Basics of Forensic Accounting

Forensic Accounting

The book ‘A Guide to Forensic Accounting Investigations’ by Golden e.al.., categorized fraud as a legal concept. Hence, accounting professionals consider the idea as foreign to them.

Whenever there is fraud, it is  human nature to respond since nobody wants to be bamboozled or deceived. Fraud constitutes four essential features: misrepresentation or omission of an important matter; scanter or awareness of misrepresentation; reliance on the individual who obtains or acquires the misrepresented information relied upon; and damages or the sustained financial consequences.

 

Types of Fraud

There are numerous kinds of frauds and a lot of ways to classify them. But the ones that are closely related to accounting professionals are Employee Fraud or Misappropriation of Assets and Financial Statement Fraud.

  • Employee Fraud or Misappropriation of Assets

Also referred to as retail fraud, employee fraud is the most typical kind of fraud. It is associated with skimming revenues, theft of cash or inventory, embezzlement, and payroll fraud. Employee fraud also involves employees assisting and instigating individuals outside the organization to either dupe or swindle third parties.

  • Financial Statement Fraud

Financial statement fraud or wholesale fraud is described with deliberate misrepresentations or omissions of important information in financial reporting to mislead or delude the users of the financial statement. This type of fraud is associated with abusing the accounting standards and guidelines on purpose in order to manipulate the outcome.

 

What is Forensic Accounting?

The series of accounting scandals in the early years of the 21st century led to profound changes and transition in the accounting profession, laws, and regulations. Among these developments was the emergence of forensic accounting.

Forensic accounting is the study of financial fraud and misconduct. The Association of Certified Fraud Examiners described financial accounting as “ a set of skills used in potential or actual civil or criminal cases, including generally accepted accounting and auditing ones; determining loss of profits, revenues, property, or damage; and assessment of internal controls, fraud, and everything else that leads to the applying of accounting knowledge to the legal system.” Forensic accounting is an integration of auditing, accounting, and investigative skills, and presents an accounting evaluation that is appropriate and acceptable to the court, which will then establish the basis for discourse, debate, and the settlement of arguments.

 

Components of Forensic Accounting

Litigation support and investigative accounting are among the few elements of forensic accounting. Investigative accounting thoroughly examines issues regarding employee theft, insurance fraud, securities fraud, etc.  Litigation support entails providing accounting support on matters concerning current or pending litigations.

Computer forensics is also a large part of forensic accounting. With the aid of technology, it has become a lot easier to perpetrate and hide fraud. However, forensic accounting has brought about innovative technology that can detect even the most encrypted fraud, ensuring that every dollar that companies earn is accounted for.

 

Objectives of Forensic Accounting

Forensic accounting aims to determine the probability and/or extent of the occurrence of fraud. By analyzing definite financial and non-financial information, checking public records, and administering fact-finding and admission-seeking questioning and evaluation, suspicions or accusations will be resolved and refuted.

 

Forensic Accountants

The field of forensic accounting has been in existence for a long time. However, it has evolved over the years. In 2001, the American Institute of Certified Public Accountants (AICPA) added the Certified Forensic Accountant (CRFA) to its list of credentials.

Electronic discovery plays a central role in a forensic accountant’s investigation. In fact, they have been instrumental in the design and development of these programs. Investigators use complex computerized applications to highlight any unusual activity, which is useful in risk reduction.

A forensic accountant’s scope of work is far reaching. Aside from investigative tasks, a forensic accountant is often called upon for deterrence programs. With his/her findings, criminal investigations, partnership disputes, personal injury claims, fraud, matrimonial disagreements, and loss quantification, among others, can all be resolved.

It is also the job of a forensic accountant to gather, analyze, and interpret complex financial data. In carrying out his/her accounting duties, the forensic accountant will utilize different economic theories, financial reporting systems, accounting and auditing principles, data management and analysis, and investigative techniques. At the end of the forensic accounting work, the forensic accountant will present a summary of his/her findings with supporting evidence. Even if these findings will help identify fraud, forensic accountants are generally not called upon for their opinions. The information they assess is presented to a court and it is up to them to decide if there is fraud or lack thereof.