Accounting is a primary function for companies and all organizations. This function relates to handling financial transactions. Usually, it involves recording, analyzing, summarizing, and reporting those transactions. In the past, accounting only covered the financial aspects of a company’s operations. Over time, however, its scope has increased to cover more activities. Today, accounting has many branches aside from financial accounting.
Accounting branches include areas where companies and other individuals can apply their concepts. Two of the primary areas where accounting can be helpful are financial and managerial accounting. Usually, these areas apply to all companies. Apart from these, auditing is also a crucial accounting branch, which is helpful to all companies. One more specific area in accounting involves forensic accounting.
What is Forensic Accounting?
Forensic accounting involves using accounting tools for fraud investigations. Usually, it involves detailed research and analysis of underlying financial information. Forensic accounting provides significantly more detailed reports than other accounting branches. Through its application, companies can identify frauds or financial manipulation. Apart from that, forensic accounting can also have other benefits.
Forensic accounting also involves financial information. Unlike financial accounting, however, it is more elaborate. Companies use forensic accounting to perform substantially detailed research and analysis. Based on that research, they can reach conclusions in forensic accounting reports. This report can then help in various matters. One of the areas where it is significantly crucial is litigations and other disputes.
Companies hire forensic accounting to help with the investigation and research work. Usually, they don’t have internal accountants who can perform these activities. Forensic accounting requires more work and experience in specific matters. However, this branch does not apply to all companies. Companies may need it in special cases. Therefore, having a dedicated forensic accounting team is not viable in the long run.
Overall, forensic accounting involves investigations and research through financial information. This branch requires accounting and auditing skills to support litigations and other similar matters. Usually, it requires more detailed work than financial accounting or auditing. Therefore, companies hire external forensic accountants to help them tackle specific cases. This branch entails performing similar activities as auditing but more specifically.
How do Companies Perform Forensic Accounting?
Forensic accounting involves investigating various matters. It involves similar activities as auditing but requires a more detailed approach. However, this approach differs from the most common external audits performed for financial statements. Depending on the type of forensic accounting, companies must use a different protocol for each assignment. In most cases, forensic accounting involves the following activities.
Investigation
An investigation is the essence of the forensic accounting process. This process involves collecting evidence in areas where fraud suspicions exist. Usually, accountants must consider any discrepancies in the data under examination. If this data provides red flags or indications of fraud, it is crucial to forensic accounting. The investigation process involves various forensic accounting procedures, similar to auditing.
Forensic accounting procedures
Companies use various forensic accounting procedures to investigate information. The most crucial of these is an inspection of supporting documents. Similarly, it involves inquiries from staff to gain more information. Based on this evidence, forensic accountants reach conclusions about the underlying assumption. This conclusion helps form the base for the forensic accounting report.
Report
One of the critical aspects of the forensic accounting process is reporting. Accountants must deliver their conclusions through a report. However, this report only includes a summary of the findings. Accountants prepare and present this report to specific personnel. The requirements for this report may differ based on the underlying type of forensic accounting.
Litigation
The last step in the forensic accounting process involves presenting the report for litigation. As stated above, forensic accounting usually involves legal matters. Therefore, accountants must explain the evidence they gathered and what it implies. Usually, this process occurs in the court. Litigation is the final process where forensic accounting plays a crucial role.
What is a Forensic Accounting Report?
A forensic accounting report presents a summary of the work done by a forensic accountant. This report includes their findings in view of the underlying issue. Based on this information, users can understand how the fraud occurred and the people involved. The forensic accounting report also determines how to handle the case.
The forensic accounting report also presents the accountants’ suggestions on the steps to take in the future. These recommendations can help companies prevent future incidents. Similarly, they focus on the areas where a forensic accountant finds or suspects fraud. These suggestions focus on bolstering internal controls and security. Moreover, it points out any issues that exist in the identified areas.
Preparing and presenting the forensic accounting report is a crucial part of the process. Usually, it occurs in the final stages of the forensic accounting process. Like auditing, this report plays a crucial role in reporting the summary of this process. It also serves as evidence in litigation matters to resolve the case. Forensic accountants prepare the forensic accounting report for a specific purpose.
Overall, the forensic accounting report summarizes the findings of a forensic accountant. This report includes several elements which dictate how to prepare it. Similarly, it is crucial in communicating the procedures used by forensic accounting and their results. On top of that, it outlines the fundamental elements that can contribute to the underlying matter.
How to Prepare a Forensic Accounting Report?
Unlike auditing and financial accounting, forensic accounting does not involve specific formats. It does not fall under the scope of any standards. Therefore, the forensic accounting report may vary based on various factors. Nonetheless, it must cover several areas and include them as a part of the final report. Some of the elements that contribute to preparing the forensic accounting report include the following.
Background
An essential part of the forensic accounting report is presenting the background. This section provides a summary of the company or matters under investigation. Similarly, it offers details on forensic accounting work and its scope.
Executive Summary
The forensic accounting report also provides an executive summary of the investigation. It covers the crucial areas where forensic accountants perform their procedures. Similarly, it summarizes their findings. These areas also include a more detailed explanation later in the report. The executive summary offers a brief version of the report.
Scope
The forensic accounting report also includes an area that describes the scope of the forensic accounting process. This area is crucial in defining what aspects forensic accountants consider in their work. On top of that, it helps define the responsibility of the parties involved in the process.
Examination findings
Forensic accounting examination findings show the areas where forensic accountants worked. However, it includes a more detailed explanation of each examination performed. This area links to the executive summary provided above. The examination finding reports all the fraud or red flags detected by the forensic auditors during their work. It also includes detailed analysis supported by evidence and financial figures.
Internal control findings
As mentioned above, forensic accountants also report their findings on internal controls. This area covers those findings based on the COSO framework for internal controls. Forensic accountants can use this area to report any internal control weaknesses they find during their work.
Summary of identified red flags
Forensic accountants can also provide a summary of red flags during their work in their reports. However, these do not constitute their findings. Instead, red flags detail the problems areas accountants faced during their execution.
Approach
The forensic accounting report also includes an area to show the approach taken by forensic accountants. This area presents procedures, planning, and information gathering used by the team. Similarly, it mentions the accountants involved in the process.
Deliverables
If the forensic accounting process involves any deliverables, the report will also mention that. It may include evidence to support the accountant’s findings in the forensic accounting process.
Conclusion
Forensic accounting is an accounting branch that involves fraud and litigation investigations. This branch takes a detailed approach to the process. Usually, it involves similar procedures as auditing. Based on their work, forensic accountants present a forensic accounting report. This report summarizes their findings and various other areas.