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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.

More from Jim Ethell…

About the Author

Jim has over 25 years of varied management, finance and accounting experience as a CEO, CFO and Controller. He has served companies ranging from start-up to operating divisions of Fortune 500 companies. Jims experience encompasses industries including medical device and electronic manufacturing, distribution, service and not-for-profit in both domestic and international markets. Jim combines his knowledge of accounting and financial matters with a very strong background in business process management and optimization, along with extensive enterprise system deployment experience. Jim is able to work with all levels in an organization and his strong team approach makes him a valued addition to any organization.

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