Accounting is all about numbers and working out what they mean for your business, but sometimes numbers don't show the whole truth. Forensic accounting considers more than just figures to fully display the financial status of a company in legal terms. Explore forensic accounting in greater depth with our comprehensive guide.
Forensic accounting definition and examples
The term "forensic" may make it sound like forensic accounting takes place at gruesome crime scenes, and while that's not quite how it works, forensic accounting is used to recognise crimes. "Forensic" can be defined as "techniques used in connection with the detection of a crime," and forensic accounting is used to detect crimes like fraud.
Examples of forensic accounting roles include:
White-collar crimes call for forensic accountants to find proof of misdemeanours, which can include:
However, some cases are more pedestrian, such as investigating insurance claims to establish damages.
Objectives of forensic accounting
The main objective of forensic accounting is to find proof of a crime and to present it in a way that can stand up in a court of law. Looking into the financial records of an individual, or even an entire corporation, is a massive undertaking that requires the specialist skills of forensic accountants. The prevention of crime is also crucial for auditors, who are hired to ensure your company's financial records are compliant with laws and regulations.
Therefore, the purpose of forensic accounting is to:
Prove financial crimes
Prevent financial crimes
Anticipate future crimes
Forensic accounting is as much about the criminal as their crime, so there is much more to the field than just numbers. Forensic accounting professionals must create a clear picture based not only on figures but also on the company's broader operations.
How does forensic accounting work?
Forensic accounting takes into account a wide range of documents to uncover crimes, including:
Examining financial statements
Talking to associated parties
Examining internal data
Examining court records
Collaborating with government officials or lawyers
Examining bank statements, credit statements
Examining correspondence like invoices, letters, and emails
Observing and proving changes in the lifestyle of the accused, i.e., increased spending
Forensic accountant professionals also need to employ their traditional accounting skills to determine whether the company's expected revenues match their actual revenues. They must then make this digestible to a court using graphs, sheets, or other visualisation methods.
Advantages of forensic accounting
Forensic accounting is an area of accounting that requires deeper specialism than standard accounting. Large companies will have a dedicated forensic accountant to ensure they are always compliant and make sure financial exchanges with other parties are carried out correctly. It may be worth adding a forensic accounting professional to your business if you plan to grow, as the advantages of forensic accounting include:
Helps solve and prevent financial crimes
Helps monitor your current processes and teams
Helps evaluate the compliance of parties you are considering working with
However, introducing forensic accounting can be a sensitive issue. If your team feels that their professionalism or integrity is under investigation, morale can drop.
Can anyone be a forensic accountant?
No, forensic account professionals will need specific qualifications, such as:
ACCA (Association of Chartered Certified Accountants)
ICAEW (Institute of Chartered Accountants in England and Wales)
CIMA (Chartered Institute of Management Accountants)
These all qualify an individual for a range of accounting roles, but further specialism, such as auditing, will be needed for anyone who wants to become a fully-fledged forensic accountant.
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