What Is Forensic Accounting?
Forensic accounting investigations are a product of the forensic accounting process which is the review of accounting information that will typically involve the suspicion of financial irregularities that may or may not have arisen.
What Forensic Accounting Is Not
Forensic Accounting although a unique skillset; it is not separated from ‘accounting’ by separate qualification. You can be a forensic accountant by qualifying as an accountant. You can also become a forensic accountant without necessarily qualifying as a recognised accountant. It is however common that you might be a Certified Fraud Examiner for example instead of for instance being a qualified Chartered Accountant. A forensic accountant who appears as an expert witness at Court will typically be qualified with a recognised professional body.
However, the key distinction between an accountant who is undertaking accounts preparation compliance or providing tax advice, is not necessarily the different accounting involved per se but the purpose for which the accounting work is being undertaken.
Purpose Of The Accounting
The purpose of forensic accounting is that the accountant’s role is to address concerns about transactions entered into and to examine the effect of the same.
Why Use A Forensic Accountant
You would typically look to use the services of a forensic accountant if you are seeking to investigate financial suspicions, misconduct and fraud. However, as discussed later there might well be no involvement of any misconduct in many instances and a forensic accountancy services could still be very useful.
A forensic accountant will often be an expert at undertaking financial investigations, examining financial records and financial data.
Why Not Use Your Accountant
There is no reason not to use your reporting accountant to do your desired forensic accounting investigation if that person has the skills and expertise to do the job. However, an accountant whose expertise and experience is in the field of compliance and provision of tax advice will often not have the time and may not have the experience to undertake some of the larger forensic accounting investigations.
Is Financial Misconduct Inevitable?
It is by no means inevitable that there will be financial misconduct or irregularities discovered after using the services of a forensic accountant. The suspicion that there are financial irregularities, financial misconduct or even financial fraud does not mean as a matter of fact that there is the existence of the same. You employ the services of a forensic accountant to see if there ‘might’ be financial irregularities, financial misconduct or financial fraud. If you already know as a matter of fact (not suspicion) that there have been financial irregularities, financial misconduct or financial fraud you might well not even necessarily need to deploy the services of a forensic accountant to investigate.
Forensic accounting has a huge role to play in insolvency investigations. Companies that enter liquidation are typically fertile ground for investigation, to see why the company has suffered such a demise. The forensic side to insolvency is often undertaken by an Insolvency Practitioner themselves for the benefit of creditors, often by bringing insolvency claims.
The Forensic Accounting Investigations Process
There are typically three stages to the Forensic Accounting Investigations Process:
A forensic accounting investigation will typically start out by way of a client alerting a forensic accountant to their concerns. The forensic accountant will typically then seek to record the client’s concerns and the reasons for them inter alia for subsequent reporting purposes. This will enable the forensic accountant to ensure that they have addressed the key concerns and fulfilled the terms of their instruction and or engagement by the client.
The forensic accountant will then seek to unscramble the matter by collating the various sources of evidence that can be assembled so that investigations can be undertaken.
What Is A Financial Investigation?
Frequently there can be some confusion about what a financial investigation might be. It can be a very flexible concept. Sometimes a financial investigation will be undertaken to confirm known facts and sometimes to discover the unknown. It is all down to the nature of the engagement sought by the client. There is no prescribed format or formula.
In the first instance the forensic accountant will assemble whatever records the client has available for review and may well before undertaking a review ask the client for other records and reasons for unavailability if that happens to be the case.
Review Of The Initial Records Available
A forensic accounting investigation cannot be undertaken without review of financial accounting records. A review of what does exist in cases where records are incomplete will alert the forensic accountant to the potential need for further information and documentation that might not be readily ascertainable.
Discovery Through Sourcing Further Information And Documentation
Once the client has provided the forensic accountant with all the information and documentation that appear relevant to the matter being investigated from an organisation’s own records, the next stage will either likely be obtaining third party information and or interviewing relevant personnel who might be able to assist with the investigation.
Whether the forensic accountant decides to assemble third party information before interviewing people, doing neither or either one or the other, will depend upon the facts of the case and the nature of the client’s authority.
Information From Third Parties
Depending on the nature of the forensic accounting investigations being undertaken will relevantly control what third party sources of information the forensic accountant might wish to approach.
This can be a particularly important tool if the investigation appears to suggest that the records of the client might have been subject to false accounting. The purpose therefore will be to obtain information about transactions from third parties such as banks, customers and suppliers to see if their information matches those of the client or highlights discrepancies.
Interview Relevant Persons and Staff
Interview of relevant persons is a critical weapon in the armoury of the forensic accountant undertaking a forensic accounting investigation.
Being effective at such an interview process is often down to experience and in being able to spot the signs of someone who might not necessarily be entirely forthcoming with information, potentially even being untruthful. This is particularly the case when interviewing persons suspected of participating in the anticipated misconduct and even any fraud.
An essential skill is overcoming the natural human instinct in wanting to believe someone (the heart!) and ensuring that a story full of inconsistencies and implausibility is not too readily accepted (the head!), particularly when the historical documentary evidence says something else.
