What are the key differences between forensic accounting and traditional accounting?
Here are some of the most well-known differences between forensic accounting and traditional accounting at a glance;
1. A very obvious and unobtrusive key difference that can be identified between a traditional auditor and a forensic accountant is that:
The first is someone who checks for mathematical accuracy in the accounting department, while the second is someone who looks behind these financial numbers and discovers what is not correct.
2. The second differentiation is “investigative intuition.”
Intuition refers to the gut instinct one may have to guide one in the proper direction from which to begin his investigation. This is not an earned textbook, but rather something that can be gained through massive experiences. Most of the time, no research intuition is found or required in traditional accounting.
3. Traditional auditing is a process of auditing the work of others to determine whether they have followed official documented company policies, procedures, and practices. The determination is based on evidence. It is a matter of fact and not merely of opinion. This type of audits is required by financial intermediaries and the government depending on the circumstances.
4. Traditional auditing focuses on the identification and prevention of errors. Prevention is the result of an effective internal control system. The auditor reviews the effectiveness of the internal control system by sampling transactions of some acceptable percentage. Materiality is the accounting way of designating the importance of a transaction or event.
5. Traditional auditors use statistics to determine the likelihood of material errors being identified or not and the likelihood of their occurrence. This is cause for concern as only a sample of transactions and events will be reviewed. The internal control system is evaluated. It is argued that if the internal control system is considered highly effective, then material errors are not likely.
6. Traditional auditors generally adhere to generally accepted auditing standards (GAAS) promulgated by the Public Companies Accounting Oversight Board (PCAOB). External auditors generally review whether an organization follows GAAP. GAAP is promulgated by the Financial Accounting Standards Board (FASB). This indicates that auditors are affected by these three organizations and should keep up with the old, new, and changing standards and principles issued by these three organizations.
7. Instead, forensic accountants use physical evidence, testimonial evidence, documentary evidence, and demonstrative evidence to help identify suspects and culprits.
8. For Forensic Accounting, any type of evidence can be used as information, be it documentary paper, computer video or audio. However, it requires an expert to interpret the evidence and present it. Demonstrative evidence is not real evidence. It is only an aid to understanding, like a model of a body part or pictures or other devices used to help clarify the facts.
9. The Forensic Accountant is often asked to serve as an expert witness in a lawsuit or criminal case in court, the forensic accountant must have applied reliable principles and methods to sufficient facts or data. The expert is a recognized specialist in relation to the principles and methods applied to sufficient facts or data.
10. A forensic accountant typically needs to possess the experience and skills in these 2 fields: the private investigator and accounting are what is specifically required to be a great forensic accountant. On the other hand, there is no such requirement in the traditional accounting space.