With so much going on, blurring of the line between right and wrong seems to be taking a toll as the need for Forensic Accounting is rising. Let’s discuss this in detail and uncover why Forensic Accounting is the need of the hour as prospects of insolvency revolve around the financial market.
Why Forensic Accounting is so important?
If we go by the definition, forensic accounting is an investigative field that uses auditing, accounting, and investigation skills to carefully examine the finances of an individual or business and help them resolve financial problems while ensuring that they aren’t committing any cybercrimes and/or embezzlement. Moreover, forensic accounting is helpful in reducing any risks associated with contracts.
Now that we have established what forensic accounting is, it gets easier to understand why it is important, especially during these times. The COVID-19 situation has created an environment of unfortunate economic conditions. Backed by various government aid, grant, and deferral schemes, a window for opportunistic fraud has opened up.
While Forensic Accounting isn’t a new concept, the rising need to curtail business insolvencies and other nefarious activities has in turn triggered the need for Forensic accountants. Some of the major reasons, according to a report by Deloitte, that are rising due to the pandemic are as follows:
- Disclosure fraud
- Capitalization of expenses
- Restructurings and “big bath” charges
- Overstatement of revenue
- Understatement of allowances and reserves
- Manipulation of valuations and impairments
- Pressures arising from “stock-drop” litigation
- Internal Controls over Financial Reporting (ICFR)
What Forensic Accountants can ensure?
Fraud risks have increased because of the economic downturn created by the ongoing pandemic, as businesses and individuals face increased financial pressures. Forensic Accountants are trained professionals who leverage their accounting/auditing skills and combine them with their investigative skills to sense red flags in a business. In case, Forensic Accountants find pieces of evidence of any suspicious financial behaviors, then it is their job to track the roots of such activities.
Forensic Accounting keeps businesses from getting trapped in the Fraud Triangle (opportunity, incentive, and rationalization), which undoubtedly has been engulfing businesses during the ongoing pandemic. When you ask what Forensic Accountants can ensure, the answer is quite simple: they have expertise in following the trail associated with business insolvencies or other nefarious activities, and once they know it, they can help businesses recover from the same.
Implementing an effective Forensic Accounting strategy
Forensic Accounting isn’t a one-day job, it is a process that requires monitoring and going through years of financial data of an organisation. However, it is the pandemic that has raised concerns over fraudulent activities being carried out. Here are a few steps that Accountants need to follow in order to implement and incorporate an effective forensic accounting strategy into the existing business model of their clients:
- Go through the client’s general ledgers and build pivot tables. This will help in categorizing expenses. It will further help in identifying wrongly represented funds and/or expenses.
- Litigation: Thoroughly examine affidavits, contracts, and other legal documents of your client that contain all the legal data about how business is to be conducted by your clients.
- Training and development of skills to deal with unprecedented situations.
- Up-to-date with the latest industry knowledge and government policies.
- Continuous compliance monitoring, supervision, and oversight.
While Forensic Accounting has become very important during the ongoing crisis, fostering and practicing a culture of honesty and integrity is equally important for accounting firms.