{"id":8429,"date":"2022-02-01T14:33:47","date_gmt":"2022-02-01T13:33:47","guid":{"rendered":"https:\/\/www.hawkins.biz\/?post_type=insight&p=8429"},"modified":"2025-08-07T10:55:17","modified_gmt":"2025-08-07T09:55:17","slug":"forensic-accounting-the-need-for-accounting-support-in-the-claims-process","status":"publish","type":"insight","link":"https:\/\/www.hawkins.biz\/insight\/forensic-accounting-the-need-for-accounting-support-in-the-claims-process\/","title":{"rendered":"Forensic Accounting – The Need for Accounting Support in the Claims Process"},"content":{"rendered":"\t\t
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Many accountants have been accused of being\u00a0creative<\/i>. Whilst this word is either used to tease the profession, or maybe insinuate skirting with accounting regulations, there is also some truth to this assertion. Accounting, unlike the physical sciences or engineering, where components have physical properties, is an art; the origins of accounting go back to mathematician Luca Pacioli. Pacioli, who had both skills as a magician and links with the artist Leonardo da Vinci, was an Italian monk who is now credited as the Father of Accounting Theory.<\/p>

Though accounting principles are set out in standards, the standards themselves vary, with both the International Financial Reporting Standard (IFRS) and the Financial Reporting Standard (FRS102) being commonplace in the UK. The implementation of these standards is subject to interpretation by each individual, professional accountant, who must give a true and fair view of the entity on which they are reporting. However, the interpretation of the standards when preparing a set of accounts will vary depending on the individual\u2019s background, commercial awareness, and risk appetite, amongst other factors.<\/p>

Even assuming that the financial statements have been prepared by an appropriately qualified and skilled professional, practicing accountants would still expect to find considerable variation in their approaches, and therefore calculations of costs and profitability may vary between sets of accounts prepared for entities within the same industry (let alone the variations in approach that will appear due to differences in operations across a variety of industries).<\/p>

Businesses cannot rely on the statutory audit alone for the purposes of gaining comfort around the detailed costs used in their accounts. The purpose of the statutory audit is to ensure that the accounts present a true and fair view of the company with no material discrepancies. The statutory audit process does not go into the level of detail required to confirm the accuracy of the costs, and further to this, many firms are classified as \u2018small\u2019 under the Companies Act, which states that businesses of that size do not require an audit, with the definition of small including companies with a turnover up to \u00a310.2m and up to 50 employees.<\/p>

Many insurance claims for stock loss or business interruption are reliant on calculating the accurate costs that have been, and will be, incurred by the insured. During these calculations, complexities can arise with discrepancies between the calculated accounting cost for an item and the actual cash cost paid. With the accounting cost calculated using one of a number of approaches, including either standard or activity-based costing systems, the discrepancy is further exacerbated by a difference in similar terminology between the accounting and insurance professions: for example,\u00a0Gross Profit<\/i>:<\/p>

Accounting Definition:\u00a0<\/strong>Accountants often calculate Gross Profit by deducting the total Cost of Sales from Turnover. For a manufacturing business the Cost of Sales might be the sum of the net value of Stock (Opening Stock less Closing Stock), Raw Materials, Sub-Contracting and Direct Labour Costs.<\/p>

Insurance Definition:<\/strong>\u00a0This approach can be distinguished from Business Interruption insurance policy wordings which define how Gross Profit should be calculated. A typical definition might read,\u00a0\u201cGross Profit is the difference between the sum of Turnover plus Closing Stock and Work in Progress and the sum of Opening Stock \/ Work in Progress and Uninsured Working Expenses.\u201d<\/i><\/p>

Failure to correctly calculate Gross Profit in accordance with the policy wording can result in underinsurance, allegations of misrepresentation and ultimately the unnecessary failure of the business.<\/p>

This difference in definitions of similar terminology can lead to either double counting of costs or failure to identify all costs when processing the claim, leading to the claim not accurately reflecting the costs of the insured. Further to calculation and terminology issues, discrepancies can arise due to other factors including the skills, experience and qualifications of the individual preparing the reports and forecasts. Inaccuracies that may arise in the reporting costs during the claims process include:<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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