Forensic accounting, forensic accountancy or financial forensics is the specialty practice area of
accounting that investigates whether firms engage in
financial reporting misconduct.
Forensic accountants apply a range of skills and methods to determine whether there has been financial reporting misconduct.
History
Forensic accounting was not formally defined until the 1940s. Originally
Frank Wilson is credited with the birth of Forensic Accounting in the 1930s.
When Wilson was working as a CPA for the US Internal Revenue Service, he was assigned to investigate the transactions of the infamous gangster
Al Capone
Alphonse Gabriel Capone (; January 17, 1899 – January 25, 1947), sometimes known by the nickname "Scarface", was an American gangster and businessman who attained notoriety during the Prohibition era as the co-founder and boss of the ...
. Capone was known for his involvement in illegal activities, including violent crimes. However it was Capone’s Federal Income Tax fraud that was discovered by Forensic Accountants. Wilson’s diligent analysis of the financial records of Al Capone indicted him for Federal Income tax evasion. Capone owed the government $215,080.48 from illegal gambling profits and was guilty of tax evasion for which he was sentenced to 10 years in Federal Prison. This case established the significance of Forensic Accounting.
Application area
Financial forensic engagements may fall into several categories. For example:
*
Economic damages calculations, whether suffered through
tort
A tort is a civil wrong that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act. Tort law can be contrasted with criminal law, which deals with criminal wrongs that are punishabl ...
or
breach of contract
Breach of contract is a legal cause of action and a type of civil wrong, in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other par ...
;
* Post-acquisition disputes such as
earnouts or breaches of
warranties;
*
Bankruptcy,
insolvency
In accounting, insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet in ...
, and