What is Forensic Accounting?

Forensic accounting is the investigation of fraud or  financial manipulation by performing detailed research and analysis of financial information. People turn to forensic accounting in situations such as:

    • to uncover hidden or obscured divorce & marital assets,

    • to determine that the books are in order in mergers & acquisition,

    • to determine the nature of irregularities and perhaps uncover a pattern in company audits and

    • to determine exactly what is owed under the contracted agreement in contract disputes.

While not all engagements may end up in formal litigation, forensic accountants are required to produce information to a standard that would be suitable for use in a court of law.

Forensic accounting services can assist our legal colleagues in an investigation. This may involve legal proceedings or be in connection with allegations of, or concerns regarding illegal, unethical, or otherwise improper conduct, where the matter will likely be brought before a tribunal, court or hearing.

Forensic Accounting services include:

a) expert witness services

b) lay witness services

c) consulting expert report services

d) Family Court investigations and reporting

e) other investigation services.

Fundamental responsibilities of Chartered Accountants when engaged to perform Forensic Accounting services

APES (Accounting Professional Ethical Standards)215 requires members to observe and comply with their public interest obligations when they provide forensic accounting services. The Standard also reminds members of their professional obligations established in accordance with APES 110 Code of Ethics for Professional Accountants (including Independence Standards).

APES 215 imposes an obligation to members to comply with the independence definition of Part 4A of the Code when they provide forensic accounting services that require independence, or when they purport to be independent and with Part 4B of the Code when a forensic accounting service is an assurance engagement.

Rider Chartered Accountants Forensic Accounting Firm Sydney

Rider Accountants & Advisor is a Sydney based Chartered Forensic Accounting Firm and can assist you or your client find hidden assets, value contract terms, prepare expert reports, value assets or follow money trails in Australia and overseas.

Reach out to our experienced team if you have a matter requiring expert forensic accounting services whether for family law related hearings, court matters or tribunal hearings.

Steven P. Rider Practice Principal is a Chartered Accountant and CPA since 1997 with experience in the Supreme Court (NSW), Local Courts, and the Magistrates Court. Steven has experience in preparing expert reports related to tax matters, asset valuations, money trails and financial statement analysis.

Engaging a Forensic Accountant to Quantify Business Losses

To quantify business losses in a forensic accounting engagement, we follow a methodical approach. The process generally involves defining the scope, gathering and analysing data, and then calculating and presenting the loss amount.

🔍 Defining the Engagement Scope

First, determine the purpose and scope of the engagement. This involves understanding the legal or business context, such as a breach of contract, intellectual property infringement, or insurance claim. Identify the period of loss, which is the specific timeframe during which the business was negatively impacted. Also, define the specific nature of the business losses to be quantified, whether it’s lost profits, lost value of the business, or out-of-pocket expenses. This foundational step is crucial for directing all subsequent work.

📊 Data Collection and Analysis

This is the core of the methodology. We need to gather all relevant financial and operational data. This includes financial statements (income statements, balance sheets), tax returns, sales records, budgets, forecasts, and industry reports. The most critical part is performing a detailed analysis to establish a “but-for” scenario—what would have happened “but for” the harmful event. This involves comparing the business’s actual performance during the loss period to a hypothetical, counterfactual scenario where the event did not occur.

Key analytical techniques include:

  • Historical performance analysis: Use pre-loss financial data to project what the business’s performance would have been.
  • Industry and economic analysis: Benchmark the business’s performance against industry trends and general economic conditions to account for external factors.
  • Comparable company analysis: Compare the business’s performance to similar businesses that were not affected by the event.
  • Budget vs. Actual analysis: Analyze differences between the company’s projected budgets and its actual results.

📈 Calculation and Reporting

Once the analysis is complete, you will calculate the loss amount. This often involves calculating lost revenues, then subtracting avoidable or variable expenses to arrive at lost profits. It’s essential to account for mitigation efforts by the business. Finally, prepare a comprehensive report detailing the methodology, assumptions, data sources, calculations, and the final quantified loss amount. This report must be clear, well-supported, and defensible, as it may be used in litigation or other formal proceedings. The report’s clarity and completeness are as important as the accuracy of the calculation itself.

Forensic Accounting: Fraud Examination, Services and Types

Expert witness service – Accounting Professional Ethical Standards (APES)

APES 215 imposes mandatory obligations on CPAs and Chartered Accountants who provide expert witness services. It also requires CPAs/CAs who provide expert witness services, subject to any legal requirements or restrictions, to communicate a number of elements in any report.

APES 215 reminds members that in providing an expert witness service their paramount duty is to the Court and that they need to assist the Court in an objective and unbiased manner. A CPA/CA has an obligation to make it clear to the Court when a matter falls outside the CPA’s/CAs expertise and has a duty not to be an advocate for a party.

The information that a CPA/CA needs to communicate in an expert witness report is a mandatory requirement of the standard, and includes among other elements:

    • oral or written instructions received

    • limitation on the scope of work performed

    • whether any opinions, findings, or conclusions are not based on the CPA’s specialised knowledge

    • any relationships the CPA/CA or the practice or the CA/CPA’s employer has with any of the parties to the proceedings that may compromise compliance with the fundamental principles of the Code or the CA/CPA’s paramount duty to the Court and any appropriate safeguards implemented

    • the significant facts and assumptions upon which opinions or other evidence is based

    • any restrictions on the use of the report

    • a statement that the expert witness service was conducted in accordance with the Standard.

Refer to the standard for information concerning:

    • scope and application

    • definitions

    • fundamental responsibilities of CA/CPAs

    • professional engagement matters

    • expert witness services

    • false or misleading information and changes in opinion

    • quality control

    • professional fees

    • facts, assumptions, and opinions

    • decision tree to determine the type of forensic accounting service

    • examples of forensic accounting services

Some other considerations:

1. The difference between forensic accounting services which provide evidence to the court (i.e. expert witness service) and those which doesn’t involve providing evidence to the court.  Please refer to Appendix 2 of APES 215 for further guidance and details.

2. The obligations of practitioners who provide expert witness services and the required disclosures in the report of expert witness services.

3. The terms of engagement related to forensic accounting services shall be developed and communicated to clients, preferably before the engagement commences.

4. By law, when a member provides expert witness services, there is no legal prohibition for the member to provide other professional services to the client

APES 215 Forensic Accounting S