Forensic accounting is the area of accounting practice wherein the accounts are examined by independent accounts with the prenotion objective of determining financial misconduct and reporting fraud. It is usually conducted by an independent accounting and auditing firms appointed by regulators, the management, or sometimes the government agencies to check alleged wrongdoing in the financial accounting system of the organisation under scrutiny of misconduct.
Did You Know?
Every major accounting firm in India has forensic accounting sections specialising in various sub-sections
What Is the Meaning of Forensic Accounting?
Forensic accounting is a type of engagement of the independent auditor wherein the auditor is vigilant to every circumstance that could increase the risk of fraud in the organisation. The accountant applies the principle of accounting and analytical skills to check irregularities in books of account. There could be prespecified standards of the investigation by the court or regulator requiring the forensic accountants to apply special skills of law, research, and investigation skills to collect and evaluate the pieces of evidence that could possibly or have materialised the fraud in the company and report to the court, regulator or to the person who has appointed him to check on misconduct.
Also Read: Fundamentals of Accounting - Learn About Accounting Process and Steps & Basic Features of Accounting
Why has Forensic Accounting Developed as a Field of Practice?
As mentioned above, forensic accounting is not a new concept. Law enforcement agencies at different levels of government hierarchy have trained and recruited individuals to investigate financial matters. However, due to their area of expertise, accountants with years of experience, education, and training always have an edge in being experts in complex financial matters. It is especially important for large corporations that a huge chunk of their operations are conducted through IT software, providing a complex culture. Such a complex culture induces employees to commit fraud. The federal governments have largely failed to evolve with these complexities in their search and seizure methods.
Thus, independent accounting and auditing firms recognised these opportunities early on and built on their strength in forensic accounting. Now, these firms conduct a substantial part of forensic accounting independently. Also, such investigations are conducted to check on the employees' morale. Therefore, the administration also conducts forensic accounting to check the effectiveness of controls as far as they are related to financial reporting in the company.
Application for Forensic Accounting
There is different dimensions of businesses where the concept of forensic accounting is used to detect financial frauds and misreporting. Following are a few dimensions -
Business Fraud
Business fraud includes misappropriation of assets, laundering of money, and other forms of fraud. Using analytical and investigating skills, accounts uncover business frauds through the application of forensic accounting.
Tax Fraud
Businesses usually understate their profits or falsify their financial statements to evade taxes. Forensic accounts use their skills to catch tax evasion.
Securities Frauds
Financial industry participants are usually rushed to make short-term money. This causes them to enter into risky ventures and sometimes commit wire fraud to gain insight into stock moves. Regulators often appoint forensic accountants to look into such matters.
Insurance Claims
Forensic accountants analysis of the economic damages in accidents and medical negligence cases for the claims lodged. They review the insurance policies and coverage issues and calculate the potential damages that could have been made if irregularities did not exist. They also investigate property losses, business losses, and claims in lawsuits.
Money Laundering
Regulators often appoint forensic accountants to look into money laundering matters. Forensic auditors unfold any possible disputes and linkages into such matters through their investigative skills. The same could be seen in the case when the government appointed appointed Forensic accountants to look into the matter of the Satyam Computer Services scandal .
As an example, purchasing a large house, shop but showing less value on paper where real market value of purchased properties if much more. It is done so that they could reduce tax burden. Therefore, black money is collected through tax evasion.
Also Read: Liabilities in Accounting - What are Accounting Liabilities? Explained in Detail
How is Forensic Accounting Different From an Independent Audit?
It is a common belief that auditors will detect fraud in a company if any is committed in the organisation's financial system. However, the truth is those audit procedures are never designed in the first place to detect fraud or wrongdoing in the financial statements. Rather, they are designed to detect misstatements in the financial statement.
At the same time, it is quite true that the auditors have detected many financial frauds, but at the same time, most of them went undecided. The reason is that the auditor relies on samples and audit evidence that may be falsified by the management. Also, the auditor does not have the power to search and seizure as required in case of investigation. Here is an elaborate difference table to differentiate between the two -
|
Basis of Difference |
Audit |
Forensic Accounting |
|
Objectives |
To express an opinion on the financial statements that the state of affairs of the company presents a true and fair view. |
A Forensic audit is conducted to evaluate whether fraud has taken place in the books of account. |
|
Techniques |
The audit is conducted on sample-based evidence, while substantive analytical procedures are also used to evaluate the effectiveness of internal controls with respect in financial reporting |
A forensic audit is conducted to investigate the matters of fraud and, thus, requires in-depth checking into the accounting matter. |
|
Period |
Normally, for an accounting period, |
There is no such limitations |
|
Misappropriation of Assets |
For most audits, the auditor relies on the management and obtains a certificate that the management recognises its responsibility to value, classify and record assets. However, if the auditor comes to a notice of misappropriation of assets, then we will take appropriate action. |
The forensic accountant will verify independent assets where he suspects a matter of fraud. And conduct in-depth analysis. |
|
Off-Balance Sheet items like contracts etc. |
Used to vouch for the arithmetic accuracy & compliance with procedures |
Regulatory & proprietary of these transactions/ contracts are examined. |
|
Response to Adverse Finding |
The auditor will modify his opinion and could express a disclaimer of opinion if circumstances warrant so |
The Forensic accountant will evaluate the legal implications of any adverse findings and include them in his report. He also will check his legal and regulatory responsibilities under different statutes. |
Best Forensic Accounting Firms
Often big independent audit firms have also deep roots in forensic accounting due to their long expertise and experience in financial matters. As per the Firsthand report in 2022, some of the best forensic accounting firms in India and overseas are -
- PWC LLP (PricewaterhouseCoopers)
- Deloitte
- Ernst & Young LLP (EY)
- KPMG LLP
- Grant Thornton LLP
Issues in Forensic Accounting
Forensic accounts face the following challenges in carrying out their work -
- Forensic procedures require a lot of analytical and investigative skills
- Investigations may potentially leak confidential documents
- Even mere speculation of an alleged felony generates unwanted negative publicity around the company
- Depending on the scope of forensic accounting, it may become costly to conduct a forensic audit into the fraudulent reporting
- Even after proving suspects not guilty, employees remain suspicious.
Conclusion:
Forensic accounting is preferred by regulators and courts to look into complex fraudulent activities. It is an independent examination of alleged wrongdoing in the company’s accounting system. As a matter of fact, forensic accountants are appointed by courts, tribunals, and regulators on behalf of the public interest at large. I hope you have enjoyed reading it so far.
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