Forensic accounting is a specialized field that deals with the application of accounting skills for legal financial issues. The merits and demerits of this field are discussed in this article.
Accounting, as such, is a wide subject which includes many areas of specialization. One of them is forensic accounting. Accountants specializing in this field use skills to investigate and analyze financial information. They generate reports, stating their findings, which are acceptable in the court of law for legal use. This field requires thorough knowledge about business, law and finance, along with accounting skills. With this kind of knowledge, financial accountants are able to identify fraud or embezzlement in a business organization. Forensic accounting is also useful to assess losses, in cases where financial compensation is asked for. In cases of divorce, it comes into the picture for establishing adequate compensation required for spouse and child support. This field is also useful in many cases involving finance. However, it has its own set of pros and cons.
Advantages of Forensic Accounting
✔ Fraud Identification and Prevention
Fraud is quite common in big organizations where the number of daily financial transactions is huge. In such an environment, an employee can easily undertake fraudulent activities without being caught. Forensic accounting helps in analyzing whether the company’s accounting policies are followed or not, and whether all the transactions are clearly stated in the books of accounts. Any deviation observed in the books of accounts can help in identifying fraud, and necessary measures can be taken to prevent it in the future.
✔ Making Sound Investment Decisions
As forensic accounting helps in analyzing the financial standing and weaknesses of a business, it provides a path for investors to make thoughtful investment decisions. A company dealing with fraud is definitely not a good option for investment. Therefore, the reports of forensic accountants act as a guide for potential investors of a company. Many organizations also apply for loans from various financial institutions. By performing an analysis, such institutions can come to a decision on whether they would like to fund a company or not.
✔ Formulation of Economic Policies
Various cases of fraud that become evident after forensic analysis act as a reference for the government to formulate improved economic policies that would be able to curb such fraudulent activities in the future. By doing so, the government can strengthen the economy and prevent such illegal activities in the country.
✔ Rewarding Career Opportunity
As a career, forensic accounting is extremely rewarding, as it not only involves regular accounting activities, but also involves identification, analysis, and reporting of the findings during an audit. The acceptance of reports generated by a forensic accountant by the court of law, gives them an upper hand as compared to other accountants. Good forensic accountants are in high demand and can easily draw a starting salary between $30,000 and $60,000 per annum.
Disadvantages of Forensic Accounting
✘ Confidentiality Issue
Since the scrutiny of a company’s financial records is done by an external forensic accountant, the chances of leakage of confidential matter is always there. It is true that their code of ethics clearly mentions that forensic accountants and other members involved in the scrutiny must not engage in disclosing confidential data to outsiders, but the possibility of disclosure cannot be nullified.
✘ Increased Chances of Threats and Negative Publicity
If the analysis of a company’s financial statements points out the involvement of a particular person in fraudulent activities, there is a significant chance that the person will try to threaten the company to safeguard himself from the trial. Also, any trial that confirms a fraud happening in the company comes under public eye and gains negative publicity, which directly affects the reputation and investor relations of the company.
✘ Costs a Lot of Money
Forensic accounting can be an expensive affair because the procedures which accountants use involve high-end accounting software. If study results have to be presented in a trial, the overall expenditure goes up even further, because the fees of forensic accountants is quite high. This can be a matter of concern for the organization.
✘ Losing Employee Trust
It is quite obvious for employees to feel offended when they come to know that their job is under scrutiny by a third person. If no fraud is identified, employees are left with the feeling that the employer does not have faith in them. Lost trust can be difficult to regain in such cases.
✘ Limited Use of Services
Federal regulations limit the use of services from a single accounting firm. Suppose a company has tied up with one firm for auditing, it cannot ask the firm to provide other services to it. Therefore, a company has to reach out to several firms for carrying out its accounting tasks.
Despite the disadvantages associated with forensic accounting, it is, and will continue to be an important part in the world of business. This is because it helps organizations and individuals to figure out whether their financial accounts are accurate or fabricated to hide illegal activities going on within the organization.