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Forensic Economics vs. Forensic Accounting

We provide expert forensic economics to determine economic losses in legal disputes.

There is a significant distinction between a forensic accountant and a forensic economist. Accountants who often work in the capacity as forensic experts are often inadequately prepared from an experience and education perspective to provide the interpretation a forensic economist can illustrate.  A forensic accountant’s main focus typically uses a more myopic lens, involving specific details such as information from P&L statements.  A forensic economist’s focus is on the bigger picture, with a typical scenario including all variables such as work-life expectancy, earnings trends and career arch.

A forensic economist not only has the academic background, but the training and experience to ascertain complicated economic matters such as both past and future income loss, financial damages, and other economic losses. While forensic accountants are capable at calculating numbers, unless they’re trained and credentialed in the economic sciences, they can provide an opinion that is incomplete. In simple terms, economists assess and analyze case variables with a larger lens when compared to a forensic accountant. 

What is a Forensic Economist?

An expert forensic economist is someone who can intelligently look at every financial aspect of income, business earnings, or other economic damages and paint an accurate financial picture of the individual or business. We also look at specifics concerning expense items and partnerships to construct an accurate economic assessment of either the individuals or company we’re reviewing. This is what separates us from forensic accountants.

We use a wide variety of forensic audit methods to accomplish this. From depositions and court documents to public records such as federal income tax returns, business valuation resources, and partnership agreements, we’ll determine the facts and then write our expert opinions or offer compelling deposition testimony.

One of our many strong suits is our ability to rapidly analyze opposing expert opinions in a case and then offer an explanation to our clients as to why those viewpoints are flawed. Our counterparts could be offering subjective opinions that lack an objective outlook, which in turn is nothing more than an unqualified opinion.

As forensic economists, we also look at many public and private records that can help us paint a more accurate picture of the before, during, and after economic picture of an individual or business. Some of the data that we look at can include, but are not limited to:

  • Records review – We review all files presented to us, including documents such as earnings history, W2 statements, Social Security Administration, federal/state tax returns, State Unemployment, and payroll records, to name just a few.
  • Earnings capacity – From the records review, we can develop intelligent insights into the income potential of the individual or business as we figure out the damages that they sustained.
  • Profit and Loss Calculations – For P&L calculations, we consider past and future income. Based upon the available pre-incident records, we can come up with an accurate figure in today’s dollars that accurately represent the loss of earnings of the business or individual.

Why Hire a Forensic Economist?

Cases most often need a baseline of economic theories to initiate the research for an economic loss. The ability to determine what losses were sustained requires this expert knowledge. Accounting losses, for example, may be dominated by the measurement of loss as identified by the IRS code of a loss.

The concept of a loss in earnings capacity, for instance, is not something necessarily picked up in the accounting genre. Specifically, an economic analysis will also incorporate the age-earnings-cycle. This is taught in college-level economics classes.

Economics is the theoretical backbone of finance. Would a CPA offer an opinion on risk? Indeed, a CPA is aware and may have been schooled in present value; however it is those who are trained in economics and finance that research this phenomenon and can provide expert opinions and testimony.

An MBA includes significant high-level schooling in finance, high-level economic theories, and the concept of present value. An economic expert is much more likely to be sensitive to all of the nuances surrounding present value than an accounting or CPA expert.

CPA’s also don’t author the research data that forensic economists use. From government earnings data to interest rates to work-life-expectancies, all of this valuable information comes from economists, not accountants.

Do you need a forensic economist to help determine the economic damages of your case?

What is a Forensic Accountant?

A forensic accountant’s job is to look at the numbers of a company and determine where the money is going. They use their accounting skills to reconstruct what took place in a financial setting.  Some of the services a financial accountant can perform are:

•    Analyzing financial evidence.

•    Tracing the sometimes-complex flow of money throughout an organization.

•    Determining compliance with various tax laws and other financial regulatory issues.

•    Assisting in depositions or legal proceedings.

A forensic accountant can also help look at the internal financials of a company to see where the money originated from and ultimately wound up. But when it comes time to calculate complex economic determinations such as business valuations, financial losses, or projected future income of an injured party, a forensic economist is the person you want to hire.

When Should you Hire a Forensic CPA?

A forensic CPA may be necessary for matters involving tax or perhaps business disputes that focus solely on the interpretation of accounting data. The rules and regulations regarding income, cash flow, and taxes are where a forensic CPA will shine.

The bottom line to everything in the world of business is economics. It’s ultimately involved in the proper definition of profits — the study of scarcity as well as the principles of how to distribute goods in a scarce world.

You should use the services of a forensic accountant when the issue pertains specifically to accounting. You should use a forensic economist when the court dispute has the words “economic” attached to it.

The Knowles Group – Expert Forensic Economists

In cases and disputes where an expert is needed to analyze and determine economic losses and project future income, a qualified forensic economist is much more capable than a forensic accountant.

At The Knowles Group, we have over 30 years’ experience helping our clients accurately assess both individual and business losses, determine future income loss, as well as valuate businesses.

If you’re unsure as to whether your case needs a forensic accountant or forensic economist, give us a call at (206) 860-9477 or contact us via our website. We will advise you on the particulars of your case.