By: Reena Panchal, CFR, Consulting Manager
To the uninitiated, the term “forensic accounting” can seem arcane and inscrutable. For many people, the term “forensic” is reserved exclusively to describe the kind of work crime-solving detectives do on pot-boiler prime-time television shows. Forensic accounting, however, is actually a much more generally applicable field, and putting it to use can help you and your company resolve legal disputes, uncover and investigate fraud, establish risk management controls, and more.
“Forensic examination” in any professional field refers to an analysis, investigation, or test in an effort to find truth in a particular matter and form an “expert opinion”. In the case of the aforementioned television show detectives, their forensic work consists of analyzing fingerprints and the like in order to catch a perpetrator. Conceptually similar, forensic accountants perform sophisticated, highly specialized work that uses analysis of financial and legal information to identify and deal with the business and personal reality of a situation.
A forensic accountant identifies, retrieves and examines financial data and/or evidence, develops computerized models to analyze that data, and picks that data apart to determine, say, if a company’s bookkeeper is skimming some money off the top. They then communicate their findings to management and, if necessary, assist in any resulting legal proceedings.
Despite forensic accounting’s specialization, its utility is widespread. Individuals, businesses, lawyers, insurers, government agencies, banks, and courts all frequently rely on forensic accountants for their services. These services can serve a wide variety of functions, from quantifying losses from breaches of contracts to settling matrimonial disputes and everything in between, including fraud, regulatory, and criminal investigations, shareholder/partnership disputes, and professional negligence.
This discipline breaks down into three main areas of practice: litigation support, fraud detection, and fraud risk management. In short, they prevent, identify, and handle the fallout from financial malfeasance. In the case of litigation support, forensic accountants are often called upon to resolve disputes between two parties laying different claims to the same finances. The forensic accountant analyzes the data, creates a clear financial picture of the situation, and presents their findings to all parties involved, hopefully providing an objective picture of the dispute and even possibly helping it avoid going to trial.
In a fraud detection case, a business owner may sense that something isn’t quite right about where their money is going and/or how it’s being handled. They will call in a forensic accountant to dig through the data and figure out if they can identify things like employee theft or corruption. This kind of investigation is not necessarily tied to the detection of criminal activity. The same techniques could be applied to civil cases, i.e. asset tracing in matrimonial disputes.
Risk management is the prevention to fraud detection’s cure. Companies and individuals seeking to insulate themselves against potential fraudsters call a forensic accountant to assess the risks they potentially face, analyze their current preventative controls, and recommend and/or implement additional controls. Furthermore, the forensic accountant can help with the creation and installation of an overall fraud management policy for the company.