Before discussing what forensic accounting report is, it’s good to define what ‘Forensic Accounting’ is. First, the report is made by forensic accountants that analyze, interpret and summarize difficult and complex business and financial matters. These professionals work in insurance companies, police forces, banks, public accounting firms and government agencies, to name some. Forensic accounting, on the other hand, involves compiling financial evidence, communicating their findings through presentations, reporting and developing computer applications so that they could manage the collected information well.
Forensic accounting, forensic accountancy or financial forensics is the specialty practice area of accounting that investigates whether firms engage in financial reporting misconduct. Forensic accountants apply a range of skills and methods to determine whether there has been financial reporting misconduct.
Forensic accounting is a comprehensive field of professional practice for fraud investigation services. In fact, a forensic accountant plays a significant role in the process of detecting, preventing and prosecuting those individuals who are involved in criminal activity such as financial misstatement, money laundering, and identity theft (Honigsberg, 2020; Sanchez, 2012).
Besides, forensic accountants are expected to deal with computerized environments and engage with a variety of work such as information technology, data mining, and computer forensics (Pearson and Singleton, 2008; Rezaee and Wang, 2019; Van Akkeren et al., 2013). Pearson and Singleton (2008) named various cybercrimes where forensic accountants can take a significant role, such as credit card fraud, online narcotic sales, telecommunications fraud, online/email extortion, online gambling, theft of computer privacy and intellectual property rights.
Forensic accounting is an accounting specialty that describes engagements that result from actual or anticipated disputes or litigation. Forensic accounting analysis consists of analyzing financial documents searching for illegal activity within an organization, usually a white-collar crime. Although it is the courts that determine the existence or absence of fraud, it is the procedures used in forensic accounting that uncover irregularities that indicate the presence of willful misleading activities.
Forensic accounting audits relating to criminal matters often are called for when fraud has already been determined. In many cases this will involve the accounting information system assignment and accounts presentation to determine if numbers match reality.
Background of forensic accounting
The inherent aim of the forensic accounting profession is to support people, organizations and governments throughout one of the most challenging times, by providing a wide range of services that may maintain their ongoing (Howieson, 2018). Forensic accounting services are broad; thus, forensic accounting is a multidisciplinary specialization (Hegazy et al., 2017). Forensic accountants practitioners can work in different types of organizations including, insurance companies, public institutes, police forces, banks and government agencies (Tiwari and Debnath, 2017; Yogi Prabowo, 2013). Although there is an overlap between some services that forensic accounting provides (e.g. fraud detection and cybercrimes detection; litigation services and business valuation), the vast majority of research in the forensic accounting area have classified the services offered by forensic accountants into four main categories, which are litigation services (Heitger and Heitger, 2008), fraud investigation (Louwers, 2015; Van Akkeren and Buckby, 2015), computer forensic analysis (Pearson and Singleton, 2008) and business valuation (DiGabriele and Lohrey, 2016).
Procedures
The common procedures would be financial statement analysis, computer assistance, supporting document examination, investigation, and interview. This engagement involves professional firms with professional experiences, expertise in accounting standards, and legal background. In general, Forensic Accountants are required to have knowledge and experience in accounting and investigation skills. These are the most important requirements. Also, knowledge in those related industries is considered important to perform its works efficiently and effectively.
Why Forensic Accounting?
Forensic accounting is essential not only because they have a special skill and are trained in the investigation and expertise in accounting records, but also because of the evidence found playing a significant role in judicial decision making. This job is quite different from the auditor and cannot substitute by them. As we know, the auditor performs its testing in the accounting records against accounting standards like US GAAP or IFRS. Their responsibility is not to investigate and quantify the Fraud that happens in the company, and also, the evidence found by the auditor might not be used by the court. However, the evidence found by forensic accounting could be used by the court as expert evidence. For example, the FBI also has a forensic accounting team to work for them in investigating any matter related to accounting.
Provide Litigation Support
So basically, this is the popular service provided by Forensic Accounting. The Forensic Accounting report is prepared to support the litigation in the court in certain areas. For example,
- Produce the Profit and Loss report of the company. This is simply figuring out how much profit or loss related to the company, project, or related subject matter.
