Forensic Accounting: A Basic Guide to The Profession
By, Alan Zysman, B.Comm, CA·IFA, CFE - Forensic accounting has existed for many years. With the growing complexities of the business environment and the growing number of business related investigations, forensic accounting professionals are increasingly asked to assist in the investigation of financial and business related issues.
What is Forensic Accounting?
The integration of accounting, auditing and investigative skills yields the specialty known as forensic accounting. "Forensic", according to the Webster's Dictionary means, "Belonging to, used in or suitable to courts of judicature or to public discussion and debate."
"Forensic Accounting" provides an accounting analysis that is suitable to the court which will form the basis for discussion, debate and ultimately dispute resolution. Forensic Accounting encompasses both Litigation Support and Investigative Accounting.
As forensic accountants, we utilize accounting, auditing and investigative skills when conducting an investigation. Equally critical is our ability to respond immediately and to communicate financial information clearly and concisely in a courtroom setting. Forensic accountants are trained to look beyond the numbers and deal with the business reality of the situation.
The utilization of specialized investigative skills in carrying out an inquiry conducted in such a manner that the outcome will have application to a court of law. A forensic investigation may be grounded in accounting, medicine, engineering or some other discipline.
An examination of evidence regarding an assertion to determine its correspondence to established criteria carried out in a manner suitable to the court. An example would be a forensic audit of sales records to determine the quantum of rent owing under a lease agreement, which is the subject of litigation.
An audit performed by an employee who examines operational evidence to determine whether prescribed operating procedures have been followed.
An audit performed by an auditor engaged in public practice leading to the expression of a professional opinion which lends credibility to the assertion under examination
What does a Forensic Accountant do?
A forensic accountant is often retained to analyze, interpret, summarize and present complex financial and business related issues in a manner which is both understandable and properly supported.
Forensic accountants can be engaged in public practice or employed by insurance companies, banks, police forces, government agencies and other organizations.
A forensic accountant is often involved in the following:
- Investigation and analysis of financial evidence;
- Development of computerized applications to assist in the analysis and presentation of financial evidence;
- Communication of their findings in the form of reports, exhibits and collections of documents; and
- Assistance in legal proceedings, including testifying in court as an expert witness and preparing visual aids to support trial evidence.
In order to properly perform these services a forensic accountant must be familiar with legal concepts and procedures. In addition, the forensic accountant must be able to identify substance over form when dealing with an issue.
What should I consider when retaining a Forensic Accountant?
The following issues should be considered on retaining a forensic accountant:
- The experience and qualifications of the forensic accountant.
- The forensic accountant should be retained as early as possible in order to obtain the maximum benefit. The assistance that a forensic accountant can provide early in the process can be significant in reducing the overall cost and maximizing the benefit. If retained early, the forensic accountant can assist with the Examination for Discovery, identify additional areas of damages, assist with settlement negotiations and provide a preliminary assessment of the quantum of damages.
- If the forensic accountant is being engaged as an expert witness then he or she should be given access to all of the relevant documentation. If restrictions are imposed upon the scope of the investigation there may be an impact upon the acceptance of the findings.
- In situations where counsel is involved, the forensic accountant should be retained by counsel so that the privilege which exists between the client and counsel will be extended to the work product of the forensic accountant.
What types of assignments does a Forensic Accountant perform?
Forensic Accountants become involved in a wide range of investigations, spanning many different industries. The practical and in-depth analysis that a forensic accountant will bring to a case helps to uncover trends that bring to light the relevant issues.
Detailed below are various areas in which a forensic accountant will often become involved.
Forensic investigations often relate to criminal investigations on behalf of police forces. For example, a forensic accountant may be retained by the R.C.M.P., the O.P.P., as well as by regional or local police forces and organizations such as the Law Society.
A forensic accountant's report is prepared with the objective of presenting evidence in a professional and concise manner.
Shareholders' and Partnership Disputes:
These assignments often involve a detailed analysis of numerous years' accounting records to quantify the issues in dispute. For example, a common issue that often arises is the compensation and benefits received by each of the disputing shareholders or partners.
Personal Injury Claims / Motor Vehicle Accidents:
A forensic accountant is often asked to quantify the economic losses arising from a motor vehicle accident. The forensic accountant needs to be familiar with the legislation in place which pertains to motor vehicle accidents.
Cases of medical malpractice and wrongful dismissal often involve similar issues in the calculation of the resulting economic damages.
Business Interruption / Other Types of Insurance Claims:
Insurance policies differ significantly as to policy conditions. Accordingly, these assignments involve a detailed review of the policy to investigate coverage issues and the method of calculating the loss.
A forensic accountant is often asked to assist from either an insured or insurer's perspective in the settlement of the case.
Examples of these types of assignments include; business interruptions, property losses and employee dishonesty (fidelity) claims.
Business/Employee Fraud Investigations:
Business investigations can involve funds tracing, asset identification and recovery, forensic intelligence gathering and due diligence reviews.
Employee fraud investigations often involve procedures to determine the existence, nature and extent of fraud and may concern the identification of a perpetrator. These investigations often entail interviews of personnel who had access to the funds and a detailed review of the documentary evidence.
Matrimonial disputes from a forensic accounting point-of-view often involve the tracing, locating and evaluation of assets. The assets to be evaluated and valued may be businesses, property or other assets.
Business Economic Losses:
Examples of assignments involving business economic losses include; contract disputes, construction claims, expropriations, product liability claims, trademark and patent infringements and losses stemming from breach of non-competition agreements.
These investigations are often approached from two different but complimentary perspectives, these being:
- Technical - has a breach of Generally Accepted Accounting Principles or Generally Accepted Auditing Standards or other standards of practice occurred;
- Loss Quantification.
- If the professional in question is an accountant then we are often involved with both perspectives. If the matter involves some other professional the forensic accountant will normally be retained to perform only a loss quantification.
Mediation and Arbitration:
Because of their familiarity and comfort with legal issues and procedures some forensic accountants have sought out special training and become involved in alternative dispute resolution (ADR).
ADR services include arbitration and mediation services which are designed to help individuals and businesses resolve disputes with minimal disruption and in a timely fashion.
Alan Zysman, B.Comm, CA·IFA, CFE has been in practice since 1984. His firm Zysman Forensic Accounting Inc. specializes in the provision of Investigative and Forensic Accounting services.
Mr. Zysman is a CA - designated specialist in Investigative and Forensic Accounting and a Certified Fraud Examiner. Mr. Zysman is a member of the Canadian Institute of Chartered Accountants, a board member of the The Alliance for Excellence in Investigative and Forensic Accounting, a member of the Association of Certified Fraud Examiners and the Arbitration and Mediation Institute of Ontario.
Mr. Zysman has appeared numerous times as an expert witness in accounting matters before the Ontario Superior Court of Justice and has also appeared before the Supreme Court of Newfoundland Trial Division.