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Before going into the specific role of a forensic accounting expert, it will be relevant to first know what forensic accounting and auditing is all about as well take a glimpse into where the concept originated from.
A forensic accountant is also known as investigative auditor or forensic auditor because of the specific area of accounting that they specialize in. He/she uses professional investigative skills in the field of accounting and auditing to compile information that can be placed in a court of law. Forensic accounting is implementing techniques to detect fraud and misuse on matters related to insurance, business disputes and intrusions, individual damage, cyber-crimes, business valuation and products liability. The practice of forensic accounting helps to estimate damages in all such cases.
Even though the concept of forensic accounting is thought to be a fairly recent one, in reality it stretches back to 3300-3500BC to ancient Egypt when accountants of the day were engaged in fraud detection and prevention. Around the 1800s, an association was formed in the USA between accountants and the legal profession and the former were often called to be witnesses in accounting fraud related cases.
An example of forensic accountants helping to get convictions is the famous Al Capone case in the USA. Even though Eliot Ness, a prohibition agent got all the credit, it was actually the behind the scenes work of Elmer Irey, then director of IRS that sealed the fate of the Chicago mobster. Elmer is considered to be the first high profile forensic accountant of the modern era.
The role of a forensic accounting expert is spread out over a whole range of activities. It starts with evaluating the overall financial position and goes into examining business records and looking for irregularities, tracing the flow of funds, meeting affected parties, investigating electronic data and its analysis and scrutinizing all historical records of transactions.
All these can be categorized as follows –
- Forensic Audit – It is examination and evaluation of financial information of an individual or a company that can be used as evidence in a court of law. It is usually conducted to prosecute someone for embezzlement, fraud and other financial claims and seek conviction in the case.
- Forensic Investigation – It is the compilation, gathering and analysis of physical evidence related to a crime. For a forensic accounting expert it is usually in the domain of investigating hard drives, computers, flow of crime related funds and fraudulent accounting entries and reports. It is basically to track and establish how a crime took place.
- External audit – This is distinct from internal auditors and accountants hired by a company. An external audit is carried out by an auditor engaged in public practice who gives a professional opinion in financial matters. Since the auditor is not connected to an individual or an organization, the opinion is always taken to be highly credible and authentic.
Apart from these aspects, a forensic accounting expert is often called to train internal auditors and investigators on mechanisms to detect financial fraud and embezzlement and to evaluate a company’s vulnerability to frauds.