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What is Forensic Accounting?

Posted by Admin Posted on July 07 2016

We have it on our website…we talk about it…but what is “Forensic Accounting?" There seems to be some confusion about this, but the answer is simple. Forensic accounting is investigative accounting and auditing. Forensic means “suitable for use in a court of law." That means, transactions that do not look right are analyzed to see if there is any wrongdoing. And, depending upon the quality and quantity of the information, the transactions may have to be reconstructed so that the full picture can be seen. In other words, you need to put the puzzle pieces back together again. I am a former police officer and currently a Certified Public Accountant. For me, forensic accounting is the perfect marriage of my experiences.

Isn’t forensic accounting the same as auditing? There are some similarities. Auditing is defined as a systematic and independent examination of data, statements, records, operations and performances (financial or otherwise) of an enterprise for a stated purpose. The purpose of an audit is to give an opinion on the adequacy of controls within the environment being audited. The audience for an audit is normally an audit committee, management, or an individual. The audience may or may have not solicited the audit and there is no preconception of wrongdoing at the onset of the audit, but with forensic accounting, there is.

Forensic accounting provides a variety of services that include, but are not limited to, fraud detection, theft detection, detection, records tampering identification, misappropriation detecting, tax evasion identification, and accounting violation investigations. Forensic accountants can and have been used on both criminal and civil cases, as well as on cases that never make it to the judicial process. Other than those mentioned above, other cases may include scams, bribery, money laundering, bankruptcy, and divorce.

Unveiling accounting knots to recognize fraudulent and deceptive practices is not always easy. The reality of the situation is that we live in a much more complex world and people find more sophisticated ways of hiding things. You really have to follow the audit trail and look beyond the numbers. How big is your business? What internal controls are in place? Are those internal controls being enforced? That is when you start looking at the company, management, resources, the culture, opportunities, financial stress, and the like.

What happens when we are done with our investigation? The analysis that comes from forensic accounting is normally used by law enforcement, DA’s or lawyers. They review and discuss the results with the forensic accountant or forensic team and decide whether or not the information in useful. If it is useful, the forensic accountant would also most likely be used to give expert witness testimony in the subsequent court proceedings. Sometimes the evidence is not sufficient enough to use the analysis and, therefore, would not be used.

What can be done before needing a forensic accountant? Making sure that you have the proper business structure in place is a great start. Setting up your internal controls is a good second step. If you have product(s) and other assets, make sure you have controls in place to protect them. If you have employees, try to segregate duties so that there are checks and balances in place. If you have controls in place, enforce them. Are your employees happy? Thinking you know and really knowing can have a huge impact on your business. I have seen this so many times. Businesses went to the trouble to create and implement control procedures, but then never enforced them. That is when they ran into some big problems. With that said, no set of controls is perfect, but they may be enough to deter others from providing you with a “bad” surprise at some point in the future.

 

-Michael Hermanson, CPA | CGMA