Meaning, Definitions, Characteristics, Functions and Importance of Forensic accounting

15th July 2021 0 By indiafreenotes

Forensic accounting utilizes accounting, auditing, and investigative skills to conduct an examination into the finances of an individual or business. Forensic accounting provides an accounting analysis suitable to be used in legal proceedings. Forensic accountants are trained to look beyond the numbers and deal with the business reality of a situation. Forensic accounting is frequently used in fraud and embezzlement cases to explain the nature of a financial crime in court.

Financial forensic engagements may fall into several categories. For example:

  • Economic damages calculations, whether suffered through tort or breach of contract;
  • Post-acquisition disputes such as earnouts or breaches of warranties;
  • Bankruptcy, insolvency, and reorganization;
  • Securities fraud;
  • Tax fraud;
  • Money laundering;
  • Business valuation; and
  • Computer forensics/e-discovery.


Failure of audit:

Internal audit and audit committee as a point of the management function could not through light on the different facts and other hidden aspects of corporate fraud.

  1. Defective audit appointment method:

Rotation of the statutory auditor touches as part of the problem while it refuses emphasis but it adversely need longer duration. The method of appointing the statutory auditors used not foolproof as its books collusion and lobbying.

  1. Position of internal auditors:

The internal auditor can surely detect what was happening but they are hardly in a position to initiate proper action in proper time.

  1. Failure in scrutiny of certificates:

The certificate of the auditors are hardly scrutinized carefully especially when the reports are unclean and qualified.

Role of Forensic Accountant:

A forensic accountant is often retained to analyze, interpret, summarize and present complex financial and business information in a manner, which is both understandable and properly supported.

A forensic accountant is time and again involved in the investigating and analyzing financial evidence development of computerized application to assist in the analysis and presentation of financial evidence communicating their findings in a form of report exhibits and collection of document and assisting in legal proceedings, including testifying in court as an expert witness and preparing visual aids to support trial evidence.

The role of forensic accountant can be explained with the following points:

  1. Advice:

Giving preliminary advice as an initial appraisal of the pleading and evidence available at the start of proceedings.

  1. Identification of key documents –

Identifying the key documents which should be made available as evidence. This is important when the forensic accountant is acting for the defense and lawyers are preparing lists of documents to tender in court.

  1. Preparation of report:

Preparing a detailed balanced report on quantum of evidence, written in a language readily understood by a non accountant and dealing with all issues, irrespective of whether or not they are favourable to the client.

  1. Review of reports:

Reviewing the expert accounting reports submitted by the other party which may have impact on the quantum of evidence and advising lawyers on these reports.

  1. Briefing:

Briefing legal counsels of the financial and accounting aspects of the case during pre trial preparation.

  1. Initiative in Environmental accounting:

The other plane of the forensic accountant can initiate measure for introduction of environment accounting to highlight the damage done to the environment by the possible recoupment of such damages or replenishment of lost properties through environmental management continually.

The occupational fraud committed by employees usually involve the theft of Assets and embezzlement and the involvement of employees in kick back schemes or conversion of corporate assets for personnel use, the forensic accountant can intervene and observe the suspected examination of assets, invigilation, inspection or documents and interview of those involved to control such practices.

  1. Suggestions:

Experience and these type of engagement enables the forensic accountant to offer suggestions as to internal control that owners could implement to reduce the likelihood of fraud.

  1. Criminal investigation:

Besides, the forensic accountant will also engage himself in criminal Investigation on behalf of Police Force, where his report is prepared with the objective of presenting evidence in a professional and concise manner.

These assumptions often involve a detailed analysis of numerous years accounting records to qualify the issues in dispute. He does need an understanding of legal issues of business activities.

Advantages of forensic accounting

Forensic accounting is an area of accounting that requires deeper specialism than standard accounting. Large companies will have a dedicated forensic accountant to ensure they are always compliant and make sure financial exchanges with other parties are carried out correctly. It may be worth adding a forensic accounting professional to your business if you plan to grow, as the advantages of forensic accounting include:

  • Helps solve and prevent financial crimes
  • Helps monitor your current processes and teams
  • Helps evaluate the compliance of parties you are considering working with