By definition, accounting is all about maintaining accurate records of an organisation’s financial activities – literally ‘accounting’ for every penny.
With good bookkeeping comes insight and control. You get a clear view of how a business is performing, you can see strengths and weaknesses, risks and opportunities. You know what you can and cannot afford. You make good decisions based on good information.
But there are times when standard day-to-day accounting might not give you the depth of intelligence you need. Businesses can be complicated and their financial arrangements even more so. Particularly when something goes awry, untangling accounts to get to the bottom of what is going on can be a tough ask.
Forensic accounting is a specialised field designed to do exactly this kind of heavy lifting – analysing complex financial records, transactions, documents and processes to answer difficult questions. Forensic accountants train to have a range of auditing and investigative skills as well as expert financial knowledge.
Forensic accountants also have to be very well-versed in legal matters. In fact, forensic accountants routinely work in close collaboration with lawyers and regularly act as expert witnesses in legal proceedings, including giving testimony in courts.
Here are some typical situations when forensic accounting is called for.
Forensic accountants are often appointed to investigate suspected cases of financial fraud, including misappropriation, embezzlement, money laundering and fraudulent financial reporting. Fraud investigations can be notoriously complicated and require thorough analysis of financial records to identify any irregularities, plus the challenging task of tracing illegitimate transactions.
Disputes and litigation
Money is often at the centre of commercial disputes and forensic accountants can help build the case for any party. Examples include business valuation disputes, breach of contract claims, intellectual property infringement, and any other litigation where an expert financial opinion might be relevant.
Bankruptcy and insolvency
In bankruptcy or insolvency cases, any suspicion that malpractice has led to a company’s demise, or that an individual is trying to hide assets in a bankruptcy, may lead to forensic accountant being asked to investigate. For example, if it is found that an insolvent company’s assets are much lower than anticipated, a forensic accountant can assess the financial condition of the company prior to entering insolvency and analyse transactions to try to ascertain if cash has been siphoned off fraudulently.
Forensic accountants play a crucial role in insurance claims related to business interruption, employee theft, property damage, or other financial losses. Again, by examining financial records, they can assess the impact of the event on the business’s finances, and quantify the losses to assist insurance companies in evaluating and settling claims.
Asset tracing and recovery
As mentioned in bankruptcy and insolvency cases, forensic accountants are often employed when it is believed assets are missing, using their skills to follow money trails, analyse financial transactions, and maybe locate hidden or offshore accounts to help recover assets. Asset recovery is also an important part of fraud investigations, and is even needed in cases like divorce proceedings when one party might attempt to hide assets from the other.
Regulatory compliance and risk assessment
Forensic accounting can also be used in a preventative capacity by companies wanting to ensure their financial controls and risk management processes are watertight. This can be undertaken as a fraud prevention measure, but also to check compliance with financial regulations.