Insights |Investigations

14th September 2021

Forensic accounting: An overview

Within the vast field of investigations lies forensic accounting, a specialised service that combines accounting with legal proceedings.

Forensic accounting entails a process of auditing, accounting and investigation into a company’s finances. The information obtained can then be used in court, with forensic accountants often being required to give a statement as an expert witness on a case.

A forensic accountant typically begins their career as an accountant or auditor, before specialising and training for further credentials, for instance, the Certified Fraud Examiner (CFE) designation. To qualify, accountants require deep knowledge of tax legislation and financial reporting. The role involves a scrutinisation of accounts, finding hidden or concealed money, in an efficient and concise manner. Forensic accountants are versatile, working with data and numbers, and articulating their findings in a way that is presentable to a court.

A forensic accountant will be familiar with legal concepts and procedures and must be able to communicate financial information clearly and concisely in the courtroom. Likewise, their knowledge on regulatory compliance mandates and financial markets must be solid, in order for procedures to be correctly followed. Forensic accountants will also often need to review contracts, bank statements, accounting records or other data relevant to the investigation, all bearing on knowledge in financial crime and internal investigations. The information is reviewed to identify discrepancies or areas of inconsistency that support the case further.

Charlie Batho, a professional forensic accountant at ESA Risk, has shed some light on the ad-hoc nature of the job. “It is a unique form of accounting; each case is different and you can never be sure what you might come up against. There is no textbook guidance to it, each investigation is a one-off experience and every single case is different. When a company requires forensic investigation, it is usually for the first and last time. My job is to follow where the money has gone, usually in cash trails, scoping out how and why it has gone missing and providing answers for my clients.”

Forensic accounting involves working in a variety of areas, for instance in pre-litigation, accounting, complex finance and tax disputing.

Tax disputes

HMRC might start to litigate against an individual who is partaking in tax evasion, so when hired by that individual, the role of the forensic accountant would be to defend them, finding mitigating circumstances and evidence to demonstrate their innocence.

Marital disputes

In the case of a divorce, couples may dispute over the holding of shares. A forensic accountant would handle the financial disagreement and, if the case is taken to court, act as an expert witness. Depending on which side of the dispute they are hired to represent, the forensic accountant would explain the value of the shares and present a case for why their client is owed a certain amount.

Medical cases

In cases where children are born with disabilities or brain injuries, it is the job of a forensic accountant to establish what the ongoing capital award might be for the parents to look after the child for the rest of their life. Additions, such as ramps, shower-railings, disabled access around the house, a 24-hour carer and the annual RPI, must be taken into consideration. Forensic accountants project figures into the future to estimate finances, as well as looking retrospectively.

Fraud cases

In companies there are times accounts might be mishandled, cash goes missing or problems arise in internal accounting. Payroll fraud is an example of this, where employees add fictitious workers to the payroll and direct the money into their own accounts. It is the role of a forensic accountant to uncover and expose this kind of fraud to their clients.

Shareholder disputes

In business valuation, forensic accountants assist with valuing companies in various ways. For instance, two shareholders might each hold 50% of a company and one wants to exit and sell their shares, but there is a disagreement over the price to sell those shares for. Here, the forensic accountant will put together a financial report to support a case stating why the shares are worth more or less than the disputed amount.

Insurance claims

In cases that involve insurers not paying out, for example after a car crash, a forensic accountant would provide information to negotiate the claim. This would involve the worth of the car, comparing dealers’ prices and car policies on mileage.

Audit complaints

If an audit has been incorrectly taken and auditors have been negligent and misstated accounts or missed a fundamental accounting policy, a forensic accountant would have to prove how the auditors made an error, filing an insolvency case against them. This might be relevant if a company goes bust but the audit was previously signed stating that budgets and cash flows were all in order.

At ESA Risk, we offer expert litigation support and forensic accounting services, available for the consideration of any company or individual that requires assistance with a financial error or dispute.

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