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Accounting – Why and When a Forensic Accountant Is Needed

Forensic accounting is a specialized form of accounting that is conducted by an expert in a particular field. It can be used in many applications and consists of a wide array of activities. The forensic accountant may testify in court as an expert witness.

What Is Forensic Accounting?

Forensic accounting deals with actual or anticipated disputes that may lead to litigation. The term “forensic” implies the use of the information in court. Forensic accountants generally must be prepared to present their findings in court, typically as expert witnesses. They use accounting, auditing and investigations to determine what financial transactions occurred and theorize on the impact of these financial transactions.

Tasks Completed by a Forensic Accountant

A forensic accountant may conduct a wide array of tasks to uncover financial transactions and any suspicious financial activity. A forensic accountant may analyze and interpret complex financial information. The forensic accountant may investigate and analyze financial evidence. In some cases, the forensic accountant may develop computerized applications
or install software that can uncover traces of financial transactions. Forensic accountants may also be involved in the communicating this information in courtrooms and may present a report, exhibit or other visual aid to show the findings.

At the end of the investigation, the forensic accountant may summarize this information to key personnel in a way that is understandable so that business leaders can make informed decisions about their business.

Role of Forensic Accountants

After the forensic accountant investigates the financial transactions in question, the accountant may perform a number of additional operations. This includes valuating a business, calculating losses and potential legal damages, determining the extent of disagreements regarding mergers or acquisitions.

A primary source of the forensic accountant’s concentration is on investigation. An investigation can uncover if an employee is stealing, financial statements are being defrauded, a person or business’ identity has been stolen, insurance fraud has arisen or other criminal or unethical acts have occurred. A forensic accountant may look for hidden assets.

One vital area that forensic accountants work on is supporting litigation efforts. The forensic accountant may help substantiate the level of damages proposed by the party that has hired him or her. Additionally, the forensic accountant can propose settlement figures based on the amount of damage the business or private party has suffered. Because the forensic accountant is used to the court system and rules of evidence, he or she may have greater experience in this realm than the typical accountant.

How Forensic Accountants Are Hired

A forensic accountant may be retained in a variety of ways. A business may keep a forensic accountant hired in-house to complete work on an ongoing basis. A private person may hire a forensic accountant for a specific project. Forensic accountants may work in public practice or may work for an insurance company, bank, government agency or other type of organization. A forensic accountant may work for many different types of clients and on a variety of cases.

Types of Forensic Accounting

There are a variety of types of cases that forensic accountants may work on. These include:

Fraud Prevention

Forensic accounting may be used by organizations and corporations to try to prevent fraud from occurring in the first place. Early planning can help prevent a sequence of events from going into effect that would result in a customer or client committing fraud against the business. This type of case seeks to control a situation before something bad occurs.

Employee Fraud

Forensic accountants may be hired after a business suspects theft, fraud or embezzlement. Employee fraud may occur because an employee is under financial pressure due to a divorce, gambling addiction, medical issue or other issue. The employee may rationalize his or her behavior because he or she is not making the type of money that he or she wants or did not receive a wanted promotion. Many employees have the opportunity to steal from the company or embezzle funds. A thieving employee may have been in a position for trust for many years and may know where the vulnerabilities of a business are and how to exploit these vulnerabilities.

A forensic accountant may analyze the data-retention policy to determine how information is stored. He or she may make recommendations regarding how to modify these policies to better protect the interests of the business so that the data can be recovered in a meaningful way. Forensic accountants can utilize this data to investigate into the financial transactions. It can be difficult to get all of the information that is necessary for a case when data is stored on multiple computers, multiple servers and across various platforms.

A forensic accountant can provide advice on how to improve internal controls to decrease the opportunity for employee fraud. He or she may recommend strategies such as segregating duties and dual-employee interaction when completing pivotal tasks such as bank reconciliation, counting cash and reviewing financial statements.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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