September 01, 2020

A Closer Look at Forensic Accounting

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A Closer Look at Forensic Accounting

The term forensic accountant was first used in 1946 by Maurice Peloubet, who wished to recognize and celebrate IRS special agent Frank J who led to the takedown of the famous gangster Al Capone.

What is Forensic Accounting?

Forensics is a discipline where one works to present something to a court of law. The best definition of forensic accounting is that it is the art and science of investigating people and money. It is also the prevention of fraud services, litigation support, and expert testimony work where accountants testify in court on business claims, damages, and different aspects that require the expert opinion in accounting matters. Accordingly, forensic accounting is the use of accounting theories, principles, or analysis in legal action.

The forensic accounting can also include estate mergers and acquisitions, as well as insolvency and reorganization work where troubled businesses who might be on the verge of bankruptcy need special accounting assistance and management assistance relative to pre-bankruptcy filings, insolvency opinions with the court, etc. The forensic accountant would need to follow the legal rules of evidence during every engagement. In addition to applying accounting in their work, knowledge in the following fields in also required:

  • Finance
  • Economics
  • Statistics
  • Law
  • Research
  • Investigative methods.

What Does a Forensic Accountant Do? 

A forensic accountant is a CPA who uses statistics, proven research and investigative methods, and proper documentation of evidence to research the facts of a situation. The work of the forensic accountant is then presented in a formal report that can be defended in a court of law. Experience and appropriate education are very valuable here. 

Forensic accountants can help an individual or a company to assimilate and analyze an enormous amount of financial records on a case. A forensic accountant can take all your boxes of financial materials, analyze it, and prepare charts that you can use to visualize what happened in your case for the jury.

For example, you can show with a forensic accountant what happened to the victim’s money in conjunction with what was happening with the victim’s mental state. The chart would reflect when the doctor first saw dementia, when it became moderate and when it became severe alongside with what happened to the victim’s funds. 

A Closer Look at Forensic Accounting

Forensic Accounting vs. Financial Auditing

How does forensic accounting differ from financial auditing? 

  • Financial audits

Financial auditing is performed by independent Certified Public Accountants to express an opinion on the financial statements of an organization taken as a whole. When an auditor works on the financial statements, they are not required to find fraud. They are required to set up their audit procedures to detect either errors or fraud that could lead to a material misstatement in the financial statements. 

  • Forensic audits

Forensic audits or forensic accounting engagements are conducted by an expert in the field to verify information, determine valuations, investigate fraud, verify compliance with government regulations, verify compliance with contracts, and to investigate and report on other issues. 

As you can see, there is a limited scope when forensic audits are made. It might be limited, for instance, based on the time financial information was prepared or to a specific financial account. This scope of engagement should be clearly defined, so there aren’t any questions later on if the accountant did the work. During the trial then, the accountant can say that something was outside their scope of the engagement. 

In addition to financial records, the forensic accountant may search public and community records for evidence of lifestyle changes with the person under the suspicion, visit social network sites to see if the person is, for example, bragging about trips that they have taken or automobiles that they purchased or jewelry they bought and use other resources, such as business email and other communication records, that can be helpful. After all, many frauds are committed without recording the transaction.

A Closer Look at Forensic Accounting

What Makes a Good Forensic Accountant?

There are different traits that a forensic accountant have, but we would like to point out the ones that all successful forensic accountant should have. One of these is that this individual has to think differently than everyone else because when you go into the courtroom, the lawyers and judges think the same thing and you need to be able to think differently and show them that you are right.

A good forensic accountant would have a really strong sense of professional skepticism and a healthy dose of curiosity because a lot of times one might find a loose thread and would want to tug on it to see where it goes. This would mean questioning documents that are in front of you and questioning the answers that you are given. You have to be persistent, detail-oriented because sometimes the slightest little piece of information or evidence could be the leading source of uncovering the fraud or the crime.

Moreover, one also needs to be able to stay cool under pressure in every situation because when one is facing somebody who has committed fraud, you are putting pressure on them, so you have not to lose yourself if you want to get to the bottom of the case. These accountants need to know not just accounting, but also marketing, finance, taxes, and everything that might be connected with the business. It is a continuing learning process and the field is constantly evolving with new tools and techniques that are employed in forensic accounting.

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Author: Charles Lutwidge

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