Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Forensic accounting or forensic economics?

forensic economics, forensic accounting, expert, litigation

In a previous blog, I discussed the term “forensic accounting” and ultimately provided a very general definition: Forensic accounting is the application of specialized accounting, finance, economics and related knowledge and skills in a legal setting. After publishing that blog, I realized that I may have given short shrift to the term forensic economics. Upon review, it seems as if that term could easily be defined in the same manner by simply moving around a couple of words like this: Forensic economics is the application of specialized economics, finance, accounting and related knowledge and skills in a legal setting.

Although forensic economics is less likely than forensic accounting to be confused with strict fraud investigations, there is significant overlap in the two fields. For instance, many forensic economists and forensic accountants quantify economic damages – whether lost profits in a commercial litigation matter or lost earnings in a tort. And many of these accountants and economists are typically very well qualified to provide those forensic services.

Sometimes the distinction is self-imposed or simply a product of the educational and career path undertaken by the forensic practitioner. A forensic accountant might have earned an undergraduate (and perhaps a graduate degree) in accounting before beginning a career providing forensic services. On the other hand, a forensic economist might have completed his or her degree(s) in economics and followed a career path with a similar destination.

I suggest that in many of the litigation matters where a forensic accountant or economist is retained, and specifically in many of the cases that require a calculation of damages, this is a distinction without a difference. Many forensic accountants understand the relevant economics, and many forensic economists understand the relevant accounting. There are, of course, specific instances where an accountant or economist would likely be more qualified, but there is considerable overlap in forensics.

Moreover, it is often in an organization’s best interest to use one term or another. For example, the American Institute of Certified Public Accountants (AICPA) uses the term forensic accounting and includes “Economic Damages Calculations and Due Diligence” as one of the specialty areas therein. Not surprisingly, the National Association of Forensic Economics (NAFE) defines forensic economics to include, among other things, “the calculation of pecuniary damages in personal and commercial litigation.” Under these definitions, both forensic accounting and forensic economics include damages calculations.

In sum, though not in each case, the terms “forensic accounting” and “forensic economics” are essentially interchangeable. Sometimes it makes a difference, but more often than not, the beauty is in the eye of the beholder.