Forensic accounting is also known as financial forensics or forensic accountancy which refers to a special area of expertise of accountancy in which engagements that are the outcome of anticipated or actual litigation or disputes are described. The meaning of forensic is “suitable for use in a court of law”, and the forensic accountants usually have to work to that potential and standard outcome. Forensic accountants are also known as investigative auditors and forensic auditors and they are often required at eventual trial to provide expert evidence. Specialist Forensic accounting departments are present in all the large accounting firms and also in many medium sized firms. A forensic accounting department may be further sub divided into various specializations, such as forensic accountants may specialize in personal injury claims, construction, insurance claims, royalty audits or fraud.
Categories of forensic accounting engagements
Forensic accounting engagements can be divided into many categories like:
- Insolvency, bankruptcy, reorganization.
- Business valuation
- Post acquisition disputes like warranty breaches or earn outs.
- Securities fraud.
- Calculations of economic damages whether it is suffered through breach of contract or tort.
- E-discovery or computer forensics.
Many times, the professional negligence claims are assisted by the forensic accountants where they assess and comment on the work performed by other professionals. Another area where forensic accountants are engaged is marital and family law to analyze lifestyle for the purpose of spousal support, equitable distribution and to determine income that is available for child support.
Engagements often relate to criminal matters that generally take place as the consequence of fraud, and they often involve assessing the accounts presentation and accounting system in order to find its accuracy and fairness.
There are some forensic accountants who specialize in forensic analytics that deals with procuring and analyzing the electronic data to detect, reconstruct or support claims of financial fraud. The key steps of forensic analytics are collection of data, preparation of data, analysis of data and reporting.
In forensic accounting, forensic accountants are needed to use the understanding of business information, economic theories, accounting and auditing procedures and standards, financial reporting systems, data analysis techniques for fraud detection, data management and electronic discovery, litigation procedures for doing their work.
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