As with any industry, forensic accountancy has its own plentiful supply of jargon, which can sometimes seem like a foreign language. In order to help those about to enter the industry or those looking to hold a conversation with a forensic accountant, I have compiled a list of some basic terms and accounting phrases that will help translate the often confusing into the understandable, and hopefully ease the conversation.
1) Why are you called a ‘Forensic Accountant’?
I shall start with the obvious and most frequently asked question. Why are you called a ‘Forensic Accountant’? People tend to think of CSI Miami when they hear the term forensic. The phrase however comes from the Latin forensis and means “…suitable for courts of law”. This emphasises how our work has traditionally been for use in litigation, although its application today is much broader. Like CSI Miami, we investigate – only we’re investigating numbers (and not crime scenes). The word forensic also helps to differentiate us from other accountants such as auditors or management accountants.
The phrase ‘Accountant’ on the other hand is self-explanatory. We are qualified accountants. At RGL in the UK we are either ACA (Association of Chartered Accountants), ACCA (Associate of Chartered Certified Accountants) or CIMA (Chartered Institute of Management Accountants) qualified, each of which takes roughly three years of on-the-job training and exams to complete.
2) Depreciation, amortisation and EBITDA
Depreciation and amortisation often come up when talking to forensic accountants because they can be contentious issues in the quantification of losses. The principle behind them however is very simple. A key accounting principle is the ‘matching principle’ in which revenue and the costs incurred to earn that revenue are matched. Depreciation and amortisation allow for the cost of an asset to be matched to the revenue earned from that asset over its useful economic life. Specifically, depreciation relates to tangible assets (e.g. factory equipment, computers, etc.) and amortisation relates to intangible assets (e.g. goodwill, licences, etc.).
Depreciation and amortisation also feed into the abbreviated EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) calculation which is an indicator of a company’s financial performance and, by proxy, its earning potential. In short EBITDA offers a reflection of operations before considering key ‘non-operating’ expenses.
3) (Insurance) Gross Profit
The final and one of the most useful pieces of jargon to understand, is the concept of Gross Profit and the differences between ‘Accounting Gross Profit’ and ‘Insurance Gross Profit’. In short, accounting gross profit is the profit a company makes after deducting the costs associated with making its products or providing its services:
Sales – Cost of Goods Sold = Gross profit
In some forms of business interruption policy, insurance gross profit is defined, however it differs from the standard accounting definition. It is defined as sales less uninsured working expenses which are usually variable costs (ie those costs that reduce in direct proportion to a decrease in sales):
Sales – Uninsured Working Expenses = Insurance Gross Profit
Accounting gross profit can often deduct ‘fixed’ costs as part of the cost of goods sold, for example labour costs, and is therefore often a lower value than insurance gross profit. This is an important differentiation and can have major implications for quantum during the calculation of a business interruption insurance claim.
In conclusion, I hope that you find the above jargon busters useful and are now in a position to walk into a conversation with a forensic accountant with some understanding of our world.