Most people identify the word ‘forensic’ with criminal investigations that help put perpetrators behind bars. Along the same lines, forensic accounting is assumed to be involved with catching criminals committing financial crimes. While there is a hint of truth in this point of view, forensic accounting is often misunderstood. Even for professionals in the financial sector, there are some details they always miss through their operations. It is time we debunk the common misconception about forensic accounting and what it does to help you get a better understanding of what to expect from forensic accountants.
Myth 1: Forensic Accountants Only Review Tax Returns
For effective forensic accounting, forensic accountants must review various documents. While tax returns are among the many documents to review, forensic accounting also focuses on bank statements, budgets and resource allocation reports. Besides, the financial matter in investigation determines the necessary financial documents, and a forensic accountant will help you understand the documents needed.
Myth 2: Forensic Accounting Compromises Business Privacy
Financial information is always a sensitive topic for companies and organizations. Most businesses evade financial accounting firms, fearing they will go through their financial records and documents to jeopardize their privacy. This should not be an issue because strict non-disclosure policies and privacy agreements bind forensic accountants.
Myth 3: Forensic Accounting Reports are Complex to Understand
Most businesses need help understanding complex financial topics and reports from audits and investigations. This is not a concern since forensic accountants prioritize their client’s needs. They ensure that the reports are easy to understand for non-accounting professionals. They also present to clients to help them understand the results of the investigations and answer any relevant questions. Simplifying these reports prevents misinterpretation of results for better decision-making.
Myth 4: Forensic Accounting Only Applies in Prosecution
The most common assumption is that forensic accountants only work with prosecutors. There are numerous instances when forensic accounting services apply for civil legal disputes and company investigations. For example, forensic accounting professionals may investigate a person accused of hiding assets or finances. These professionals can dig deeper into complex financial documents to identify inconsistencies.
Myth 5: A Forensic Accounting Report Identifies the Embezzler
Forensic accountants rely on data and factual information in their services. In an embezzlement case, the information includes assets, money, source, where it went to, responsible officials, and supporting documents that show the theft of funds. A forensic accountant will generate a report to help file charges or prove that a specific person (s) committed theft. The report will not prove an employee’s guilt or innocence. Only the court can substantiate the information and conclusions of a forensic report to give a verdict.
Myth 6: You Do Not Need Forensic Accounting After Yearly Audits
Unsurprisingly, internal audits only uncover 15% of organizational frauds. More fraudulent activities are detected accidentally. Regardless of conducting yearly financial audits, forensic accounting is still required to uncover fraud and embezzlement. Audits only prove the fairness of a company’s financial reports within a given period. It also guarantees that the financial statements are accurate and consistent. Despite audits proving that financial statements are 100% accurate, they will not show the occurrence of fraud.
Myth 7: Forensic Accountants Help You Get Your Money Back
Companies and businesses believe forensic accountants will help them get their money back. Unfortunately, this is inaccurate because a forensic accountant only goes through the financial statements to identify fraud. They can use this information to credit or discredit courts in cases and show where the money went. Only attorneys can help you get your money back once forensic accountants prove that fraud and embezzlement occurred.
Myth 8: Forensic Accountants Only Investigate Corporate Fraud and Scams
While forensic accounting primarily works to uncover high-profile fraud and embezzlement, it also applies to daily contracts, disputes and court cases. Forensic accountants can investigate a couple’s finances in case one is suspected of concealing assets or hiding their real income. They may also investigate real estate investors trying to understand the level of monetary damages when a buyer breaks their contract or backs out of a deal. Forensic accounting may also help investors working on large commercial projects determine whether contractors are overbilling for services provided.
Myth 9: Any Accountant Can Conduct Financial Investigations
Even if someone is an accountant, they still require more skills and knowledge about financial investigations. Traditional accounting involves balancing books for accurate financial reporting through statements and transactions. Forensic accounting analyses the available data to detect and investigate fraudulent activities. Unlike other accountants, forensic accounting firms are experienced in accounting practices and can assist with litigation support.
With all the details covered above, businesses and companies will understand why and when to look for forensic accountants. These professionals are different from conventional accountants and should be treated as such. Despite internal audits not indicating the possibility of fraud, adequate internal controls may guide towards identifying misstatements with financial information.