"Forensic" means "Belonging to, used in or suitable to courts of judicature or to public discussion and debate." Webster's Dictionary
“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. This type of Investigation may be grounded in many disciplines such as accounting, medicine, engineering etc.”
"Forensic accounting", provides an accounting analysis and investigation that is suitable to the court which will form the basis for discussion, debate and ultimately dispute resolution.
“A forensic accountant may take on fraud auditing engagements and may be a fraud auditor, but he or she will also use other accounting, consulting, and legal skills in broader engagements. In addition to accounting skills, he or she will need a working knowledge of the legal system and excellent communication skills to carry out expert testimony in the courtroom and to aid in other litigation support engagements” : CCH Group
Thus the term of Forensic accounting includes the following dimensions;
n Time: Forensic accounting focuses on the past, although it may do so in order to look forward.
n Purpose: Forensic accounting is performed for a specific legal authority or in anticipation of presentation before a legal authority.
n Peremptory: Forensic accountants may be employed in a wide variety of risk management engagements within business enterprise as a matter of right, without the necessity of allegations (e.g., proactive).
n Forensic accounting is the action of identifying, recording, settling, extracting, sorting, reporting, and verifying past financial data or other accounting activities for settling current or prospective legal disputes or using such past financial data for projecting future financial data to settle legal disputes.
The history:
The word “Forensic “ was coined by Maurice E. Peloubet in print in 1946. But it was not the starting of this arena of Investigating Accounting. Though, the Sherlock Holmes is considered as the first forensic Accountant, now a day, Indian culture and its heroes are not ignored while giving their due credit. The legendaries like the Kautilya in the Mauryan Times thorugh its famous work in “Kautilya Arthashastra”, the Birbal, the scholar in the court of King Akbar for his litmus test approaches and the Tenaliram are given due credit for their work. Today, there are more than 600 FBI agents with accounting backgrounds. The FBI has a Financial Crimes Section that investigates money laundering, Internet crimes, financial institutions fraud, and any other economic crime.
The Areas:
"Investigative accounting", is often associated with investigations of civil as well as criminal matters. Forensic accounting can come to help in resolving civil disputes by providing litigation support "Litigation Support", provides assistance of an accounting nature in a matter involving existing or pending litigation. Litigation service is further broken down in practice as;
– Damages
– Antitrust analyses
– Accounting
– Valuation
– General consulting
– Analyses
It deals primarily with issues related to the quantification of economic damages. A typical litigation support in civil case assignments, would be calculating the economic loss resulting from a breach of contract while that in the criminal case assignments would be an investigation of employee theft. Other examples of Forensic accounting assignment include;
1. Securities fraud,
2. Insurance fraud,
3. Kickbacks
4. Criminal Investigations
5. Shareholders' and Partnership Disputes
6. Personal Injury Claims / Motor Vehicle Accidents
7. Business Interruption / Other Types of Insurance Claims
8. Business/Employee Fraud Investigations
9. Business Economic Losses
10. Mediation and Arbitration
Engagements relating to civil disputes may fall into several categories:
1) Calculating and quantifying losses and economic damages,
a. whether suffered through tort or
2) disagreements relating to company acquisitions—
a. perhaps earn outs or
b. breaches of warranties; and
3) Forensic accountants often assist in professional negligence claims where they are assessing and commenting on the work of other professionals.
4) Forensic Accountants are also engaged in marital and family law matters for the purpose of analyzing lifestyle for spousal support purposes, determining income available for child support and equitable distribution.
Engagements relating to criminal matters typically arise in the aftermath of fraud. They frequently involve the assessment of accounting systems and accounts presentation—in essence assessing if the numbers reflect reality.
Thus, Forensic accounting requires an integration of accounting, auditing and investigative skills while conducting an investigation which is aimed at to solve any existing or pending disputed matter at law. It is an examination of evidence regarding an assertion to determine its correspondence to established criteria carried out in that standard manner that the potential outcome of which is suitable/ presentable to the court.
The eruption of the Forensic Accounting
ð In the early 1980s, companies began to use computers to perform their record keeping.
ð Intense competition caused auditing fees to fall as much as 50% from the mid-1980s to the mid-1990s.
ð Auditors cut costs by reducing the process of reviewing hundreds of corporate accounts. They grew more reliant on internal controls.
ð Top executives were able to circumvent internal controls and manipulate the records.
ð World wide more frauds through existing financial reporting machinery covering manipulation, misrepresentation and Misapplication were noticed involving some of the big accounting firms.
ð This lead to situations such as Enron, WorldCom, Xerox, Adelphia Communication, Satyam and the fall of Arthur Andersen in the early 2000s.
ð Due to the financial disaster of companies such as Enron and WorldCom, Satyam there will be an increase of forensic techniques in audits and an increase in fees.
