Forensic Accounting Warnings For Businesses Part 1
Forensic accounting, also called financial forensics or forensic auditing, is an area of accounting that investigates actual or anticipated disputes. Forensic accountants examine data to determine where missing money has gone and how to recover it. They are not simply accountants who appear as expert witnesses for law firms; but also investigators who spend time interpreting financial evidence and they do on finding it. They use accounting, auditing, and investigative skills to examine the finances of an individual or business. They prepare reports of their findings as evidence during legal proceedings, where some testify as expert witnesses. They work at public accounting and consulting firms, law firms, law enforcement agencies, and insurance companies. Forensic accounting is used in fraud and embezzlement cases to explain the nature of a financial crime in a court. Disputes can range from business-related litigation to marital dissolution. Because a forensic accountant’s job is crucial for financial security and safety, the position requires certain competencies. At Compass Accounting we handle both litigation support and investigative accounting.
Here are a few things forensic accountants look for when they are examining a company or an estate.
Significant Inventory Changes - Dishonest companies typically use a combination of several methods to commit inventory fraud. Fictitious inventory, manipulation of inventory counts, non recording of purchases, fraudulent inventory capitalization to name a few. These elaborate schemes have the same goal of illegally boosting inventory values. The goal is to create various records for items that do not exist in order to increase inventory asset value. That can be accomplished by unsupported journal entries, inflated inventory count sheets, false shipping and receiving reports and fake purchase orders. It can be difficult to spot false documents, the forensic accountant normally uses other means to support the existence and value of inventory.
Unreported Documents - Documents pertaining to extra income or assets that are important to the valuation or devaluation to a company or estate are also critical pieces that forensic accountants try to uncover. These can be a bit trickier to surface, but forensic accountants look past the numbers and into the reality of a business to discover the truth behind the numbers.
Accounting Discrepancies - Accounting errors are very different from accounting fraud. In accounting fraud an intentional mistake is made to misrepresent financial information or to conceal assets. Accounting errors are easier to identify when they cause a difference between debit and credit totals of a trial balance. Financial statement misrepresentations are quantitative or qualitative statements that are in or are not in a company’s financial statements.
Annette Hamilton | 10/04/2021