Forensic accountants are uniquely suited to help in-house counsel address issues involving financial reporting, accounting and internal controls. Understanding what forensic accountants do, and how their role differs from other accounting and auditing functions, can help in-house lawyers best utilize their skills.
Forensic accountants collect and analyze accounting and internal-controls evidence. They produce a fact-based report that can inform the decision-making process in inquiries, investigations and dispute resolution.
Byproducts of a forensic accountant’s work often include remediation strategies to help a company mitigate and remedy procedural or internal-controls gaps that allowed the underlying issue to occur. Inquiries into accounting and internal controls raise a host of technical issues requiring specialized knowledge that forensic accountants are uniquely positioned to provide.
Forensic accounting differs from auditing in its objective and its practitioners’ skill sets. The objective of a forensic accounting assignment is to collect, analyze and report on the evidence or facts surrounding a particular act that often has litigious, fraudulent or criminal implications. Auditors also collect and analyze evidence, but an independent auditor’s objective is to attest to the credibility of assertions that are under examination, such as the material accuracy of financial statements for which the audited company’s management is responsible. Internal auditors examine evidence to determine whether people followed prescribed processes or internal controls; this occurs, for example, in an operational or Sarbanes-Oxley compliance audit.
Forensic accountants, independent auditors and internal auditors all have experience related to accounting and internal controls. All are process oriented and know how to spot issues. But one of the most important traits of a good forensic accountant stems from the difference in the work’s objective as previously discussed.Once an independent or internal auditor spots a concern, protocol is to notify company management about the issue but not investigate further; that’s management’s responsibility. This is where the objective shifts and one of the forensic accountant’s strongest skills comes in: an investigative mind that drives him or her to answer questions about what occurred, when and how it happened, and who was involved.
Sometimes forensic accountants also may need to gather facts about why an event may have occurred. This is true, for example, in a fraud claim where the trier of fact must find intent to determine fraud. Forensic accountants always look for answers to such questions or for red flags in the evidence.
Many forensic accountants have additional training and experience in skills such as evidence collection and preservation, witness interviews, and data-mining and analysis. They often are well aware of legal procedures and protocols, and they also may be subject-matter experts with specific specializations, such as corruption, bribery or money laundering.
Forensic accountants can work with in-house counsel when accurate reporting of key facts involving accounting, financial reporting or internal controls is critical to the outcome of the matter. Typically, these are situations where outsiders can or will adjudicate the facts. Those decision-makers could be as close to the organization as the board of directors or as removed as federal regulators or courts. Frequently, the potential for a monetary judgment is involved.
When an organization faces these types of issues, in-house counsel should think about some key issues when deciding whether to use a forensic accountant.
One consideration is whether to hire a forensic accountant directly as an employee or to engage an outside third party that provides such services. A factor in this decision is whether it’s useful to have the skill set in-house or preferable to have the forensic accountant be completely independent of management.
If in-house counsel decides to hire the forensic accountant as an employee, the department to which the individual should be assigned is a consideration. Should the forensic accountant be part of internal audit, for example, or legal and compliance?
In the past, companies have used existing internal auditors to do this type of work as a way to reduce costs and due to the perceived similarities in the skill set and work product. More and more, however, forensic accountants employed by an organization are assigned to the legal and compliance department because of the legal implications surrounding the work. This structure also allows the forensic accountant to maintain an objective approach to an assignment as he or she is not governed by management or influenced by potential biases within the organization. Assigning the forensic accountant to the legal and compliance department also could result in more privilege protection than assigning him or her to internal audit or another department. In some instances, outside counsel may need to engage the forensic accountant on behalf of the company to invoke the attorney-client privilege.
Collaboration with a forensic accountant can be especially effective for developing case strategy when financial reporting, accounting or internal controls are involved. In-house counsel has institutional and legal knowledge, and the forensic accountant understands how to gather, analyze and report on financial and accounting evidence in a manner that is suitable for the legal or regulatory audience. Together, this team can be quite an effective combination to help companies deal with difficult situations.