Definition of Forensic Accounting

Accounting procedures are used to record all financial and operations activities of businesses. Standard auditing activities verify and validate the accuracy of the recordings, noting any errors and irregularities. Forensic accounting goes further by investigating the history and circumstances causing the transactions and entries. These investigative procedures are designed to identify the propriety of the entries. Forensic accounting, combining strong auditing procedures with sophisticated investigative techniques, verifies the accuracy and legitimacy of financial reporting.

Function

Forensic accounting is actually the melding of auditing and investigation. Instead of looking at and analyzing numbers, forensic accounting looks "behind" the numerical data. Its primary function is to uncover accounting irregularities, either innocent or intentional, that affect the display of operating results and/or financial condition of a company.

Benefits

Companies and the public get at least two primary benefits from using forensic accounting. First, inappropriate use of the books and records of a company to perpetrate any level of fraud or enhanced financial statement presentation can be discovered using forensic accounting. Second, experienced forensic accountants are respected as competent expert witnesses at trials when accounting irregularities are uncovered.

Expert Insight

Much like scientists, psychologists, psychiatrists and other recognized specialists are used as expert witnesses during litigation or criminal trials, so are experienced forensic accountants. Some accounting firms have even become expert forensic specialists, making testifying in courtrooms the focus of their practices.

Misconceptions

Before the inception of forensic accounting, the popular assumption was that standard corporate audits would identify any irregularities or errors that affected the financial statements of public companies. The numerous fraudulent irregularities that affected the stock value of some major public companies in the late 20th century spawned the rise of forensic accounting, using investigative procedures to verify reported financial results, to protect the public and stockholders. While standard accounting audits are effective, the misconception that they will always uncover improprieties is lessening.

Effects

The emergence of forensic accounting and the identification procedures regarding accounting irregularities have had an enormous effect on corporate responsibility. Even new federal legislation, like the Sarbanes-Oxley Act, requires corporations to report financial results accurately and verify that published financial reports are correct as written. The combination of audit principles and investigatory procedures defining forensic accounting has helped reduce improper practices and deceitful activities in financial and transactional recording and reporting for all businesses.

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