Forensic Accounting and Auditing: Everything You Need to Know – Difference, Cost, and Exams

Background

With all the publicity given to forensic accounting these days and thought of as a fairly recent aspect of the accounting profession. In fact, as a concept, it has been around for centuries which is often traced back as far as 3300-3500BC. The scribes of Ancient Egypt, who were the accountants of their day were involved in the prevention and detection of fraud. In the early 180’s an association developed between the accountancy and legal professions, with accountants acting as expert financial witnesses in court cases. In the 1930’s in America, Eliot Ness got all the publicity in the case against Al Capone. But in fact, it was the work of Elmer Irey, an accountant with the Internal Revenue Service working behind the scenes, who ensured Capone’s conviction for tax evasion. He was probably America’s first high-profile forensic accounting expert.

So, far from being a new practice, forensic accounting has long been a part of the accounting profession. While it took a back seat in the early 20th century but now it is gaining back momentum. However, it is surrounded by some mystery so we are going to clear up the confusion regarding it. I have performed dozens of forensic accounting exams as a CPA, CFE, CVA, Esq.

What is Forensic Accounting?

Forensic accounting is a specialty practice area where accounting, auditing, and investigative skills are used to analyze information that is suitable for use in a court of law. Accountants are engaged to measure damages in cases related to fraud and misuse as well as on matters involving business disputes, business intrusion, insurance, individual damage, ecological harm, cyber-crime, products liability, and business valuation. Forensic accountants are also known as investigative auditors and forensic auditors.

In California litigation, forensic accounting is governed by CCP 2034 expert disclosure rules and must survive Sargon challenge – meaning methodology must be reliable and generally accepted.

What Do Forensic Accountants Do? My 6-Step Exam

Forensic accounting professionals are skilled at assessing damages and determining the full extent of a loss. They have several different tasks on a daily basis, that include examining business records, analyzing historical statements, looking for irregularities in business practice, analyzing trends, tracing the flow of funds, interviewing relevant parties, analyzing electronic data and performing an overall evaluation of the situation in question.

My forensic exam process (what I actually do for $5k-$25k+ engagement):

Step 1: Data Collection (Week 1)
I collect: QuickBooks file (not PDF), 3 years bank statements in CSV, credit card statements, POS reports, tax returns, operating agreement, cap table, Amex/Bill.com. See my Where’s the Evidence page for checklist. I do NOT start with narrative alone – I need data.

Step 2: Data Preparation (Week 1-2)
Clean data: OCR bank statements, de-duplicate, code transactions. Bank statements have thousands of transactions with no description – I use AI + manual coding to categorize: legitimate vendor, personal, related party, unknown. Recent case: 18,000 transactions coded in 2 weeks.

Step 3: Data Analysis (Week 2-3)

• Benford’s Law: Detect fabricated numbers
• Trend analysis: Revenue declining but distributions increasing = red flag
• Related party search: Secretary of State lookup – is vendor owned by partner’s spouse?
• Cash vs accrual: Is company booking revenue before collecting? (My retail store fraud case)
• Sales tax vs P&L vs bank: Three-way match catches revenue inflation

Step 4: Interviews (Week 3)
I talk to bookkeeper (she knows who really got paid), operations manager, sometimes employees. Not as interrogation, but to understand business flow.

Step 5: Damages Calculation (Week 4)

• Direct misappropriation: Sum of personal expenses
• Lost profits: But-for analysis under CACI 3903
• Return of capital vs distribution analysis under Corp Code 316
• Prejudgment interest at 10% (CCP 3287) – often adds 30% to damages

Step 6: Reporting (Week 5)
Report that survives Sargon: Facts, methodology (NACVA, ACFE), application, opinion. Includes Bates-stamped exhibits linking every dollar to source doc. See my Legal Issues for Experts page for FRE 702 2023 update.

Other tasks:
Forensic Investigation – the utilization of specialized investigative skills in carrying out an inquiry conducted in such a manner that the outcome will have application to a court of law.
Forensic Audit – it is an examination of proof with respect to an announcement to decide its correspondence to set up criteria carried out in a manner suitable to the court.
External Audit – an audit performed by an auditor engaged in public practice leading to the expressions of a professional opinion which lends credibility to the affirmation under examination.

What Events Would Constitute Forensic and Investigative Accounting?

Forensic and investigative accounting is done in the event of professional negligence claims, detection of fraud by employees within the organization, settlement for a retiring partner, and criminal investigation.

My 2025-2026 case mix:

1. Partnership disputes (40% of my practice): Partner taking excess distributions, coding personal Tesla, vacation, family payroll as business. See my expert-witness-work-sub-specialties page.
2. M&A fraud (20%): Seller inflates revenue, buyer discovers after close. My retail store case: $300k claimed, $72k actual. I do Quality of Earnings and work capital peg analysis.
3. CPA malpractice (10%): CPA overstates income by $700k, causing tax bill. Subsequent CPA regurgitates error to state auditor. Standard of care under B&P.
4. Employee embezzlement (15%): Bookkeeper writes checks to self via Zelle/Venmo, codes as vendor. Recent case: $400k via fake “ads” to company owned by partner’s wife.
5. Divorce business valuation (10%): Pereira/Van Camp, cash flow for support.
6. Elder abuse/trust (5%): Caregiver takes $300k from elder with dementia – trace funds.

When forensic accountants are involved in such situations, they help determine unbiased distribution, spousal support, and income available for child support. For criminal matters, forensic accountants assess the accounting systems to ensure finances reflect reality.

Difference Between Forensic Accounting and Auditing? This Is Critical

The investigation methods of forensic accounting and auditing are quite different in comparison. An audit is done to assess the financial statement of the organization and is conducted by a CPA. The auditors evaluate whether the financial statements prepared by the management of a company are in compliance with Generally Accepted Accounting Principles (GAAP). Auditors give their opinion by examining, on a test basis, the evidence supporting the amounts and disclosures in the financial statements. However, a forensic audit may or may not analyze every transaction or look for fraud specifically, but if properly planned it may uncover fraud. The reason being financial statement audits are designed to detect material misstatements and thus auditors focus only on that.

On the other hand, a forensic accounting engagement is conducted by forensic accounting expert and is particularly intended to uncover fraud. The goal here is to find out who committed the fraud, how they went about it, how much they took and how to prevent it from happening later in the future.

Example of difference:
Audit: Auditor sees $84k to American Express, sees receipt for “office supplies,” passes because under materiality.
Forensic: I pull American Express statement – $84k includes $2,400 Four Seasons Maui, $1,800 Nordstrom, $1,200 Tesla payment – all personal, breach of operating agreement requiring pro-rata distributions. That’s $84k damages plus 10% interest.

So, this is all about forensic auditing and accounting and as a business owner, it is imperative that you clearly understand and define your objectives as it relates to an audit engagement as both have different objectives that do not overlap. If you suspect fraud may be occurring in your business or want to learn ways to help prevent it, contact the fraud and forensic accounting expert at HP Accounting.

Cost: I charge $5k-$25k for preliminary forensic exam (data collection through damages summary) and $375/hr as of 2026 for expert witness testimony. Compared to Big 4 forensic who charges $500-$800/hr with 3 staff. I offer free 15-min conflict check/consultation.

Contact hpaccounting.com/contact – based in Fremont, California, serving Bay Area and beyond.