Accounting has been around for a long time. One of its lesser-known branches is Forensic Accounting (or Forensic Audit).
Forensic accounting, or investigative accounting, is a unique professional field that combines accounting with information technology. A forensic accountant uses advanced computer programs to examine financial data and find evidence that would be valid during legal proceedings.
Forensic accountants are usually asked to review financial records for mergers and acquisitions. You can also serve as an advisor to a company’s audit committee or resolve shareholder disputes within the company.
The Babylonian Code of Hammurabi is the first authorized document known to man. Some of its fragments hint at the basic idea of forensic accounting: to prove fraud or a lie with accounting documentation.
It was not significant until the historical event of the 30s when Al Capone was arrested. Al Capone was a famous Chicago gangster of the prohibition law and the author of innumerable murders. Still, they could only be jailed when agent Eliot Ness and his team of “Untouchables” could find all the receipts. The receipts linked Capone to illegal gambling income and tax evasion from that income.
In recent years, fraudulent bankruptcies and accounting scandals in the United States, for example, Enron, Worldcom, and Tyco resulted in the United States Securities Commission investigating hundreds of companies. It will create a body to supervise accounting and conflict of interest issues.
In the case of Europe, the Parmalat fraud case in 2003 led the European Commission to establish a directive on audits, which included a tightening of national supervision of auditors. It will promote close collaboration between federal authorities and third countries.
Forensic accounting has developed significantly during the last ten years, its base being the public sector. Our best practices in this field have been created. An example is the Government Audits that articulate investigation processes with auditing.
Therefore, we can define forensic accounting as a science that gathers and presents accounting, financial, legal, administrative, and tax information. It will provide an accounting examination that the courts will accept since it will form part of the basis of the discussion, debate, and opinion of the sentence against the perpetrators of an economic crime.
The relationship between accounting and auditing terms with forensics becomes close to criminal evidence. Therefore, a forensic audit is initially defined as an audit specialized in discovering, revealing, and attesting to fraud and crimes in developing public and private functions. It also studies the effects of events that may or may not be criminal to provide the judge with evidence involving accounting records.
Approaches to Forensic Accounting
Given the characteristics of economic crimes, the participation of the accountant is necessary for the previous stage to conduct the investigations and calculations that allow examining the existence of the crime and, as far as possible, its amount to define whether the initiation of a process is justified penal. The most common case is the one that has to do with a scam based on accounting records and supports. The intervention of the forensic accountant can vary, from the quantification of fraud and the gathering of evidence to participation as a witness. It is going through activities as diverse as systematized applications to present the evidence.
Corporate crime investigations
These investigations relate to accounting and corporate fraud by presenting intentionally manipulated, inaccurate financial information. Examples:
- Business fraud
- Counterfeiting
- Money Laundering
- Economic losses in business
Commercial disputes
In this field, the forensic accountant can function as an investigator to gather evidence to prove or clarify some specifics, such as:
- Claims for breach of contracts
- Disputes for the purchase and sale of companies
- Claims for profit determination
- Claims for breach of guarantees
- Intellectual property disputes
- Disputes over project costs
- Discrepancies between partners and stockholders
- Measurement and Arbitration
Insurance claims
When the responsibilities correspond to the administration of the companies.
- Claims for the return of faulty products
- Claims for damage to property
- Claims for complex administrations and processes
- Verification of alleged claims
Professional negligence related to:
- Audit- Accounting
- Morals
- Quantification of losses affected by negligence
- Covers all professions, including Accounting, Medicine, Engineering, Law
- Evidence from professionals in Auditing and Accounting Standards
- Advice to plaintiffs and defendants
Brand valuation
- Intellectual property
- Valuations of stocks and businesses in general
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