Forensic Accounting Terms of Reference

In cases of suspected fraud in a business's financial reporting, a Forensic accountant will be contracted to independently investigate and analyze the company's financial statements and processes. Forensic accountants specialize in re-creating and explaining financial histories in the courtroom as an expert witness. They are also contracted by companies to prevent fraud from occurring.

Significance

Forensic accounting is used in the prevention, investigation and prosecution of financial fraud. A forensic accountant may investigate a company's financial statements for the purpose of bearing witness in a court of law. She may be called upon by either the defense or prosecution as an expert witness to recount an impartial analysis of the reality of a business's financial history and present state. Companies may choose to employ forensic accountants or to adopt forensic accounting practices as a means of preventing fraud from occurring by examining and investigating the validity of their financial reports. Forensic accountants also act as investigators in instances of suspected fraud by examining financial documents, reconstructing whole documents from partial entries, and locating assets, funds, profits or losses that may have been hidden or manipulated so as not to appear in the records of the actual financial statements of a business.

Function

Forensic accountants examine financial statements, reports and any other information relating to a business's financial state and processes in order to determine the reality of a business's financial existence. They are most commonly used in the investigation of suspected fraud, misconduct or violation of industry standards.

Features

Through the use of accounting standards, auditing and investigation a forensic accountant will analyze a company's financial status. Some companies use forensic accountants in the process of initiating internal audits to prevent fraud from occurring.

Identification

Forensic accountants differ from other types of accountants because the focus of their examination is in the reconstruction of financial conditions, investigation of potential fraud, and the analysis of the financial reality of the company. While other types of accountants may perform duties that fall under forensic accounting, the specialized training of the forensic accountant in acquiring an understanding and being able to present a complete picture of a company's financial status in a short time is unique to the profession as is their ability to reconstruct financial records from incomplete or manipulated documents.. Additionally, their comprehensive training in the rules and regulations of the judicial system in the role of expert witness separates them from other types of business accountants.
There are several things that will indicate that forensic accounting may be needed:
• the presence of Special Purpose Entities (SPE) in a company's financial report. SPE's were used by Enron to hide fraud in its financial reporting by assigning to them contracts and payments that did not really exist. The presence of an SPE indicates a need for further investigation into the validity of their existence.
• notation in the footnotes of annual or quarterly financial reports of any insurance policies being held by the company in case of legal action against the company.
• an unexpected switch in company auditors.

The IASB (International Accounting Standards Board) currently recommends that the presence of the following indicates a company should conduct a yearly Forensic Audit to prevent fraud or misconduct from occurring:
• Pension plans. While common to a majority of companies, the structure of pension plans with their delayed payout is one of the most likely and easiest areas in which financial misconduct can be hidden.
• Liabilities and assets. Similar to pension plans, this is an area of financial accounting that has proven well-suited to disguising losses through the falsifying of asset acquisition reporting and requires a careful and thorough investigation to detect.

Benefits

A Forensic accountant not only provides an accurate and realistic understanding of a company's financial status and practices in a court of law, but can help a company to prevent illegal practices from taking place. A forensic accountant can provide an impartial and authoritative analysis of a company's finances with the added benefit to the company that should legal action be required, the forensic accountant's reporting has already been done to the standards required of an expert witness. They can also prepare accounts from incomplete records; compile a loss-of-profits claim; and create a visual presentation of evidence.

Resources

• The Legal Role of a Forensic Accountant