Forensic Accounting

Definition

Forensic accounting is the application of investigative and analytical skills for the purpose of resolving financial issues in a manner that meets standards required by courts of law. This definition of forensic accounting includes no explicit reference to fraud although fraud investigations are part of forensic accounting.
Fraud is the result of misleading, intentional actions or inaction (including making misleading statements and omitting relevant information) to gain an advantage. Forensic accounting is broader than fraud examination; it also includes services (that could involve investigations) related to the purchases of business, valuation of divorce assets, determination of the dollar value of damages to business property, and calculation of lost profits.

Forensic accountant

Forensic accountants apply special skills in accounting, auditing, finance, quantitative methods, certain areas of the law, and investigative skills to collect, analyze, and evaluate evidential matter and to interpret and communicate findings. Finance and quantiative skills are especially important to forensic accountants, who calculate damages.

As fraud examiners, forensic accountants are a mix of accountant and private investigator. In other words, the fraud examiner is atype of private investigator with a strong financial sixth sense who possesses knowledge of professional standards in accounting and law. While auditing knowledge and skills are extremely helpful to the forensic accountant, she also possesses the ability to think "out of the box". The importance of this ability cannot be overemphasized; often, auditor examination of financial statements does not uncover frauds. Even when the effects of fraud are contaned in the financial statements (e.g., in the form of overstated account balances), financial statement auditors are usually not the persons who detect this fraud because their work involves the examination of only a part of the accounts through the accepted practice of sampling.

One must be able to differentiate financial statement auditors from forensic accountants who investigate fraud. Financial statement auditors (e.g., external auditors) determine whether the financial statements present fairly, in all material respects, financial position, results of operations, and cash flows of the entity being audited. They are searching for material misstatements or omissions that would affect the decisions of a reasonable user of the financial statements, whether the mistatements are the result of errors or fraud. However, because their focus is not specifically on fraud, which more difficult to detect than errors (i.e., unintentional misstatements), and because they test the detail behind the financial statements, by sampling, they are not likely to uncover fraud.

Knowledge and skills of the forensic accounting

Well-trained forensic accountants have as least a minimum level of knowledge and skills in the following areas:
- Auditing skills are of paramount importance to the forensic accountant because of the information-collecting and verification nature of forensic accounting.
- Investigative skills and knowledge, such as surveillance tactics and interviewing and interrogation skills, assist the forensic accountants beyond the skills related to auditing and blend the financial and legal aspects of forensics.
- Criminology, particularly the study of the psychology of criminals.
- Accounting knowledge helps the forensic accountants analyze and interpret the financial information necesary to build a case in a financial investigation.
- Legal knowledge is critical to the success of the forensic accountant. Knowledge of laws and court procedures enables the forensic accountant to identify the type of evidence necessary to meet the legal standards of the jurisdiction in which the case is to be adjudicated and preserve evidence in a manner that meets the criteria of the court.
- Information Technology (IT) knowledge and skills are necessary tools of the forensic accountant in a world filled with paperless crimes.
- Communication skills are required of forensic accountants so that the results of their investigation/analysis can be correctly and clearly conveyed to users of their services.

Forensic accounting organizations

Several organizations support and promote the practice of firensic accounting. These include the Association of Certified Fraud Examiners, the American College of Forensic Examiners, the Association of Certified Fraud Specialists, the National Association of Certified Valuation Analysts, the National Litigation Support Services Assocation, the Institute of Business Appraisers, and the American Institute of Certified Public Accountants.

Glossary

Forensic accounting often incorporates some terms use eventually in the investigation of financial frauds. Some important terms are as follows:
arbitration. process of bearing and deciding a case that involves parties that have taken different positions.
defalcation. appropriation of assets for the benefit of thise who do not rightfully deserve them.
errors. unintentional misstatements or omissions of information.
external auditor. accountant who conducts an audit of the financial statements to determine whether they fairly state assets, liabilities, owners' equity, revenues, gains, expenses, losses, and cas flows in accordance with generally accepted accounting principles.
forensic accounting. accounting specialization in which investigative and analytical skills are applied for the purpose of resolving financial issues in a manner that mets standards required by courts of law.
forensic accountant. accountant who performs investigative and valuation services, the result of which could be used in a court of law.
fraud. means by which a person can achieve an advantage over another by false suggestions or supression of the truth.
fraud examination. investigation undertaken to determine the facts of a suspected fraud.

internal auditor. employee whi verifies information produced by other employees or processes in the organization; may also work on special projects such as analyzing whether the company for which he works should make or by a particular product.
investigative service. function of searching for evidence that supports an objectives and communicates the results of the search.
litigation service. function of a valuation and investigation service (including testifying as an expert witness) performed to assist the court in the determination of an equitable judgment.

mediation. act of assisting parties with differing perspectives to arrive at a compromise.
misrepresentation. act of presenting oneself in a manner that does not agree with reality. The presentatio could be the result of actions, statemets, or omissions.


Reference: Accounting and Legal Fundamentals for Forensic Accounting.