Why Is Forensic Accounting Knowledge Important
Apr 05, 2011
One of the disciplines of accounting that can be very important to organizations is forensic accounting. There are entire firms built around this specialty, certifications and professional organizations. Forensic accounting is more than just accounting and combines those talents with detective work to determine the root cause of a situation that brought about a certain accounting result. In one assignment I was brought into an organization because they knew something was wrong, but couldn't figure out what. Using the abilities to read financial statements, in-depth knowledge of how systems interact and accounting skills we were able to pinpoint the accounting and operational issues error that were the root cause and identify the true financial impact. The company's audit firm had missed it and filed the necessary returns and reports with the error included.
What was the error and how did it come to light. When we dug into the historical records it was discovered that inventory balances were not reconciled and were, in fact, over stated by over a million dollars. Needless to say this had a major impact on the organization and it's profitability. The inventories were overstated because the bills of materials of this organization were inaccurate. The organization had failed in their accounting basics and weren't doing their necessary account reconciliations on a regular basis. The organization's accounting professional assumed that this basic practice was being performed and didn't ask about it as part of their quarterly and annual reviews.
This issue could have been avoided and discovered early on if the organization had stuck to accounting basics and performed this reconciliations. Instead they went through a costly forensic accounting project.