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Forensic accounting: why it’s vital and the role it plays in the insurance world

What do lawyers, doctors and forensic accountants have in common? All three can specialize in one or more different areas in their respective fields.

For example, an attorney can specialize in maritime, criminal, personal injury or tax law. A doctor can specialize in cardiology, neurology, pediatrics, or plastic surgery.

The same is true for a forensic accountant. A forensic accountant can specialize in one or more different fields of forensic accounting, such as criminal investigations, shareholder and partnership disputes, personal injury/wrongful death matters, matrimonial disputes, business/employee fraud, and insurance claims such as business interruption.

So what is the role of a forensic accountant in an insurance claim?

Many insurance claims can be reviewed and settled by the insurance adjuster. However, when the claim is complex, or has multiple facets of accounting that overlay multiple areas of insurance coverage, the adjuster may look to an expert for assistance, such as a forensic accountant.

Forensic accountants provide an independent and objective analysis of an economic loss. And they don’t take things at face value. The forensic accountant will ask the questions who, what, when, why and how? They look at the business from many different angles, combining both accounting and investigative skills in their approach to identify the facts and quantify the loss.

Throughout the process, forensic accounting consultants work closely with the claimant and the adjuster. They try to set expectations by discussing the forensic accountant’s role, outlining the review process and discussing the types of financial documents that may be available for review. Sometimes the forensic accountant will also work with other consultants retained by the adjuster, such as construction consultants or forensic engineers, to help ensure that claim components and work efforts are not duplicated.

Oftentimes “customized reports” or summaries are prepared specifically to support the claim. The forensic accountant will perform due diligence on the data to confirm whether the information that is represented is accurate and the application of the data is appropriate to the purpose of the loss analysis. Due diligence often includes testing back to source documents and cross-referencing to third-party information, such as tax returns, audited financial statements, bank statements, vendor/customer contracts, etc.

In addition to considering financial documents, the forensic accountant looks beyond the numbers. This may involve researching market trends, industry information, and also conducting interviews with the business owner, its employees, and sometimes vendors and customers. They consider the business’ history and any special circumstances that could affect the loss measurement. If factors are identified that may affect the loss measurement these factors are communicated to the adjuster which allows the adjuster to address any issues in a timely manner.

Most insurance claims also necessarily include certain assumptions about future events, such as the level of sales growth or operational costs. The forensic accountant will also evaluate these assumptions and challenge those that are not realistic or based in unrealistic expectations.

When a lawyer or doctor explains a complex matter to their client or patient, they rely on their expertise to communicate the information in a way their audience can easily understand. The same is true for a forensic accountant. When a claim is complicated, forensic accountants draw upon their specialties to present the facts in a concise, easy to understand manner so that all parties can make an informed decision.

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