In general terms, fraud is an intentional deception, whether by omission or commission, to realize a gain. Under common law, fraud includes four essential elements:
- A material false statement
- Knowledge that the statement was false when it was spoken
- Reliance on the false statement by the victim
- Damages resulting from the victim’s reliance on the false statement
In the broadest sense, fraud can encompass any act for gain that uses deception as its principle technique. This deception is implemented through fraud schemes, specific methodologies used to commit and conceal the fraudulent act. The legal definition of fraud is the same, whether the incidence is criminal or civil. The difference is that criminal cases must meet a higher burden of proof.
How does fraud examination differ from auditing? Aren’t they the same? What about the term “forensic accounting?” How is it different from auditing and fraud examination?
Auditing includes steps to plan the audit, conduct risk assessment, identify and test internal controls for both design and implementation and then develop the necessary audit evidence and finally report on the findings of the audit.
In some audits, the auditor may discover symptoms suggestive of fraud. In those circumstances, the audit intersects with fraud examination using the techniques developed to define the who, what, when, where, and how the fraud took place, but also notice that fraud examination includes prevention and deterrence efforts as well as detection and investigation.
Finally, fraud investigation also includes remediation, which is cleaning up the mess. Remediation can include addressing internal controls issues, helping the victim to file insurance claims when appropriate and even testifying in court. Testifying in court – that’s where fraud investigation intersects with forensic accounting. The term “forensic” generally suggests that the issue will end up being resolved in court.
Forensic accounting, implies that we have an accounting issue where accounting provides evidence that may shed light on a legal matter. So, in short, forensic accounting is the intersection between accounting and the law. Some fraud examination efforts might end up in court, but others, like prevention and deterrence will not.