Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

What does forensic accounting mean anyway?

forensic accounting, valuation, courtWe hear the term forensic all the time, and it holds a special place in pop culture thanks to TV shows like the fictional CSI and the “real-life” Forensic Files. The news also inundates us with stories about legal proceedings involving forensic accountants, psychiatrists, pathologists, toxicologists and others. However, when pressed, most people don’t really know what forensic means. Many get close, referring in some way to criminal investigations or “legal-type” work, but it is much broader.

To start, the Merriam-Webster online dictionary defines it as follows:

  1. belonging to, used in, or suitable to courts of judicature or to public discussion and debate
  2. Argumentative, Rhetorical
  3. relating to or dealing with the application of scientific knowledge to legal problems

In the context of today’s environment – both in the real world and the fictional realm – a simplifying combination of the above definitions says it best. Forensic simply means suitable for presentation in a court of law. Note further that there is no distinction between criminal and civil law in the definition, even though the media and entertainment industry seem to focus on the more nefarious criminal matters.

Many believe that forensic accounting and fraud investigation are one and the same. This is not the case. While fraud investigation procedures are indeed performed by some forensic accountants, the term forensic accounting applies to much more. In addition to fraud investigations, forensic accountants are often called upon to quantify damages arising from allegations related to both contract and tort law.

Read more about forensic accountants and what they do

While there are many measures of damages under contract law, forensic accountants frequently estimate the lost profits experienced by a party to a civil lawsuit stemming from one or more alleged bad acts of another party. They also calculate damages under tort law, where the damages are intended to compensate victims resulting from the unreasonable acts of others. For instance, a forensic accountant might calculate damages in the form of lost wages and fringe benefits suffered by an individual who missed work due to an automobile accident caused by another person.

The term forensic accounting can also apply to the practice of business valuation. Shareholder and marital disputes often require a valuation of an operating or holding company. In these cases, the business appraiser applies specialized knowledge (which includes some combination of accounting, finance, economics and business) and may ultimately present his or her conclusions in a court of law. Therefore, depending on its purpose, a business valuation may also be an example of forensic accounting.

So, then, what is it? Generally speaking:

The application of specialized accounting, finance, economics and related knowledge and skills in a legal setting.

So, the next time someone tells you forensic accounting means tracing cash or investigating fraud, you can tell them it really is much more.