Dada Adefolami.
The meaning of forensic accounting is quite broad: it is the application of accountancy skills and knowledge in circumstances that have legal consequences. There are many circumstances with legal consequences in which accountancy might be required; the most well-known of which is investigating alleged fraudulent activity.
Forensic accounting, forensic accountancy or financial forensics is the specialty practice area of accounting that describes engagements that result from actual or anticipated disputes or litigation. “Forensic” means “suitable for use in a court of law”. Forensic accountants are experienced auditors, accountants, and investigators of legal and financial documents that are hired to look into possible suspicions.
Forensic investigation is a part of a forensic accounting engagement. Forensic investigation is the process of gathering evidence so that the expert’s report or witness’ statement can be prepared. It includes forensic auditing, but incorporates a much broader range of investigative techniques, such as interviewing witnesses and suspects, imaging or recovering computer files including emails, physical searches of premises etc. Forensic auditing is the application of traditional auditing procedures and techniques in order to gather evidence as part of the forensic investigation.
Application
The major applications of forensic accounting include fraud investigations, negligence cases and insurance claims. An insurance claim would require determination of how much the client should claim from the insurer. The first step would be a detailed review of the insurance policy to determine ‘coverage’, i.e. what is insured and any clauses that might restrict the amount that can be claimed or invalidate the claim.
The second step would be to gather evidence to quantify the loss, i.e. the amount to be claimed. Insurance claims might include claims following misappropriation of assets, i.e. theft of goods or money. In such cases, the forensic accountant will review inventory or cash records and details of sales and purchases to reconcile the amounts held and determine the value of the goods or cash stolen. They will also test the reliability of the information held by counting a sample of inventory or cash currently held in comparison with the client’s records. The forensic accountant will not assume that there has been a theft; they will consider other possibilities such as an error in the data held.
Insurance claims may however, be much more complicated than this, such as in the case of business interruptions arising as a result of fire or flood. In these types of engagements the forensic accountant will review prospective financial information in comparison with reported outturn to evaluate the loss of profit arising as a result of the business interruption. The forensic accountant will not assume that there has been any loss of profit due to the business interruption; they will consider other possibilities such as a straightforward loss of market share to a competitor.
Forensic engagements often require the forensic accountant to quantify a loss. One such engagement is in professional negligence claims, i.e. when another accountant has breached their duty of care to a client or third party resulting in a loss for that client. In these types of engagement, the forensic accountant would also provide an opinion on whether the duty of care owed has been breached, i.e. whether the audit or other accountancy service was performed in accordance with current standards in practice, legislation and techniques. In relation to an audit, this would require consideration of whether the International Standards on Auditing were followed.
The need for a forensic accountant may also arise because two parties cannot agree on the amount owed by one party to another, and the accountant is engaged to provide an expert valuation, of a business for example. This might be the case in partnerships, when one partner wishes to leave the partnership and is being bought out by the remaining partner(s).
Role of an Expert Witness
An expert witness is quite different to any other witness in court proceedings. Most witnesses are ‘witnesses of fact’, i.e. they can only provide evidence on what they saw, did or heard. Most importantly, they cannot give their opinion on any of the matters about which they give evidence. By contrast, an expert witness is specifically called to give their opinion on a particular matter.
An accountant can be called to give evidence as a professional witness, i.e. a witness of fact, or an expert witness. In order to give evidence as an expert witness they must be just that, an expert. They must be able to demonstrate a level of expertise that means their opinion is valuable to the court. This means not only expertise in accountancy, but also expertise in the particular area of accountancy that they are giving evidence on. A witness will provide a written report/statement to the court, and may also be required to attend court to give live evidence, in person, and be cross-examined by the ‘other side’.
However, not all forensic engagements will require evidence to be submitted to a court. Often, the engagement will simply require a report for the client’s own purposes or sometimes a report for use by the insurer. Either way, a key skill necessary in being a successful forensic accountant is the ability to explain complex accounting concepts in simple terms to someone who is not themselves an accountant, whether that be as an expert witness explaining matters to the judge or jury, or when explaining matters to the client. Forensic accounting integrates investigative, accountancy, and communication skills.
Planning
Forensic accounting engagements are agreed-upon procedures engagements, not assurance engagements. The forensic accountant will not provide an assurance opinion – that is the role of the auditor when reviewing the amount of loss included in the financial statements. This will normally involve determining an appropriate value or quantifying a loss as discussed above; this is quite distinct from an assurance engagement in which the engagement team would review an amount determined by the client.
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