Business forensics and forensic accounting
Commercial Forensics appears as a new branch of the financial industry with the aim of determinate fraud and areas of possible fraud in financial and business transactions. With primary anti-fraud activities, business forensics deals with the area and by determining the risk of fraud, and performing financial forensics evidence.
Recent global economic crisis affected the economic and social circumstances in the business environment, bringing some new indicators of poor business practices. Many years of slow growth of national economies and low levels of liquidity in the real sectors, created space to fraud, corruption and various manipulations. The goal of business (accounting) forensics has been to counter just such occurrences, and by emerging them discover, investigate and prosecute. Business Forensics is a new area of accounting and finance in Croatia, while it is the present in EU countries, especially in US for a some time.
Business forensics is a branch of accounting that requires a professional job of certified experts, and in which strong links between business and the economic and legal professions are occurring, particularly in the fields of accounting and auditing, criminal and property law and in the field of criminal investigations. We’re talking about a specific area of investigations and evaluations in the field of criminal and other illegal business developments and the situation in the functioning of business on the large scale. The research focus of business forensics is to estimate a true and fair interpretation of economic categories and documents, business records and accounting reports for business, legal, and other needs.
Business forensics experts
Business forensics is a general term used to describe any kind of economic investigation, the outcome of which may later lead to legal or other consequences. Specific tasks and activities, which could be attributed to a single business forensic expert have not been fully defined and easy to interpret, therefore, forensic accountants are carriers of the activities of professional criminal investigators and other illicit activities discovery of economic activities. With a high level of business and economic knowledge and skills, business forensics experts have very good knowledge of the legality of accounting, auditing, and business and financial statements. It takes the knowledge and experience in the research of economic fraud. The definition of forensic accounting is linked to fraud, fraud prevention and investigation of fraud. The goal of forensics experts is used to detect a fraud, whereby the collected evidence is usable in the lawsuit, and that forensic expert reports are used as proves in court.
Forensic accounting vs auditing. What’s the difference?
There are two basic differences between the financial statement audit and accounting forensics. The financial statement audit checks whether or not the information from the financial statements realistically displayed in the period of one year. Forensic audit has no such time limit. This means that a forensic audit can check and investigate the individual accounts of their creation. The differences between the financial statement audit and forensic accounting are best expressed in the reporting phase. Specifically, as the final result of the process of auditing the financial statements the auditor expresses an opinion. A significant discrepancy in the information in the financial statements with the set criteria can result in expressing a negative opinion, positive opinion, or the auditor may refrain from expressing an opinion. On the other hand, if a forensic auditor discovers fraud, he should legally investigate fraud, and point out on those who are in any way contributed to the commission of fraud.
Forensic accounting – Areas of activity
Each company, regardless of size, should have adequate control and supervision system, and the top management takes the main responsibility for the true and fair presentation of the financial statements. The accounting documents and reports are the main evidence of assets and financial operations of each company. Manipulation in the accounts implies fictive or incorrect processing of data, with the intent order to hide the true picture on the status of asset, liabilities and business results. The end result is the creation of false (desired) results.
The two most common areas for the possibility of detecting manipulation in business enterprises (“red flags”):
- False accounting treatment or reporting
- inventive use of accounting (improper creative accounting)
- excessive use of flexible (legal) choice of accounting methods, procedures and assessment
- abuse of accounting estimates in order to show a better financial position (or worse)
- changes in actual financial data to what we want to show (shareholders, investors, banks)
- Business and organizational disorder and inadequate internal control system
- entirely centralized management system
- there is no possibility (or will) for the establishment of an effective system of internal controls and internal audit
- avoiding delegating tasks
- undefined organization, authorities and responsibilities
We should never forget that fraud typically occurs in places where control is weak, not applicable or does not exist. Therefore, the effect of accounting forensics can be viewed from two aspects:
- prevention or discouraging of fraud (ex-ante)
- confirm of doubt that fraud has occurred, or detect and prove the fraud (ex-post)