Forensic accounting is an investigation on suspected or alleged fraud or irregularities which could result in litigation, court of law inquiry as well as disciplinary proceedings. The forensic accounting investigator focuses mainly on accounting issues and processes but his investigations may extend to general issues so as to gather detailed accounting information and more evidence.
When is forensic accounting necessary?
Forensic accounting is appropriate to carry when there are suspected or alleged fraudulent activities by employees as evidence by increasing costs, shortage of money, when accounting entries are not balancing off or even by a sudden change in an employee’s lifestyle which might not be justified by his remuneration. Forensic investigations are necessary when there are disputes regarding the acquisition of company assets as well as business valuations and also when there are losses or other economic damages which may be through tort or breach of contract. In-house forensic accountant The company may employ an in-house forensic accountant who is conversant with the basics of accounting and accounting concepts or who can outsource the service from Accounting and Finance practitioners only when it is necessary. Forensic auditor The forensic auditor would use all means possible to gather all necessary information and give expert evidence in order to bring the case to trial and enforce the judgment under the court of law.
Importance of forensic accounting
For the survival of the business
The results of forensic investigations lead to business continuity because the information will be used in the decision-making process and to improve company processes and procedures.
To curb fraud
Forensic accounting is important because it reduces the probability of accounting fraud by bringing the alleged criminals to book. It involves investigations on accounting and general issues.
To reduce employee dishonesty
It is used to close the avenues that may lead to employee dishonesty and set a punishable yardstick to other employees by punishing those who are found guilty.
To track accounting loopholes Forensic investigations will pinpoint loopholes in the accounting processes and procedures which exposes the organisation or to track down a journal entry which was incorrectly entered. This will help in the perfection of accounting processes and general procedures through making decisions that are based on facts and actual findings.
To develop an appropriate fraud response plan The forensic investigations results are used to develop and implement an appropriate response plan to fraud and dishonesty of employees.