It is important also to remember that such interviews may have limited value if they relate to events from many years ago as memories fade over time and can be unreliable.
Such interviews might well be of the client’s employees for example. It may well also extend to customers and suppliers, and subject to cooperation even to their employees as well.
Range Of Sources Of Information
Certainly, a comprehensive forensic accounting investigation will typically want to enable a full range of sources of information so that the matter can be reliably concluded. It is important if possible to avoid reliance on selective evidence which can mean that unreliable conclusions can be formulated.
One of the best ways to avoid having a forensic accounting investigation that results in potentially unreliable conclusions is to obtain evidence from a wide range of sources that shows a consistent pattern. That is potentially powerful evidence as we shall see when a matter might later head into litigation, particularly if financial irregularities are discovered.
Reporting On the Forensic Accounting Investigation
In the main reporting on the forensic accounting investigation process will be to the client. However, there is other reporting that can and all too often does arise. There is statutory reporting.
There is a duty to report money laundering and suspicions of money laundering to the appropriate authorities without tipping anyone off. A failure to report is an offence, as is the tipping off of the reporting.
In the case of litigation as we shall come onto, there is conceivably the reporting under what is known as Part 35 of the Civil Procedure Rules to the Court as an expert witness.
Litigation Support With Forensic Accounting Investigations
Litigation through the Courts, all too often involves financial disputes where financial irregularities have been suspected, including in some cases fraud. Litigation is about winning and losing. In every case there is a winner and a loser.
If parties have been unable to settle their difference then a court process will often be the only way forward if one of the parties will not put the matter down to experience and walk away.
How Can A Forensic Accountant Help In Litigation?
A forensic accountant can help in litigation either if due to the complexity of the transactions, they are required to provide an independent expert opinion for the Court. This can be crucial to enable a client seeking to either prosecute concerns about financial transactions or defend them successfully when they might have been inadvertently caught up in the same due to a series of misunderstandings. This can be the difference between winning and losing.
What Is An Expert Witness?
An expert witness is a witness called by one of the parties in litigation to provide evidence to the Court. Typically, an expert witness will not be called to simply restate facts except where the transactions are particularly complicated.
Why Does The Court Need An Expert Witness?
Usually, a forensic accountant acting as an expert witness will be called upon to express an expert opinion in their evidence. The purpose of an expert witness providing such evidence is to assist the Court with impartial evidence from an expert in the relevant field. The duty of the expert witness is ultimately to the Court, not the client. That position applies even though it is the client who is footing the bill, not the Court.
A party to litigation cannot be an expert in their own case and may often in cases of financial irregularity need to utilise the services of a forensic accountant when needing to introduce what is known as ‘opinion’ evidence as opposed to evidence of ‘fact’. For example, a client shareholder concerned about the sale proceeds obtained by their company director in respect of the sale of some commercial premises might want to obtain ‘opinion’ evidence from a RICS valuation agent instead of either relying upon their own inadmissible views or even moreover those of the impugned director.
The Court will expect the highest of standards of integrity from the expert witness forensic accountant, failing which there could be serious professional consequences if the Court were to be misled.
Cross-Examination Of A Forensic Accountant
A forensic accountant who provides a report to the Court by way of a Witness Statement as evidence of their opinion will do so usually in the knowledge that their report and its conclusions will be subject to potential cross-examination by the opposing party.
This is one of the reasons that an experienced expert witness forensic accountant will know what to expect when they might be subjected to critical cross-examination of their evidence. Preparation for such cross-examination is key. Any expert report to the Court also should ensure that it properly references its findings to the historical documentary evidence to ensure that any opinion ventilated can be properly justified.
Are Forensic Accounting Investigations Only About Financial Irregularities?
No. Many forensic accounting investigations have nothing to do with financial irregularities and fraud. For example, parties may be in dispute and need a forensic accountant to quantify the losses arising from an act or event that has caused a dispute between parties. Such an example might be a loss of profits claim contested by an insurer (current examples might be Covid-19 business interruption claims).
Other forensic accounting investigations might involve business valuations for example in unfair prejudice disputes between shareholders, where one shareholder has to buy out the other from the business.
In the case of insolvency, suspected unlawful dividends might not be illegal and a forensic accountant might be called upon to express a view on the integrity of the accounts that were relied upon by the Directors to declare the dividends if the same has become the subject of a challenge at a later date by a liquidator.
Our CEO, Elliot Green has in his capacity as Liquidator of many companies, appeared routinely in Court as a witness in cases in which he has brought legal proceedings in circumstances of suspected financial irregularity and other such misconduct. He is routinely subject to cross-examination on his witness statements that he uses to further such cases, often of rectifying financial misfeasance and breach of duty.
Contact Us for a Free Initial Consultation on your case to see if we can assist you.
Disclaimer: this page on Forensic Accounting Investigations is not legal advice and not to be accepted as such. It is provided for information purposes only and not to be relied upon. You should seek independent advice on the facts of your case from an independent professional accordingly.