Forensic Accounting

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What is Forensic?

Forensic (~judicial, judiciary, juridical) is an adjective relating to or denoting the application of scientific methods and techniques to the detection, investigation and reporting of alleged (supposed) crimes for the benefit of courts of law.

What is Forensic Accounting?

Forensic Accounting is the special discipline of accounting that:

• Conducts a thorough investigation and detailed analysis of financial manipulation and fraudulent activities.
• Explains and discovers the nature of financial crimes of the business entity in court.
• Combines forensic audit and forensic investigation.

It can be described as "The special type of financial knowledge that aims to prevent and detect fraud" or more comprehensively as: "The act of identifying, settling, sorting, extracting, recording, reporting and verifying financial data in question, as well as clearly organizing and analyzing to make proper conclusions about the state of financial matters that have fallen under criminal observation."

Because financial transactions are nowadays largely performed by automated systems, leaving digital traces, the use of information technology has become a major part of forensic accounting.

Usage of Forensic Accounting. Application Areas

• Fraud and white-collar crime investigations and prevention
• Preparation of expert reports, reviews and evidence
• Civil and criminal actions regarding fraud and financial irregularities
• Breaches of contract
• Breaches of warranty, particularly following company acquisitions
• Insurance claims
• Giving oral evidence in court
• Insolvency and liquidation support investigation
• Fraud prevention, Fraud Risk Management
• Corruption Compliance & investigations
• Money Laundering
• Regulatory enquiries
• Tax fraud
• Computer fraud

Forensic Accounting Key Areas

• Fraud Investigation. Investigates the criminal intention behind any activity. Forensic accountants detect: What went wrong? Who did it? How they did it? How much money has been stolen?
• Resolving Commercial Disputes. Investigates the criminal intention behind any activity. These activities include: Identity theft, employee theft, falsification of financial statement information, infringement of patent and trademarks or insurance frauds.
• Resolving Civil Issues. For instance, revealing the hidden assets behind: Divorce cases (family law), breach of warranty or contract, disputes on business valuation, claims on construction, etc.
• Insurance Claims. Used to quantify the economic damages against insurance claims such as accident of a vehicle or manipulation in medical practices.
• Valuations. Valuing a company for a sale (in part or in whole), company valuations for bank purposes to borrow funds, valuing the shares (or share options) in a company for potential sale or purchase.
• Business Intelligence. Providing (to management): Insight into how the business is running, help them to focus on where to best deploy resources, provide forensic technology services, support in anti-money laundering.
• Data Recovery & Conversion: Used to recover the quantitative and qualitative data of the suspicious, convert the recovered data into investigative report that serves as evidence and witness during litigation, help in the recovery of loss.

History of Forensic Accounting

In 1931, Frank Willson, a CPA of the Internal Revenue Service, gave birth to Forensic Accounting during Capone. Forensic accounting remained undefined for years. The term "forensic accounting" was first introduced by Maurice Peloubet (a New York CPA) in 1946.

Typical Steps in Forensic Accounting. Process

1. Problem recognition
2. Forensic investigation
3. Evidence collection (physical evidence, testimonial evidence, documentary evidence, personal observation)
4. Report preparation and submission
5. Litigation (participates in the incident's court proceedings, present findings in understandable manner, explaining and interpreting financial documents)

Famous Forensic Accounting Cases

• Enron
• Bernie Madoff Investment Securities
• WorldCom
• Adelphia
• Xerox

Sources:
George A. Manning, Ph.D, CFE, EA (2011), "Financial Investigation and Forensic Accounting", Third Edition.
Joshua Onome Imoniana, Maria Thereza Pompa Antunes, Henrique Formigoni (2013), "Forensic Accounting and Corporate Fraud", article.
PwC (2020), "Financial Investigation and Forensic Accounting".

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