What is Forensic Accounting?

Forensic accounting utilizes accounting, auditing and investigative skills to conduct an examination into the finances of an individual or business. Forensic accounting provides an accounting analysis suitable to be used in legal proceedings. Forensic accountants are trained to look beyond the numbers and deal with the business reality of a situation. Forensic accounting is frequently used in fraud and embezzlement cases to explain the nature of a financial crime in court.

Understanding Forensic Accounting

Forensic accountants analyze, interpret and summarize complex financial and business matters. They may be employed by insurance companies, banks, police forces, government agencies or public accounting firms. Forensic accountants compile financial evidence, develop computer applications to manage the information collected and communicate their findings in the form of reports or presentations.

Along with testifying in court, a forensic accountant may be asked to prepare visual aids to support trial evidence. For business investigations, forensic accounting entails the use of tracing funds, asset identification, asset recovery and due diligence reviews. Forensic accountants may seek out additional training in alternative dispute resolution (ADR) due to their high level of involvement in legal issues and familiarity with the judicial system.

Key Takeaways

  • Forensic accounting is a combination accounting and investigative techniques used to discover financial crimes.
  • One of the key functions of forensic accounting is to explain the nature of a financial crime to the courts.
  • Forensic accounting is used by the insurance industry to establish damages from claims.

Forensic Accounting for Litigation Support

Forensic accounting is utilized in litigation when quantification of damages is needed. Parties involved in legal disputes use the quantifications to assist in resolving disputes via settlements or court decisions. For example, this may arise due to compensation and benefit disputes. The forensic accountant may be utilized as an expert witness if the dispute escalates to a court decision.

Forensic Accounting for Criminal Investigation

Forensic accounting is also used to discover whether a crime occurred and assess the likelihood of criminal intent. Such crimes may include employee theft, securities fraud, falsification of financial statement information, identify theft or insurance fraud. Forensic accounting is often brought to bear in complex and high profile financial crimes. The reason we understand the nature of Bernie Madoff's Ponzi scheme today is because forensic accountants dissected the scheme and made it understandable for the court case.

Forensic accountants may also assist in searching for hidden assets in divorce cases or provide their services for other civil matters such as breach of contracts, tort, disagreements relating to company acquisitions, breaches of warranty or business valuation disputes. Forensic accounting assignments can include investigating construction claims, expropriations, product liability claims or trademark or patent infringements. And, if all that wasn't enough, forensic accounting may also be used to determine the economic results of the breach of a nondisclosure or noncompete agreement.

Forensic Accounting in the Insurance Industry

Forensic accounting is routinely used by the insurance industry. In this capacity, a forensic accountant may be asked to quantify the economic damages arising from a vehicle accident, a case of medical malpractice or some other claim. One of the concerns about taking a forensic accounting approach to insurance claims as opposed to an adjuster approach is that forensic accounting is mainly concerned with historical data and may miss relevant current information that changes the assumptions around the claim.