Forensic accounting is a specialty area that requires practice and preparation of reports suitable for dispute resolution and/or a court of law. The AICPA defines forensic accounting as “the application of specialized knowledge and investigative skills possessed by CPA’s to collect, analyze, and evaluate evidential matter and to interpret and communicate findings in the courtroom, boardroom, or other legal or administrative venue.”
Some situations requiring forensic accounting include: when there are indications of fraud; during shareholder disputes; marital dissolution; bankruptcy, insolvency; for record/transaction reconstruction; the calculation of economic damages; the search for hidden assets or hidden income; to investigate details of business valuation engagements; and business acquisitions or mergers, just to name a few.
Forensic accountants have certain procedures to gather financial information and related documents. The information is analyzed and strange anomalies are spotted that were overlooked superficially. Understanding how fraud occurs often helps to avoid disputes between business partners or other adverse situations involving monetary transactions. A forensic accountant will calculate economic damages and losses through tort, determine a business valuation, or investigate disagreements relating to company buyouts, breaches of warranty, or mergers/acquisitions. In the area of litigation support a forensic accountant explains the factual presentation of the economic issues of a case in either pending or existing litigation. This is what sets a forensic accountant apart from a CPA. They must be able to present in a concise manner that is easily understood by a jury and/or members of the court.
People have a misconception that when they initiate hiring a forensic accountant that the professional works for the client in a capacity as their advocate. “Forensic Accountant” as a term can be loosely defined as the application of accounting methods and investigative techniques to accounting evidence in regards to the investigation of crime and/or legal proceedings in a court of law. As such, the forensic accountant is expected to work independently to provide non-subjective conclusions, separate of any client advocacy. Thereby maintaining the ability to objectively testify as an expert and also withstand the scrutiny of the members of the court.
Kessler International, a global forensic accounting firm, reported a study focusing on accounting and law firms which showed significant growth in the demand for forensic accounting services over the past 40 years. Of those surveyed, 85% believed that forensic accountants require specialized skills and knowledge in order to identify and fetter out fraud that traditional accountants would miss. 75% indicated that because of the fast growing nature of the field, accountants lacking these specialized skills try to pass themselves off as seasoned forensic accountants. CPA’s at MX Advisors have the experience and specialized skills necessary for proper forensic accounting. We also teach classes to professionals on topics in forensic accounting.
-Darrin Maddox MBA, CPA, CVA