Glossary term
Forensic Accounting
Subject: Legal, Tax and Reporting, Financial Reporting and Audit
Also known as: Forensic audit, Forensic accounting investigation
Forensic accounting applies accounting, auditing and investigative skills to financial records to establish facts about fraud or disputes, in a form that can be used in court, regulatory action or negotiation.
Explanation
Practitioners trace money, rebuild transactions, analyse data for unusual patterns and interview people. Work falls into two strands. Investigation covers suspected fraud, embezzlement, bribery, asset tracing and money laundering. Litigation support covers quantifying losses, valuation disputes and giving expert evidence. It differs from a statutory audit. An audit asks whether statements are materially fair overall and uses sampling. Forensic work starts with a specific suspicion, is not limited by materiality and keeps evidence in a form that can survive challenge. Common techniques include ledger and journal analysis, bank statement reconstruction, document review and digital forensics. In some countries, including India, “forensic audit” also means an examination ordered by a regulator or lender into suspected wrongdoing. The report sets out findings and quantified losses, not legal verdicts. Boards read the report when choosing between dismissal, recovery, an insurance claim or a police referral.
Example
A company finds that supplier payments have risen faster than purchases. It hires forensic accountants, who copy the ledger under controlled conditions, match payments to deliveries and find one vendor with the same bank account as an employee. They trace payments totalling 400,000 over three years, interview the buyer, and deliver a report that supports dismissal, an insurance claim and a police complaint.
Not to be confused with
- External Audit
- An audit gives an opinion on the statements as a whole. Forensic accounting investigates specific suspected wrongdoing and quantifies it.