- Lost earnings/wages prepare reports related to loss or earn of the employee. The best example for this point is that, for example, there is the employee sue their employer for wrongful dismiss and the court wants to figure out what is the subsequent loss of this dismissed for the employee.
- Investigation of breach of contract of parties. This normally happens in daily business activities. Such examination will study the detail of terms of the contract, and the way how parties in the contract. The report on those who respect, disrespect, and loss as the result of the breach of contract will be calculated and present to the court.
- A wrongful death report is the result of an investigation related to death whether it is criminal or civil.
- Patent and copyright violation reports.
- Fraud Investigation report: This report used by the court and lawyer to understand and figure out the amount of loss and who are related parties.
- Business diminution report
- Professional malpractice report
- Wrongful termination report
- Others services
Sometimes, the lawyer or court must have someone who has the special skill in accounting and investigation skills to examine and produce the report on the areas related to accounting. These people have special skills in accounting and investigation and independence from all parties so that the report will be more reliable and no objection from all the parties.
Expert Witness Testimony
Because forensic accountants are independent and expert, they are preparing the expert report, but they also could be the witness used by the court. So that is the reason why a most forensic accountant is hired by a lawyer or court to investigate the subject meter and produce the report. They can witness areas like profit and loss, Fraud, patent and copyright, breach of contract, and many others. For example, the Forensic Accountant is engaged to investigate Fraud that happens in the purchasing department of a company and present its report to the court. In this case, a Forensic Accountant could also be the expert witness testimony on how the Fraud is committed, who committed Fraud, and the amount of loss. Such a witness will be part of the court’s decision-making. They could also be witnessed over the accounting records related to the dispute between shareholders.
Fraud Investigations
Fraud is a major expense to the company, and it is a virus that is hardly investigated and eliminated. The fraud investigation here could be performed in many different types of organizations like corporate, public, or private organizations. The investigation could also perform in many different areas like Fraud over financial reporting and Fraud over the entities’ assets. Yet, employee fraud investigation is the most popular service. For example, Fraud over salaries, inventories, fixed assets, or cash collects. In this case, forensic accounting could provide the investigation services and figure out how much the loss for those cases. The investigation report could also include the cause of Fraud, which involves with, and how the Fraud happens. Such an investigation is also similar to the audit.
Insurance Claims Analysis
The forensic accountant can help both policyholders and insurers prepare and review the claim based on the term and conditions that cover the insurance policies. The claim will prepare based on the deep and detailed analysis of the coverage in the policies on behalf of policyholders. In this case, a forensic accountant might work closely with the accounting assurance team that knows clearly about financial loss. In some cases, this service also allows the insurance company to review the claim submitted by the policyholder to quantify the claim amounts.
Advantages of Forensic Accounting
- It helps solve financial crimes.
As mentioned above, forensic accounting can greatly help in solving financial crimes. These can involve bribery within government offices as well as fraud and money laundering within business organizations. Forensic accounting not only helps with gathering evidence for crimes but can also be used in detecting and identifying crimes.
- It helps monitor professionals.
Forensic accounting can be used to assess the work of professionals, including accountants themselves. The findings from this assessment, in turn, can be used to file professional negligence claims against those who have been proven to have made critical errors (whether intentionally or not).
3. It helps businesses with their finances.
Businesses can use forensic accounting to detect anomalies among their staff and with third parties they’re working with. For instance, a company can ask a forensic accountant to check an employee’s purchasing records to see if all of his purchases were for business use or if he diverted some for his personal use.
Disadvantages of Forensic Accounting
1. It takes a lot of time.
Forensic accounting is never easy. It requires accountants to go through every piece of document to ensure that their investigation is complete and that they’ll uncover every evidence that will solve the case. This can take many days and can even stretch to many weeks or months, depending on the magnitude of the case, the size of the organization involved, and the number of documents to review.
2. It can be expensive.
Because of the lengthy period of time needed, forensic accounting can turn out to be expensive. This isn’t a problem for huge corporations that have more than enough funds, but it can be an issue for smaller businesses that have limited budgets.
