FORENSIC ACCOUNTING

FORENSIC ACCOUNTING

Do you suspect that a financial crime is going on in your organization and want to catch that criminal? Do you feel that there is possibility for financial fraud or embezzlement in your organization and want to prevent that from happening? Here is the solution: FORENSIC ACCOUNTING.”

 

What is forensic accounting

Forensic accounting is the integration of accounting, auditing and investigative skills which is used to conduct an examination or investigation and prosecution of criminal acts such as embezzlement or fraud. It is the study and interpretation of accounting evidence, and application of accounting methods to the tracking and collection of forensic evidence for investigations.

 

Forensic means the use of science or technology in the investigation and establishment of facts or evidence in a court of law. Forensic accounting (also known as forensic audit) is primarily the examination of documents and the interviewing of people to extract evidence. It examines individual or company financial records as an investigative measure that attempts to derive evidence suitable for use in litigation.

 

Importance of forensic accounting

The main fundamental changes in the business environment that significantly impacted the modern organizations are technological advances, globalization of economy and convergence in the financial and capital markets. This creates a dynamic situation for wrongdoers to exploit the weaknesses prevalent in the system for their personal gains. The global challenge of growing menace in the form of frauds and white-collar crime in all types of trades and business practices intensifies the need for forensic accounting.

 

Forensic accounting is a meticulous review of financial documents conducted when fraud is suspected. Forensic auditors often go outside the books of account to find fraudulent transactions. This may include reviewing documents, not only from the organisation, but from customers as well. Forensic auditors also interview employees, customers and sometimes clients to find out if a fraud has taken place. In short, a forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims as well as to determine the negligence on the part of the responsible people concerned.

 

Business entities can approach forensic auditors or chartered accountants firm with forensic accounting capabilities when they suspect any fraud or embezzlement in their organisation. This can be done as an investigation for the entity to have their own internal actions or to proceed with the investigation results to a court of law for legal actions. Forensic accounting evidences, when collected in line with the legal procedures, are admissible in a court of law.

 

Forensic accounting can also be done as a precaution to prevent fraud from happening and to detect it before the loss magnifies. So, business entities can use the services of forensic auditors as a preventive and detective measure when they suspect any wrongdoing or weaknesses in the existing internal control system.

 

How is forensic accounting different from audit?

Financial audit is a mandatory requirement by statutes, and it measures compliance with reporting standards and obtains reasonable assurance that financial statements are free of material misstatement. Whereas, forensic accounting is a financial investigation in response to an event and its findings are used as evidence in court or to resolve disputes. In practice, the main difference is the mindset between forensic accounting and audit: it is “investigative mentality” vs. “professional skepticism” respectively.

 

The main differences of the two functions can be summarized as given below:

Particulars Financial Audit Forensic Audit
Objectives Express an opinion as to ‘True & Fair’ presentation Whether fraud has taken place in books
Governance Primarily governed by statute Governed by specific mandate as decided by management
Materiality Materiality in reporting facts is a dominant factor Gathering of evidence is a more dominant factor. Materiality may not be relevant.
Techniques Planned in advance, substantive, compliance & sample based In response to events or occurrences, investigative, substantive & in depth checking
Period Normally for a particular accounting period No such limitations
Verification Relies on financial records, certificates and representation provided by management Independent verification of suspected/selected items and background checks to corroborate evidence/facts
Off balance sheet items Vouch the arithmetic accuracy & compliance with procedures Regulatory & propriety of the transactions are examined.
Adverse findings Negative opinion or qualified opinion expressed with/without quantification Legal determination of fraud impact and identification of perpetrators depending on scope

 

 

Conclusion

Forensic accounting is a financial investigation and not a financial audit. Evidences collected during a forensic audit are admissible in a court of law. A forensic audit can be done to investigate a fraud or embezzlement, or as a control measure to prevent fraud from happening and to detect it at an early stage. Managements can use the services of forensic accountants when they feel that a financial investigation is needed in their organization. The primary objective of a forensic audit report is to logically present facts and evidence gathered that will enable the management to reach an informed opinion on the subject matter that is under investigation.

Author – CA. Selastin A, FCA

 

Leave a Comment

Open chat