This article will look at what forensic accounting is and how it works. The article will cover some of the advantages and limitations of forensic accounting and provide a brief overview of the history of forensic accounting.
It is a type of accounting that uses investigation techniques to uncover financial crimes. Forensic accountants must be able to explain the nature of the crime to the courts. Forensic accounting is also used by the insurance industry to assess any damages from insurance claims. It’s important to know about forensic accounting from a business perspective.
What is Forensic Accounting?
As mentioned before, forensic accounting is a type of accounting that uses investigation techniques to uncover financial crimes. Forensic accounting uses more than just investigation techniques to uncover financial crimes. It also uses a number of accounting skills such as auditing to discover if a financial crime has been committed. Forensic accountants use these skills to conduct an accounting analysis of an individual or business. The information obtained from these investigations must be suitable to use in legal proceedings. It is often used in fraud and embezzlement cases.
What is the History of Forensic Accounting?
The profession of forensic accounting has been around and developing over the last 70 years. In the last decade, it has become more specialized in skills and broader in scope. While it seems that this type of accounting is a fairly recent aspect of the accounting profession, there is an older history that points to it being practiced as far back as 3300-3500 BC, with the scribes of Ancient Egypt.
By the 1800s, the practice became more tied to legal professions, with accountants provided as financial experts in court cases. By the 1930s in America, this really hit the spotlight with the Al Capone case when Elmer Irey, an accountant with the Internal Revenue Service, ensured the conviction of Capone’s tax evasion. Today, forensic accounting is still very much used in court cases in criminal investigations for financial crimes.
How Forensic Accounting Works
Forensic accountants must be very discreet when conducting investigations into fraud cases. They also must be independent of the company under investigation. When forensic accountants conduct audits, they are actively looking for signs of fraud. They examine financial statements to determine if they are accurate and complete. They also may seek out internal databases and court records. It’s important that forensic accountants also look beyond the numbers, since the people committing the fraud may have hidden the evidence of their crimes.
Professionals in this field have a number of tools that they can use in their investigations. These include tools such as regression analysis, present value and discount rates, professional skepticism and judgment, and accounting knowledge and expertise.
What are the Advantages of Forensic Accounting?
This type of accounting can have major advantages for detecting financial crimes and can help many shareholders as well as legal authorities to identify any possible malpractices affecting the interests of the company. It also allows companies to have a closer look at the legal issues surrounding fraud cases, which could prove to be very costly for the business and result in enormous losses. It can help to simplify the litigation process as well as keep track of any malpractices within the company.
What are the Limitations of Forensic Accounting?
Some of the limitations of this accounting type include; it can take a lot of time, it can be expensive, it can be distracting and it can affect employee morale. Doing a good investigation of a financial crime is not easy. It can require accountants to go through every document to ensure that the investigation is complete and that all evidence is uncovered to help solve the case. This process can take months to do. It can also become very expensive because of the amount of time involved to do the investigation.
What are the Examples of Forensic Accounting?
Forensic accountants may be responsible for addressing these types of financial crimes:
- Financial statement misrepresentation
- Employee theft
- Identity theft
- Insurance fraud
- Securities fraud
- Asset recovery
- Tracing funds
- Litigation support
- Financial statement analysis for fraud detection
- Breach of contract
- Breach of nondisclosure
- Falsification of statement
- Patent infringements
- Compensation disputes
- Searching for hidden assets
- Product liability claims
These forensic accounting examples would generally focus on one of the two main areas: litigation support and investigation. Litigation support involves the factual presentation of economic issues related to existing or pending litigation. In this role, the forensic accountant quantifies damages sustained by parties involved in legal disputes. If a dispute reaches the courtroom, the forensic accountant may testify as an expert witness. The investigation side is about determining whether a crime has taken place. As part of their investigative role, forensic accountants might write reports or recommend actions that a company or individual could take to minimize future losses.