What is Forensic Accounting?
Corporate fraud is on the rise. Fraud is deception, deliberately practiced in order to secure unfair or unlawful gain. Companies today do not just face risks from internal fraud but also from external criminals who are technologically savvy. The important role forensic accounting plays in minimizing financial losses through fraud is fast gaining ground. Forensic accounting is the use of accounting, auditing, and investigative skills to assist in legal matters. It encompasses litigation support, investigation and dispute resolution
Forensic accountants are professionals who use a unique blend of education and experience to apply accounting, auditing, and investigative skills to uncover truth, form legal opinions, and assist in investigations. Forensic accountants may be involved in both litigation support (providing assistance on a given case, primarily related to the calculation or estimation of economic damages and related issues) and investigative accounting (looking into illegal activities). Almost every scientific and technical field has a forensic application. A forensic examination refers to that part of a professional's practice that is carried out to provide an expert opinion.
As forensic accountants you may be working in areas such as:
- investigations, both criminal and civil;
- preparation and review of evidence;
- preparation of expert reports;
- affidavits and proof of evidence;
- giving oral evidence in court;
- expert determination, arbitration, mediation or alternative;
- dispute resolution;
So what does it take to become a forensic accountant? Apart from a need for the same basic accounting skills that it takes to become a good auditor, to be a forensic accountant you need to have the ability to:
- pay attention to the smallest detail;
- analyze data thoroughly;
- think creatively;
- possess common business sense;
- be proficient with a computer and; have excellent communication skills;
- A "sixth sense" that can be used to reconstruct details of past accounting transactions is also beneficial;
- A photographic memory helps when trying to visualise and reconstruct these past events.
The key areas of work for Forensic Accountants are:
Quantification of Damages and Loss of Profits- assessing the effect on profitability, cash flow, income or value, that a party claims to have incurred, or may incur, as a result of either a breach in a contract, personal injury, product liability, breaches of the Trade Practices Act or Fair Trading, etc.
The Forensic Accountant may also need to consider the impact of other circumstances on the claimed loss, and the degree to which the loss was mitigated or could have been mitigated in order to determine the actual loss incurred.
Valuations -determining the value of shares, businesses, partnerships, intangibles, etc in dispute, lost or destroyed. The Forensic Accountant must review information as both a financial analyst and as an investigating accountant, making appropriate adjustments, where necessary, and applying a generally accepted, or arguable, methodology to determine the value.
Professional Negligence -reviewing transactions and the actions, or inaction, of various professionals to determine whether the parties were negligent and, if so, to what extent.
When a review involves an accounting professional, a keen knowledge of the applicable accounting standards and the prevailing law is required. Therefore, the Forensic Accountant must have the ability to identify the impact and timing of changes in law and procedures.
Fraud - investigating frauds, and establishing procedures to prevent or detect fraud.
Forensic Accountants are frequently called upon to investigate frauds, identify the appropriate documentary evidence, quantify the loss and to assist in the prosecution of those involved.
Family Law Matters -assessing the existence, value and ownership of the financial resources available to parties in matrimonial dispute. This type of work requires excellent communication skills when dealing with related party small family businesses where the personal emotions of the parties involved as frequently the financial information being considered frequently contains a mixture of business and personal transactions with tax driven results.
Forensic Accountants need to have an interest in and the aptitude to develop accounting, auditing, financial and investigative skills to recognize, document and analyze information frequently from hostile or opposing parties-that is required to form and support an opinion.
The Forensic Accountant must have the confidence and ability to respond immediately to questions raised in court. Further, and potentially even more important than knowing the answers, the Forensic Accountant must be able to communicate often extremely technical and complex financial information in a manner that will understood by the court.