Forensic accounting, forensic accountancy or financial forensics is the specialty practice area of accounting that describes engagements that result from actual or anticipated disputes or litigation. "Forensic" means "suitable for use in a court of law", and it is to that standard and potential outcome that forensic accountants generally have to work. Forensic accountants, also referred to as forensic auditors or investigative auditors, often have to give expert evidence at the eventual trial.
What We Do
As Forensic accountants, we often assist in professional negligence claims where they are assessing and commenting on the work of other professionals. Forensic accountants are also engaged in marital and family law of analyzing lifestyle for spousal support purposes, determining income available for child support and equitable distribution.
Engagements relating to criminal matters typically arise in the aftermath of fraud. They frequently involve the assessment of accounting systems and accounts presentationâ€”in essence assessing if the numbers reflect reality.
We, as forensic accountants, also specialize in forensic analytics which is the procurement and analysis of electronic data to reconstruct, detect, or otherwise support a claim of financial fraud. The main steps in forensic analytics are (a) data collection, (b) data preparation, (c) data analysis, and (d) reporting. For example, forensic analytics may be used to review an employee's purchasing card activity to assess whether any of the purchases were diverted or divertible for personal use. Our firm also prepares valuation services for sale or purchase of businesses.
Federal Regulation Procedures
All U.S. businesses must adhere to federal and state regulations that apply to their industries. Forensic auditors examine detailed financial records and compare company procedures with those regulations that directly pertain to their operations. Forensic investigators note any apparent exceptions to regulations and recommend improvements. Should they determine that willful deviations occurred, they then notify both the company and the appropriate regulatory agency.
Litigation Support Procedures
Forensic accounting procedures vary depending on the client and specific reason for the audit. For example, to ensure all company sales dollars are legitimate, auditors strategically examine individual receipts to verify reported gross sales. Over-statement of income becomes the subject of a report stating the methodology of the strategic sample tests performed, the client/customer contact results, an estimation of the adjusted sales levels, verification of cash received and outstanding accounts receivable, and conclusions about the actions resulting in the discrepancy. These reports are structured in such a way as to be used as evidence in a civil or criminal proceeding.
Investor Protection Procedures
While critically important for public companies, smaller, private businesses are responsible for protecting their investors as well. In addition to verifying bank account balances, assets, sales recordings, cash flow and all other paper trails, forensic auditors "read between the lines," examining individual original source documents and questioning their validity to learn whether the company's financial statements are fairly presented for informed investor decisions. Auditors examine discrepancies by interviewing company personnel and executives to learn about material differences in company valuations.
Fraud Detection and Prevention Procedures
While the courts, not auditors, determine the existence or absence of fraud, forensic accounting procedures attempt to uncover irregularities that indicate the presence of willful misleading activities. Forensic auditors track some transactions from inception to completion, including verifying each step with the individuals (customers and employees) involved. Should they find some company policies and procedures that might permit future fraudulent activities to go unnoticed, they will recommend specific, tightened controls to lessen the risk in the coming fiscal period.
Report Creation Procedures
Unlike standard CPA audits, forensic accounting examinations require the use of language and structure that detail auditor findings acceptable to the court system. Just as the police and legal community build their cases in a commonly accepted series of steps, forensic accounting report procedures follow similar techniques. Whether intended for use in civil or criminal litigation, forensic accounting reports contain all the pertinent details that prove the auditor's conclusions.
Types of Cases
Economic damages calculations, whether suffered through tort or breach of contract
Post-acquisition disputes such as earn-outs or breaches of warranties