Learn what is forensic accounting definition covering scope, expertise, requirements and advantages of this types of assessment.
What is Forensic Accounting Definition
This type of accounting is a crucial to assists in discovering accounting problems. Accounting research is not the only competency that a Forensic Accountant requires, he or she must also be an accomplished presenter. They have to explain complex accounting issues to the judge and jury within a court situation. These explanations will be in the form of formal evidence which might be given orally or as a written report.
Sometimes called expert accounting witnesses, forensic accountants’ work is usually split into two distinct parts. There is the financial investigation work preceding a trial and the actual hearing in court. The Forensic Accountant must, therefore, be a competent financial investigator. Some of the field’s best practices involve the following:
- Mitigation,stabilization, or preservation
- Data mining and analysis for evidence of fraud
- Analysis of non-financial records
- Review of additional documents
Scope of Forensic Accounting
Using both accountancy knowledge and investigative skills, they will drill down into the company’s financial statements and business aspects of any case that they are presented with. This could be in a number of different areas, as follows:
- A matrimonial dispute where one party is accusing the other of hiding assets that should be available for splitting between the parties when getting a divorce. The Forensic Accountant might be asked to trace assets that a husband has concealed. He may also has to value a family business so that both parties can get their proper share.
- A personal injury could involve the Forensic Accountant calculating how much a victim would have earned from an accident. This is for the purposes of quantifying compensation payable by an insurance company.
- One party might have delivered the wrong goods, and the other might have suffered losses of profits that need to be quantified.
- A company might wish to sack an employee who has been defrauding their business – and needs an expert accountant to calculate the size of the loss.
- In a criminal fraud trial in a court of law the prosecution might want forensic accountants to explain to the court how the fraudster was able to steal the money. On the other hand, the criminal might want to attempt to mitigate his own position by undermining the charges against him.
Expertise Required in Accounting Analysis
Specializing in this particular field would require a good understanding of finance accounting issues within companies. Such financial forensics therefore is for a certified public accountant cpa or certified fraud examiner. One must also understand the law enforcement and regulations governing it. Experiences about the ins and outs of businesses, as well as other matters, would likely be demanded by forensic accounting. Government legislation, financial reporting systems, litigation processes, accounting and auditing standards, and so forth, will also require expertise. This is so since the core focus is to settle affairs of companies in financial disputes. The investigation is usually done by certified forensic accountants and the association of certified fraud examiners.
Requirements for Forensic Accounting
For many people, the thought of pages and pages of bank statements and other financial statement information is very daunting. A fraud can quite easily involve transactions between hundreds of different bank accounts. It is the Forensic Accountant’s job to present this information in a simple form, such as a succinct table or a few lines of explanation within a report.
To simplify accounting information in this way it would be very easy for a Forensic Accountant to hoodwink the court. This is the reason why both sides will usually employ their own experts. However, the best expert witnesses are fully accredited by a number of august bodies, have years of unblemished experience behind them and are usually recommended highly by respected parties.
To get the best out of such an expert witness, it is a good idea to bring them in at the outset of any financial dispute. Often the task is to stop either going down the wrong route and incurring unnecessary costs for the parties.
Once the matter reaches the formal jurisdiction of the court, the Forensic Accountant’s other skills will be called into play. Very often an expert will be questioned in-depth by the opposing counsel or examiner. This will uncover any weaknesses in the expert’s opinion. Sometimes where this is not possible the barrister will seek to undermine the expert’s credibility by forceful questioning. The experts must not only be able to respond in a way that assists the court to understand the complex issues. They must also withstand the barrage of sometimes unreasonable questions that can weaken and even intimidate the expert.
Advantages of the Accounting Services
One should note that forensic services are nothing but a branch of accounting that focuses on investigating commercial and financial data in order to reveal fraud or money laundering or any other sort of crime. There are public accounting firms that will offer such services. Forensic accounting offers varied advantages, as follows:
Allows in solving a financial crisis:
As mentioned above, forensic accounting does have the tenacity in solving financial crimes. What it generally involves is bribery within the government corporate entity. Also there are fraud and more cases involved with laundering of money within the business organizations. Forensic accounting not only involves gathering evidence for crimes but can also help in detecting and identifying crimes.
It helps to monitor the professionals:
Forensic accounting accesses the work of the professionals including the ranks of accountants themselves. This particular assessment identifies professional negligence claims against those individuals who have been proven to have made some critical errors.
It helps the business with their finances:
Business can use forensic accounting for detecting the varied anomalies among their staffs and with the third parties with whom they are working. As for example, a particular organization can ask a forensic accountant to check employees purchasing records to see if all of his purchases were for business use or if he has diverted some of his personalized usages.
Making sound investment decisions:
It provides a definitive path for the investors in making a thoughtful investment decision. A particular company dealing with fraud is certainly not going to be a superlative option for investment. Thereby the reports of a forensic accountant act as a guide for the potential investors of a company. By performing a particular analysis, these institutions can indeed come to a decision on whether they would like to fund a particular company or not.
Formulation of the economic decisions and the policies:
We should note that the various cases of frauds that become evident after a forensic analysis serve as a reference for the particular government in formulating better economic policies that would be able to curb such fraudulent activities in future. By doing so, the government can indeed strengthen the economy and can prevent such illegal activities in the particular country.