frequently asked questions

what is forensic accounting (and other faq’s)

what is forensic accounting?

Forensic accounting is the specialty practice area of accountancy, which describes matters that result from actual or anticipated disputes or litigation. “Forensic” means “suitable for use in a court of law”, and it is to that standard and potential outcome that forensic accountants generally have to work. Therefore, a forensic accountant prepares accounting analysis that is suitable for court purposes, with the objective of resolving a dispute.

what is the difference between an auditor (who conducts traditional financial statement audits) and a “forensic” accountant/auditor?

Financial statement auditors are not necessarily looking for fraud, but must consider the risks of fraud in conducting their audit (i.e. a “watchdog”). Conversely, a forensic accountant is typically hired to investigate specific allegations of fraud (i.e. a “bloodhound”).

what is involved in a typical forensic investigation?

Each situation involving fraud allegations is unique; as such, there is no “checklist” per se, when conducting an investigation. Having said that, there are general best practices that are normally followed. An investigation typically starts with a review of the allegations with the client to discuss the issues and objectives of the investigation. Priority is given to identifying and securing the potential sources of evidence, be it hard copy and/or electronic. Once the initial scope of work is agreed upon by the parties, the fieldwork is carried out, which can include: Review of documentation; witness interviews, search of hard drives and other electronic devices; physical search of work stations; preparation of schedules and analysis; and preparation of a report and document brief containing the documentation to support the investigation’s findings. The forensic accountant may also be requested to testify in court, in the capacity as an expert witness.

what are the different roles that a forensic accountant can provide on my investigation?

Forensic accountants can either serve as an advisor or expert witness, both working closely with client and very often, legal counsel. The advisor provides guidance and direction regarding the steps taken and consults on challenges and issues faced at all stages of the investigation, including litigation support should legal proceedings be required. By contrast, the forensic accountant who serves the role of an expert witness will conduct the fieldwork, prepare the analysis and report summarizing the findings of the investigation and if required, testify in court as an objective, independent expert witness.

what training/education does a forensic accountant typically have?

Forensic accountants typically have a professional accounting designation (such as a CA, CMA, CGA). In addition, forensic accountants can obtain a further designation that recognizes them as a specialist in their field. For example, the University of Toronto offers a two-year program that provides successful candidates a Diploma in Investigative & Forensic Accounting (DIFA). A Chartered Accountant who completes the requirements of the DIFA program will be recognized as a “CA•IFA “, or as a designated specialist in investigative and forensic accounting. Other specialist forensic designations include the Certified Forensic Investigator (CFI) offered by the Association of Certified Forensic Investigators of Canada and Certified Fraud Examiner (CFE) offered by the Association of Certified Fraud Examiners.

who typically hires a forensic accountant?

Forensic accountants can be hired by anyone looking to investigate allegations of fraud or suspected financial wrongdoing or to proactively determine where fraud may be at risk of occurring in an organization. Forensic accountants are often retained by lawyers, on behalf of their clients, in order for all communications between the forensic accountant and lawyer to be protected by solicitor-client privilege (until the matter goes to trial). However, individuals and corporate entities (including public sector and not-for-profit organizations) can also hire a forensic accountant directly.Forensic accountants can be hired by anyone looking to investigate allegations of fraud or suspected financial wrongdoing or to proactively determine where fraud may be at risk of occurring in an organization. Forensic accountants are often retained by lawyers, on behalf of their clients, in order for all communications between the forensic accountant and lawyer to be protected by solicitor-client privilege (until the matter goes to trial). However, individuals and corporate entities (including public sector and not-for-profit organizations) can also hire a forensic accountant directly.

what criteria should I be considering when retaining a forensic accountant?

Consider the following criteria when selecting a forensic accountant: An individual’s professional designations (i.e. do they have an accounting designation); the breadth and depth of their experience conducting investigations, particularly involving similar allegations; their ability to respond to your inquiries in a timely manner; their access to the right resources to complete the job; their ability to write clear, concise and objective reports; the transparency of the individual, I.e. are they prepared to provide me with a copy of their complete curriculum vitae? Also consider an individual’s presence in the forensic industry, which can be based on articles they have authored, presentations they have delivered, references in media, etc.

what are some situations that may require the expertise of a forensic accountant?

Any of the following would be situations where a forensic accountant can provide assistance:

  • You suspect that an employee has misappropriated funds from your organization;
  • You find an employee on the payroll who you don’t recognize;
  • You discover a paid invoice for a vendor that you never approved;
  • There is excessive loss of inventory relative to prior years;
  • You sell a really unique product, but you discover one day that a competitor is producing and selling a similar product (and this seems to coincide with the timing of departure of a senior employee at your company who was responsible for product development);
  • Your company requires dual signatures on cheques and you discover a cheque whereby one of the signatures appears to be forged;
  • You are a silent, minority shareholder of a company and you suspect the majority shareholder, who is actively involved in the business, may be involved in wrongdoing;
  • You are in the process of separating from your spouse and you are seeking Spousal and/or Child Support; you require a calculation of income of your spouse (particularly if you have reason to believe that your spouse is not disclosing all sources of their income).

what is fidelity insurance?

Also referred to as Fidelity Bond Insurance, are forms of business insurance that protect the insured against the loss of money or property resulting from dishonest or fraudulent acts committed by an employee. These policies may include a provision to cover the costs incurred relating to an investigation, such as forensic accounting and legal services.

what does a typical investigation cost? how long will it take?

It depends. Each investigation is unique and must be properly planned and scoped out. The cost of a forensic investigation is based on the number of hours required to complete the scope of work, based on an hourly rate, and is further impacted by: The nature/extent of the allegations; the number of documents required to be reviewed; the number of computers/electronic devices required to be analyzed; the number of witnesses required to be interviewed; the type of reporting required (i.e. written vs. verbal; formal report suitable for court including sworn affidavit versus PowerPoint); and whether the forensic accountant is required to testify as an expert witness in court.

what are some of the advantages of using an external, independent forensic accounting firm to conduct an investigation versus an internal resource?

When an organization discovers fraud allegations, there may be a tendency to react “emotionally” rather than “objectively”. Allegations are just that—they are not substantiated facts. Confronting an employee who is alleged to have committed fraud or terminating them without having conducted a proper investigation and seeking appropriate legal advice, could lead to bigger issues for the organization, including unnecessary and costly lawsuits. Accordingly, retaining an independent forensic accountant removes the emotions and brings an objective state of mind, focusing on the facts and allegations. A fraud can also distract employees from focusing on their primary duties, possibly resulting in further adverse financial consequences for the company. Finally, if a matter is expected to proceed to trial or other legal proceeding, a report prepared by an internal employee may be perceived as biased and lacking objectivity. Keep in mind that the work performed by an internal resource may be used, provided the external forensic accountant performs sufficient and appropriate procedures to satisfy themselves that they can rely on such work, in arriving at their own findings and conclusions.

can a forensic accountant testify in court as an expert witness?

Yes. A forensic accountant who possesses the appropriate background, skills and experience can testify in court as an expert witness. While legal counsel will present their experts and submit expert reports as evidence, it is ultimately the courts that determine whether an individual is considered an expert in a particular subject matter.