What is Forensic Accounting

Understanding The Basic Of Forensic Accounting

What is Forensic Accounting?

Forensic accounting is a specialty field combining accounting, investigative skills, and auditing for the analysis of information required in a court of law. This type of accountant is responsible for the quantification of damages including:

Fraud

• Embezzlement

• Environmental damage

• Divorce

• Business disputes

• Construction

• Insurance

• Cybercrime

Business valuation

• Business interruptions

• Personal injury

• Marital disputes

• Product liability

What are the Responsibilities of Forensic Specialists?

Understanding The Basic Of Forensic Accounting

Forensic professionals have the training to determine the total consequences of a loss and understand how damages are quantified. There are four key areas in this field, Data collection, data analysis, data preparation, and reporting. The tasks performed by forensic professionals include:

• Analysis of historical statements

• Reviewing journal entries

• Analyzing electronic data

• Establishing the flow of funds

• Examining business records

• Conducting interviews with relevant parties

• Analyzing trends

• Searching business practices for irregularities

• Performance of evaluation during a questionable situation

Individuals in this field can also serve as expert witnesses or consultants. On occasion, we have seen forensic professionals in collaboration with experts from other fields. A forensic specialist can be important for training both internal investigators and auditors. They help with the determination of the vulnerability of an organization to numerous issues including fraud. They can implement controls to help businesses decrease exposure to civil or criminal misconduct, and help prevent irreparable damage to the reputation of the business.

This type of specialist is often necessary for providing expert witness testimony or evidence in a court of law, mediations and arbitrations. The evidence provided is often used to assist lawyers in establishing or reinforcing either arguments or the actual case. There are also instances where a forensic profession is required for refuting the conclusions being used by the opposing counsel. When a forensic professional is called as an expert witness in a court of law, they are required to provide testimony based on reliable data or facts.

The first area of expertise in this field is litigation support. This is a presentation of facts regarding pending or existing litigation. The accountant is responsible for quantifying damages related to the parties involved in a legal dispute. We have witnessed cases where the accountant stopped the dispute from going to court. If the dispute reaches a court of law, the accountant often gives testimony as an expert witness. One of the key differences between a forensic and traditional account is an understanding of the courtroom.

The second area is the investigation. This is the determination of whether a criminal matter has occurred including fraud, employee theft, identity theft, and securities fraud. Forensic professionals are often hired to find assets hidden in a divorce. Despite the connection between fraud auditing and forensics, fraud auditing is generally anticipatory. The auditor attempts to control the situation prior to any damage occurring. The accountant is hired once embezzlement, fraud, or theft is suspected by the business.

A forensic profession must be suspicious in order to use their accounting knowledge for legal concerns or issues. A forensic CPA is often required for writing expert reports, testimony as an expert witness, assisting in criminal and civil investigations, assisting in depositions, and conducting investigations regarding fraud. In many instances, forensic specialists rely on the free accounting software to provide higher-quality work.

Qualifications of Forensic Accountants

This is an enjoyable and lucrative field requiring a good knowledge of GAAP, or the generally accepted accounting principles, applicable laws and business practices. For this reason, the majority of forensic specialists within the United States have a minimum of an accounting bachelor’s degree in addition to several years of experience. To become a certified public accountant, an examination must be taken and passed. The accountant must also meet several federal and state eligibility requirements. A master’s degree as a forensic accountant is offered by numerous universities. The most common courses for this field include:

• Psychology

• Criminal law

• Sociology

• Information systems

• Business law

Law enforcement

• Communication

• Business and finance

Types of Forensic Accounting

Forensic accounting services are required in numerous instances. Each service is classified according to the related legal proceeding including:

Securities fraud

Fraud or tax evasion

• Different types of lawsuits for the recovery of economic damages

• Business negligence claims

• Financial theft involving employees, customers or outsiders

• Privacy information

• Lawsuits pertaining to mergers and acquisitions

• Divorce proceedings

• Defaulting on a debt

Money laundering

• Bankruptcy

• Corporate disputes

Businesses Requiring the Services of a Forensics Accountant

Basic procedures for carrying out an accounting forensic

Forensic accountants are necessary for businesses of every size all over the world including small businesses and major corporations. Forensic departments are often established by the larger accounting firms. These accountants are dedicated to providing litigation support and quantifying economic damage in matters relating to forensics. Most companies require a bachelor’s degree in accounting for these positions.

Auditing Procedures

A forensic audit conducted by the accounting department is different than an audit for financial statements. Every situation is unique, mandating specialized protocols. This encompasses the initial investigation, final litigation, and information reporting.

Investigation / Fraud Investigation:

The process begins with an investigation conducted to find and gather evidence for pre-existing suspicions of a financial statement fraud. For this reason, the accountant conducts the investigation by searching for and gathering discrepancies, or red flags indicating fraud has been committed. The accountant often interviews the business staff to gather additional information.

We have seen numerous instances of a forensic specialist determining who committed the fraud. The information collected is then used for the formation of a hypothesis to determine what occurred. The business is then assessed using a follow-up plan. When this stage has been completed, the accountant determines what action is required prior to providing the business with all of the information.

Reporting:

When all of the data and information have been collected, a case is developed often using free accounting software. These findings are summarized and presented to the company. How the fraud was committed, and which parties were involved can then be determined. The accountant decides how the case should be handled, and offers suggestions regarding the next step.

We have seen accountants offer recommendations regarding how these types of incidents can be prevented by referring to red flags and improving internal security. Once the final report has been submitted, the accountant makes any preparations necessary for their part in a court of law.