3. It can be distracting.
Forensic accounting can cause a distraction among employees, particularly when outside accountants are brought in. The process can disrupt the staff’s normal routine and cause their productivity and efficiency to suffer.
4. It can affect employee morale.
Forensic accounting can cause employees to feel like their integrity is doubted, which can lead to lower staff morale. It’s the responsibility of managers and business owners to make their people understand that forensic accounting is done not as a sign of distrust but as a way to improve business efficiency.
Financial Forensic Accounting Can Be Called for in a Variety of Areas Including:
- Securities fraud
- Tax fraud
- Money laundering
- Economic damages calculations, whether suffered through tort or breach of contract
- Post-acquisition disputes such as breaches of warranties
- Bankruptcy, insolvency, and reorganization
- Business valuation
- Computer forensics
Writing the Forensic Accounting Report
Forensic accounting reports differ from other auditing reports in that they require the use of language and structure that detail findings acceptable to the court system. The report should be written so that it builds the case in series of steps. Regardless of whether the forensic accounting report is intended for use in civil or criminal litigation, they should contain all the pertinent details to the audit. A forensic accounting report should have the following characteristics:
- Accuracy: The report should contain all material and relevant evidence and witness statements. Any computational schedules should be correct.
- Clear: The report should use clear and simple language that is easy to understand. Slang and technical terminology should be avoided when possible. If technical terms are used they should be explained in the report.
- Just the facts: The report should only give the facts without bias or partiality. All facts should be shown regardless of which side they favor.
- Relevance: Ensure that all relevant information is in the report. If in doubt as to the relevance of information, then include it. Any information that has either a direct or indirect bearing on the case should be reflected in the report. Don’t include any non-relevant information.
- Omit opinions: You should never express an opinion of any kind on the guilt or innocence of any party involved.
Difference between forensic accounting and audit:
Forensic accounting and audit have some form of similarities and differences. For example, the purpose of a financial audit statement is to let auditors perform an independent review and then express an opinion. The auditor will only provide reasonable assurance on the financial statements. However, forensic accounting typically investigates the financial statements and quantifies the loss that might happen. They will not issue the opinion. Auditors are generally required to hold a CPA to sign the audit report. But, forensic accountants typically need both CPA and CFE. The audit report usually is not used for legal support; however, forensic accounting reports are typically used as an expert report to deal with the legal case.
Forensic Accounting Report
Preparing the Forensic Accounting Report is part of your major responsibilities if you are a forensic accountant. This task is normally done at the final stage of your investigation. In this article, we will tell you’re the main element that you should include when you prepare your forensic accounting reports. Before list down the main element that you should include in your Forensic Accounting Report, we would like to give you some main objective of forensic accounting report. Hopefully, you would have some idea about forensic accounting reports. Forensic accountant reports normally use as evidence to resolve the case and present to the person seeking forensic accounting service, normally lawyer, the insurance company, etc.
The main elements to be included:
1. Executive Summary of Report
Your Forensic Accounting Reports should provide a summary for your reader to make sure that they could get a clear understanding of your reports by not spending a long time. The importance of opinion and findings that you found during your tasks and you want your reader to pay attention to should be included here.
Executive Summary should include:
- Scope of service
- Objective of service
- Investigation Approach
- Summary of Finding ( key Finding)
2. Scope of works in the report
The scope of your forensic accounting works is really important both for you and the party who engage with you. Therefore, have to organize a good scope of work is really important.
Scope of works also helps forensic accountant to prevent and protect their liabilities to the company or other parties in case there are some problems occur. For example, there is fraud depend on the company, but it is of our scope of the accountant.
Make sure you include this in your Forensic Accounting Report.
3. State Findings in Report
Findings are the weakness, errors, or fraud that you found during the cause of your works. All of the findings should be rate base on the nature of finding, route cause and impacts. Clearly attach with evidence is really important to empower your findings. Wring the finding should be clear and concise. making sure that the findings are telling the true situation and represent fact. It probably different from audit findings, forensic accounting findings mostly face data.