The behaviour of management influences the culture of the company. Incorrect accounting practices, insufficient internal controls, incomplete or outdated documentation of procedures, and ineffective or absent auditors pave the way for fraudulent behaviour.
The evolution of society has also brought changes in business models. Economic development, the emergence of new technologies, and digitization has led to a radical transformation of the business concept and the way a business is run.
In this context, risk management and mitigation tools are vital for any organization. Effective control over all operations and resources is key to the success of any organization. This control, which leads to the reduction of costs and the minimization of business risks, is ensured by the activity of forensic accounting.
What is forensic accounting?
Forensic accounting is defined as the intersection of accounting and the law. Dating back to the 1800s, forensic accounting has developed since the 1980s.
Combining accounting skills with modern investigative methods to examine a person’s or business’s finances, forensic accounting is frequently used in fraud and embezzlement cases to explain the nature of a financial crime in court.
Forensic accounting performs two main functions:
- the expertise in litigation, which recognizes the role of the professional forensic accountant as an independent expert in the situation of litigation/dispute – this has the role of clarifying a certain state of facts, the object of the litigation.
- the investigation, which uses the skills of professional forensic accountants to discover the facts of fraud with financial impact – this is in response to specific concerns related to illicit facts in which the investigator is engaged to carry out procedures to collect, analyze, evaluate, or interpret certain evidentiary aspects for to support interested parties to conclude the validity of concerns about the existence of possible fraud.
In general, forensic accounting refers to fraud, namely the prevention, detection, and investigation of fraud. The main categories of fraud, identifiable both in private and public companies:
- asset embezzlement involves the theft or misuse of an organization’s assets;
- corruption involves the use of illegal or abusive influence in a business transaction to obtain a personal benefit, contrary to a person’s duty to his employer or the rights of another;
- misrepresentation of financial statements involves the intentional misrepresentation of financial information to mislead others who rely on it to make economic decisions;
- misrepresentation of non-financial reporting and other non-financial statements involves the intentional misrepresentation of non-financial information, including sustainability indicators (ESG – environmental, social, governance), to mislead stakeholders.
An experienced inspector, to identify persons who permanently cause losses to the company, must adhere to a certain procedure (let’s call them investigator).
Such investigative actions include primary analysis, planning, search for facts (evidence), analysis of evidence, report, and further support of the client. It is worth noting that such an order should be applied since its violation can lead to disastrous consequences.
Knowing the implications of fraud and any illegal phenomenon of an economic nature at the level of the organization, implicitly at the level of society, forensic accounting appears all the more important, which significantly contributes to the economic security of the organization. And hence, forensic accounting is envisioned to be a key component of an economy prepared for the future.
This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.