Litigation:

The last step in the process is litigation. This is the participation of the accountant as an expert witness in a court of law. The findings of the accountant are presented in court as evidence, prior to testimony against the perpetrators of the crime. The evidence is presented, and financial documents are explained in easily understandable terms regarding how the subject was identified.

In addition to finding the evidence, the accountant must also use intelligent rhetoric while in court. Once the litigation process is complete, a final determination is made by the court regarding the situation. The role of the forensic professional is extremely important for the entire process.

How Should Internal Auditors Help, If at All, with Forensic Accounting Investigations?

An internal auditor is responsible for providing objective and independent evaluations regarding the operational and financial activities of the business. Although this is different than a forensic professional, there are areas where the internal auditor is important for the investigation. When an annual audit plan is developed, the internal auditor can assist with assessing the fraud risk of the business, and the capabilities of the business to manage fraud detection. To work as an effective team, open communication throughout the business is important.

Internal auditors can assist forensic professionals with techniques necessary for the evaluation of internal controls including data analysis. Fraud can be prevented by advising the business regarding the best methods for ensuring integrity is maintained regarding the chosen methods. Internal auditors and forensics professionals are both trained to find potential risks for fraud and offer recommendations for improved security.

Both professions conduct fraud investigations such as gathering evidence, remedial actions, and analysis. Both also support the business regarding assessing the current controls for detecting and preventing fraud. Internal auditors can help conduct classroom or e-learning for fraud awareness and anti-fraud. Anti-fraud programs can be effectively designed, evaluated, and reviewed regarding the risk of specific processes for fraud.

Accrual Accounting

We generally see most businesses using two basic accounting methods for bookkeeping, cash, and accrual accounting. Although the majority of businesses prefer accrual accounting, the best method is determined by sales volume, and if the structure of the company relies on selling or buying credit. The accrual method requires the recording of expenses as they occur regardless of whether or not cash has been exchanged. When an order is placed for materials or an employee has logged into the system, it is considered an expense as opposed to when the employee actually receives a check.

Income taxes must be paid prior to any revenue being received when this method is used. This method is necessary if the annual sales of the company are more than $5 million when the structure of the business is a corporation. The accrual method is also necessary if the company has inventory, or sells using credit to ensure the expenses and income match.

FAQ

How do you become a forensic accountant ?

Primarily, to be an accountant you must have previous financial knowledge, you will have to study business, economics, or another financial career. Then, to be a forensic accountant, since you already have previous financial knowledge, you have to make the decision to choose a forensic accounting program that is specified in the area of forensic accounting. Some universities offer forensic accounting courses, where you specialize in how to identify an accounting fraud. So, being a certified forensic accountant is recommended to have the experience, meaning that you have to work hard to be taken into account in the future thanks to your resume. Therefore, to achieve this you have to find a job as a public accountant and devote yourself little by little to what you were taught or also have chosen correctly a program that offers internships and thus hold experience.

Who retains a forensic accountant?

At any time, several unpredicted situations can occur, which demands financial matters to become difficult and complicated in the accounting profession. At that precise moment, a forensic accountant must come into action, since it must be digested and summarized by an expert. Therefore, a forensic accountant is a specialist for this kind of situation, its presence is extremely necessary. These individuals are hired to analyze, interpret, summarize and present complex financial and business issues in a simple and concise manner by an accounting firm, law firms, businesses, law enforcement, the business community, banks, government agencies, insurance companies, and other organizations.

What qualifications do forensic accountants hold?

First of all, we must recall forensic accounting professionals collect financial evidence and financial data needed for the development of IT applications. This is done to manage the information generated. Consequently, forensic accounting experts deliver their results in a series of financial records, reports, or presentations. Moreover, in relation to appearing in a court, the accountant will be expected to provide visual guides to protect the evidence of financial crime during the case. Unquestionably, to access into this vocation, Forensic accountants require a minimum board certification in forensic accounting degree or a related profession. Some stances, including CFE, CPA licensure, or CA qualifications, establish criteria of forensic accounting experience in the industry and/or accreditations.

What standards does a forensic accountant need to follow?

Forensic accountants must meet certain standards, as they are constantly called upon to provide expert evidence at their trials. These forensic accountants do not use their accounting and auditing knowledge exclusively, on the contrary, through the investigative skills they are able to actually determine which events took place in a financial environment. The figure of the forensic auditor is indispensable, as they are not designed to identify and prosecute financial fraud within the standard operating areas (internal and external audit). Any organization needs to consider cybersecurity as a strategic resource regarding fraud prevention. Generally speaking, the organization must be kept in a constant state of training, not just to expecting emerging risks or major demands, but rather procuring or providing new techniques that react not just to those specific needs inside a company, but also to competitive environmental solutions to prevent any fraudulent activity.

What types of jobs can you expect with a forensic accounting degree?

Being a professional forensic accountant with its certificate, it is necessary to work hard and with, high responsibility. In this job, you are the financial crime detective and there may be many specific camps you choose to work in, depending on the case. Among the work environments of a forensic accountant, we must remember you can work as; consultant specializing in risk management, you can work for a law firm, work in government departments, operate in the field of corporate security/risk management and you can also work for companies that are dedicated to finding fraud within the financial environment. Do not forget forensic accountants will always have the job of investigative accounting, finding a dispute resolution, analyzing, and displaying the results for a company’s legal proceedings or boardroom. Always with the mission of completing a fraud examination, solving the fraud, and avoiding it as well.