A Basic Understanding of Forensic Accounting

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Forensic accounting is a newer accounting specialty that has become more popular in the last several years but many professionals don’t have a strong understanding of what a forensic accountant does.  In this post, we will define forensic accounting and get a better understanding of this specialty profession.

Forensic Accountant Defined

The American Institute for Certified Public Accountants (AICPA) defines forensic accounting as a service involving the application of specialized knowledge and investigative skills possessed by CPAs to collect, analyze, and evaluate evidential matters and to interpret and communicate findings in the courtroom, boardroom, or other legal or administrative venues.  The term forensic means suitable for use in a court of law.  

Authoritative Guidance for Forensic Accounting

Authoritative guidance for forensic services is found in the Statement on Standards for Forensic Services (SSFS) No. 1.  This statement went into effect for all engagements accepted on or after January 1, 2020.  This statement was issued to consolidate the guidance provided by The AICPA Code of Professional Conduct and the applicable portion of the Statement on Standards for Consulting Services No. 1.  As the area of forensic accounting grew, it had become necessary for the AICPA to increase the level of consistency across the forensic accounting services profession as well as protect the public interest, and the decision was made to implement SSFS No. 1 to provide specific guidance to those providing forensic accounting services.

Services Offered by Forensic Accountants

Forensic accountants are often brought into a court of law when an issue is being litigated or a financial argument is being decided.  Forensic accountants are seen as master puzzle solvers and can unravel all types of financial and compliance problems and issues.  Forensic accountants work across all types of entities including for-profit, not-for-profit, and governmental and they work on cases for individuals.  Forensic accountants are contracted to work on bankruptcies, divorces, misappropriation of asset claims, financial statement fraud, contract disputes, shareholder disputes, and damage calculations.  They are also engaged to conduct fraud risk assessments and review current internal controls to help minimize the risk of asset misappropriation of assets and financial statement fraud.    

Identifying the Engagement as Forensic Accounting

SSFS No. 1 provides guidance to follow to determine if certain audit engagements are actually forensic accounting procedures being performed.  If a member of an audit team is engaged to perform audit procedures in response to specific concerns of wrong-doing, then the procedures fall under the umbrella of the audit itself and SSFS No. 1 is not applicable to the situation.  Even if the audit team engages a forensic accountant to assist in some of the audit procedures, SSFS No. 1 is not applicable as it is an extension of audit procedures subject to auditing standards.

SSFS No. 1 states that it is more important to look at why a service is being performed, not what the service is, to determine if the service falls under this standard. Often an engagement will start as a valuation or consulting engagement and change into a forensic engagement.  The original standards being followed for a valuation or consultation will be substituted with SSFS No. 1.  SSFS No. 1 specifies that if the engagement being provided is for litigation or an investigation (as defined by the standard), then the forensic accounting standards are applicable and must be followed for the engagement.