Articles

The Importance of Forensic Knowledge
By: Cynthia Finn Barry, CPA
According to a 1998 survey, each incident of employee fraud results in a median loss of $116,000. One estimate suggests that, nationwide, losses due to fraud total $40 billion per year. Other estimates put this figure significantly higher indicating that fraud is often not detected and not reported. Due to the technology boom of the 90's, more financial records are on computers making paper audit trails a thing of the past. As a result, prevention and detection of fraud has become an increased concern for many companies and the need for a forensic accountant has escalated.

Forensic accounting techniques are used to detect crimes committed by employees, customers, suppliers and contractors. Financial fraud, which is the intentional misrepresentation of financial information for the purpose of deceiving the user, often involves creation of false records. Fraud auditing is different from financial auditing in that it focuses on motive and opportunity. The forensic accountant is trained to look beyond the numbers and identify weaknesses in controls while noticing the abnormalities that exist in falsified data.

The term forensic refers to activities that pertain to or are used in a court of law. A forensic accountant utilizes auditing, accounting and investigative skills to determine what has happened, measure the damages and provide litigation support to attorneys. Litigation support involves providing assistance to clients and their attorneys of an accounting nature in a matter involving existing or pending litigation. Generally issues relating to the quantification of damages will require a forensic accountant. In addition to investigating fraud losses, a forensic accountant is often called upon in the following instances:

• Insurance claims - Assists in obtaining necessary documentation to support or refute a claim. Also, assists in estimating claims for business interruption, employee dishonesty and property damage.
• Divorce services - Identifies the relevant documents to be requested from the opposing side. Examines and reviews financial records to determine actual income of a spouse for alimony and child support computations and to determine net worth for property distribution settlements. Performs investigative procedures designed to discover hidden assets and/or income.
• Lost profits analyses - Computes loss of profits resulting from breach of contract, construction claims, patent and copyright infringement, product liability issues and malpractice.
• Shareholder suits and partnership disputes - Measures damages suffered by shareholders in the event of mismanagement or management fraud. Performs a detailed analysis of several years of accounting records to identify and quantify the issues in dispute such as compensation and benefits.