations
Business investigations can involve funds tracing, asset identification and recovery, forensic intelligence
gathering and due diligence reviews.
Employee fraud investigations often involve procedures to determine the existence, nature and extent of
fraud and may concern the identification of a perpetrator. These investigations often entail interviews
of personnel who had access to the funds and a detailed review of the documentary evidence.
6. Matrimonial Disputes
Matrimonial disputes from a Forensic Accounting point-of-view often involve the tracing, locating and
evaluation of assets. The assets to be evaluated and valued may be businesses, property or other assets.
7. Business Economic Losses
Examples of assignments involving business economic losses include; contract disputes, construction
claims, expropriations, product liability claims, trademark and patent infringements and losses stemming
from a breach of a non-competition agreement.
8. Professional Negligence
These investigations are often approached from two different but complimentary perspectives, these
being:
Technical
It has a breach of Generally Accepted Accounting Principles or Generally Accepted Auditing Standards or
other standards of practice occurred; and
Loss Quantification
If the professional in question is an accountant, then a Forensic Accountant could be involved with both
perspectives. If the matter involves some other profession a Forensic Accountant will normally be
retained to perform only a loss quantification.
9. Mediation and Arbitration
Because of their familiarity and comfort with legal issues and procedures some Forensic Accountants
have sought out special training and become involved in alternative dispute resolution (ADR).
ADR services include both mediation and arbitration and are designed to help individuals and businesses
resolve disputes with minimal disruption and in a timely fashion
What characteristics should Forensic Accountants possess?
curiosity
persistence
detail-oriented
creativity
discretion
skepticism
organization
confidence
sound professional judgement.
Forensic Accountants must be open to consider all alternatives, scrutinize the fine details and at the
same time see the big picture. In addition, Forensic Accountants must be able to listen effectively and
communicate clearly and concisely in a timely manner.
History of Forensic Accountancy
With all the publicity given to forensic accounting these days, you’d be forgiven for thinking that
it’s a fairly recent aspect of the accounting profession, but evidence shows that it has actually been
around for centuries. In fact, archaeological findings reveal that, as far back as 3300-3500 BC, the scribes
of ancient Egypt, who were the accountants of their day, were involved in the prevention and detection
of fraud.
In more recent times, a close relationship developed between the accountancy and legal
professions in the 1800’s, with accountants acting as expert financial witnesses in court cases. And in
1930’s America, while Eliot Ness got all the publicity in the case against Al Capone, it was the work of
Elmer Irey, an accountant with the Internal Revenue Service working behind the scenes, that ensured
Capone’s conviction for tax evasion. He was probably America’s first high-profile forensic accountant.
So, far from being a new practice, forensic accounting has long been part of the accounting
profession. While it took a back seat in the early 20th century with general accounting taking a greater
role, it is now merely returning to its traditions.
Today’s forensic accountants are involved in a wide variety of cases, from the more mundane
family law and commercial matters through to a range of criminal investigations, which include white-
collar crimes such as business and insurance fraud through to organized crime, murder and even
terrorism where forensic accountants are used to trace the money trail and uncover just who is financing
the terrorist groups
References:
http://smallbusiness.chron.com/forensic-accounting-methods-66552.html
http://forensicaccountants.com/index.htm
https://en.wikipedia.org/wiki/Forensic_accounting
http://dx.doi.org/10.1108/02686909710185206
