In broad terms, forensic accounting is the application of accounting expertise to issues that relate to actual or potential legal proceedings. This could include disputes between companies or shareholders as well as regulatory or internal investigations. A forensic accountant is not only an expert in the field of accounting but also highly versed in the criminal, civil or regulatory context in which they are operating.
Questions that forensic accountants will seek to answer include: What happened? Who knew? How much was spent? How much was lost? What is the value of X? Often this will be in the context of high-stakes, high-value issues that have the potential to severely impact the reputation – and possibly the solvency – of the businesses or individuals involved.
A forensic accountant delves further into the detail when investigating, analysing and understanding the numbers in a business than would typically be expected of an accountant. They will also draw upon commercial information (proprietary or open source), economic data and other sources to understand the implications of such factors on the matter in hand. They may need to rely on witness statements, interviews (conducted by themselves or others), emails and other non-financial information to reach their answers.
Forensic accountants regularly work alongside other experts such as forensic technology experts who assist in data identification, collection, preservation, and e-disclosure. They can tackle excessive data volumes and help the parties locate critical digital information by navigating the data minefield quickly and cost effectively, finding relevant documents from a myriad of electronic sources.
Although forensic accountants draw from a large body of quantitative and qualitative information to perform their analyses, they often face challenges around the quality, completeness and consistency of the available information. A key skill, therefore, is the ability to identify, assess and corroborate relevant information.
In contrast to a traditional accountant, a forensic accountant may also have to think outside the box and come up with new ideas on how to figure out a claim or investigate a matter within the limitations of each case.
Frequently there is not a definitive ‘right’ answer – either because of gaps or contradictions in information available, or because the question asked of the forensic accountants is inherently subjective (such as “how much money did this business lose to fraud?”).
Faced with this challenge, a forensic accountant will work through a range of alternative hypotheses and underlying assumptions and provide a range of potential answers, indicating which they believe to be the most accurate. Their work usually culminates in presenting their findings as an expert witness in court in a manner that can be easily understood by non-accountants. Forensic accountants know that it is not sufficient merely to reach a reasonable conclusion, but that they must distil information into a clear, well-argued and robustly evidenced narrative that can withstand cross-examination.
Forensic accountants may work in the private or public sector. Although they are often part of an external multi-disciplinary team brought in to deal with a specific issue, they may also sit in-house as part of an internal investigation function.
The beauty of working with a forensic accountant is that they are proficient at handling a variety of complex issues across different sectors, and are used to being parachuted into new cases and so will hit the ground running.
With their ability to dissect complex information and decide what is or isn’t relevant, a forensic accountant can support your business in times of crisis, helping you scope and guide your response. The use of external forensic accountants can relieve the burden on internal resources and ensure that any skills or technology gaps are filled.
The independence of external forensic accountants (compared to internal staff) is also vital when thinking forward to formal legal proceedings that may arise from an issue, often many years later.
Lastly, where appropriate, forensic accountants can also advise on how to prevent re-occurrence of the dispute, fraud or error that arose, for example by performing a fraud risk assessment for a business or a review of a draft sale and purchase agreement.
How can a forensic accountant help you or your business?
Although many people associate forensic accountants with investigating fraud (which is one of the key areas), there are many other aspects where they can help:
- Fraud and financial crime – A forensic accountant can investigate suspected fraud, allegations of bribery and corruption and/or possible money laundering in order to understand the impact on the business and enable the business to decide (along with their legal representatives) on how to proceed. Asset recovery is often paramount in such situations and forensic accountants will support this process by using asset tracing techniques such as funds flow analysis to help identify and recover losses.
- Quantum and valuation services – A quantum expert can provide advice or expert evidence about the value of a business or a specific asset/liability, should a dispute arise between two or more parties (whether they are corporates or individuals). For example, if one party has bought a business and thinks it is worth less than they paid, the expert can advise on the value of the business at the time of the acquisition.
A quantum expert may also assess and quantify losses or damages. For example, if there has been an issue with supply of products or services resulting in a loss of profits for a business.
- Personal injury and clinical negligence – A forensic accountant may also assist individuals in quantifying losses if they have had an accident or have experienced clinical negligence which has impacted their ability to continue working. A forensic accountant can calculate the loss of earnings and/or pension, in order for the individual to issue proceedings against the wrongful party.
- Auditor negligence and financial reporting disputes – A forensic accountant with audit expertise can provide specialist advice and/or expert witness services in relation to compliance with auditing standards and whether an auditor has been negligent (for example, by failing to identify fraudulent financial reporting). They may also quantify the impact of any negligence on the business. Financial reporting experts can opine on whether a business has complied with the relevant technical standards in its financial statements.
When to contact a forensic accountant
The best time to involve a forensic accountant is as soon as possible, ideally when identification of a potential issue first occurs, or in the initial stages of proceedings. A forensic accountant can provide an early assessment of the case, to help you decide whether it is worth pursuing and how to go about that in an efficient and cost-effective way.
Early involvement of a forensic accountant and forensic technology specialist is vital at the outset of an investigation to help identify and preserve potential evidence that will be central to the case.
Annabel Kerley is a partner and head of fraud and financial crime at Evelyn Partners. She has over 20 years’ experience as a forensic accountant and investigator both in private practice and for public bodies including the SFO and FCA.