What is forensic accounting?
Forensic accounting uses accounting, auditing, and investigative skills to conduct a financial review of an individual or business. Forensic accounting provides appropriate accounting analysis for use in legal proceedings. Forensic accountants are trained to look beyond the numbers and deal with the business reality of a situation. Forensic accounting is frequently used in fraud and embezzlement cases to explain the nature of a financial crime in court.
Understanding forensic accounting
Forensic accountants analyze, interpret and summarize complex financial and commercial matters. They can be employed by insurance companies, banks, police forces, government agencies or accounting firms. Forensic accountants compile financial evidence, develop computer applications to manage the information collected and communicate their conclusions in the form of reports or presentations.
In addition to testifying in court, a forensic accountant may be asked to prepare visual aids to support the evidence at trial. For commercial investigations, forensic accounting involves the use of tracing funds, asset identification, asset recovery and due diligence reviews. Forensic accountants may request additional training in ADR due to their high level of involvement in legal matters and their knowledge of the justice system.
Key points to remember
- Forensic accounting is a combination of accounting and investigative techniques used to uncover financial crimes.
- One of the key functions of forensic accounting is to explain the nature of a financial crime to the courts.
- Forensic accounting is used by the insurance industry to establish damages resulting from claims.
Forensic accounting for litigation support
Forensic accounting is used in litigation when quantification of damages is necessary. Parties involved in legal disputes use quantifications to help resolve disputes through settlements or court decisions. For example, this can happen due to compensation and benefits disputes. The forensic accountant can be used as an expert witness if the dispute degenerates into a court decision.
Forensic accounting for criminal investigations
Forensics is also used to find out if a crime has occurred and to assess the likelihood of criminal intent. These crimes can include employee theft, securities fraud, falsification of financial statement information, identity theft or insurance fraud. Forensic accounting is often used in complex and large-scale financial crimes. The reason we understand the nature of Bernie Madoff’s Ponzi scheme today is that the forensic accountants dissected the scheme and made it understandable for trial.
Forensic accountants can also help locate hidden assets in divorce cases or provide their services for other civil matters such as breach of contract, tort, disagreements related to business acquisitions, breaches of warranty or business valuation disputes. Forensic accounting missions may include investigations of construction-related complaints, expropriations, product liability claims or trademark or patent infringements. And, if that were not enough, forensic accounting can also be used to determine the economic results of breaching a non-disclosure or non-compete agreement.
Forensic accounting in the insurance sector
Forensic accounting is commonly used by the insurance industry. As such, a forensic accountant may be asked to quantify the economic damage resulting from a vehicle accident, a case of medical malpractice or another claim. One of the concerns regarding adopting a forensic accounting approach to insurance claims as opposed to an expert approach is that forensic accounting focuses primarily on historical data and may lack relevant current information that changes assumptions regarding the complaint.