Some accounting experts believe that every audit engagement should include much more skepticism and detailed review of transactions. While other accounting experts suggest that only special engagements specifically targeting fraud can adequately and effectively root out the specific problem. The Big Four and the next two accounting firms believe that every public corporation should have a forensic audit every three years.
The Agencies that hires FA for such assignments:
Forensic Accountants can be engaged in public practice or employed by insurance companies, banks, police forces, government agencies and other organizations, law society, business community.
The forensic Accountant:
“They don’t wear cowboy hats, but they certainly have a little more swagger than your typical bean counters. Forensic accountants inhabit a cloak-and-dagger corner of the accounting World. Their Job: Respond at a moment’s notice when a client spots trouble anything from procurement fraud to a top executive cooking the books to industrial espionage.” : Justin Pope
Forensic Accountants are trained to look beyond the numbers and deal with the business reality of the situation which strictly proves the principle of substance over form. His ability to respond immediately and to communicate financial information clearly and concisely in a courtroom setting is equally critical. Forensic accountants, also referred to as forensic auditors or investigative auditors, often have to give expert evidence at the eventual trial at law. Now days, all of the larger accounting firms, as well as many medium-sized and boutique firms, have specialist forensic accounting departments. During last decade, the quantum of disputes requiring such services is increased manifold and hence firms having Forensic department have further its sub-specializations in Insurance claims, personal injury claims, fraud, Construction , money laundering or royalty audits to name a few. The Swiss tool of Forensic accountants includes an understanding of business information and financial reporting systems, accounting and auditing standards and procedures, technologies, evidence gathering and investigative techniques, and litigation processes and procedures to assist in engagements to identify anomalies and inconsistencies. Of course, it is not the Forensic Accountants that determine fraud, but instead the court. Forensic accountants are also increasingly playing more proactive risk reduction roles by designing and performing extended procedures as part of the statutory audit, acting as advisers to audit committees, fraud deterrence engagements, and assisting in investment analyst research.
What does a Forensic Accountant do?
A Forensic Accountant is often retained to analyze, interpret, summarize and present complex financial and business related issues in a manner which is both understandable and properly supported.
A Forensic Accountant is often involved in the following:
- Investigating and analyzing financial evidence;
- Developing computerized applications to assist in the analysis and presentation of financial evidence;
- Communicating their findings in the form of reports, exhibits and collections of documents; and
- Assisting in legal proceedings, including testifying in court as an expert witness and preparing visual aids to support trial evidence.
In order to properly perform these services a Forensic Accountant must be familiar with legal concepts and procedures. In addition, a Forensic Accountant must be able to identify substance over form when dealing with an issue.
A Forensic Accountant can be of assistance in various ways, including:
Investigative Accounting
· Review of the factual situation and provision of suggestions regarding possible courses of action.
· Assistance with the protection and recovery of assets.
· Co-ordination of other experts, including:
- Private investigators;
- Forensic document examiners;
- Consulting engineers.
- Assistance with the recovery of assets by way of civil action or criminal prosecution.
Litigation Support
- Assistance in obtaining documentation necessary to support or refute a claim.
- Review of the relevant documentation to form an initial assessment of the case and identify areas of loss.
- Assistance with Examination for Discovery including the formulation of questions to be asked regarding the financial evidence.
- Attendance at the Examination for Discovery to review the testimony, assist with understanding the financial issues and to formulate additional questions to be asked.
- Review of the opposing expert's damages report and reporting on both the strengths and weaknesses of the positions taken.
- Assistance with settlement discussions and negotiations.
- Attendance at trial to hear the testimony of the opposing expert and to provide assistance with cross-examination.
The Process :
SAS 99 Recommendations:
n Increased emphasis on professional skepticism.
n Discussions with management.
n Unpredictable audit tests.
n An auditor is instructed to conduct an audit “with a questioning mind that recognizes the possibility that a material misstatement due to fraud could be present, regardless of any past experience with the entity and regardless of the auditor’s belief about management’s honesty and integrity.”
n FA’s motto should be “Trust no one; question everything; verify.”
There are no thumb rules that portray a clear picture of the process involved in forensic accounting / investigation. As each forensic accounting assignment is unique. Accordingly, the actual approach adopted and the procedures performed will be specific to it. However, in general, many Forensic Accounting assignments will include the steps detailed below.
Responding to management override of controls
– Meet with the client
– Perform a conflict check
– Perform an initial investigation
– Develop an Action Plan
– Obtain the relevant evidence
– Perform the analysis
– Prepare the report
Meet with the client :It is helpful to meet with the client to obtain an understanding of the important facts, players and issues at hand.
Perform a conflict check: A conflict check should be carried out as soon as the relevant parties are established.
Perform an initial investigation: It is often useful to carry out a preliminary investigation prior to the development of a detailed plan of action. This will allow subsequent planning to be based upon a more complete understanding of the issues.
Develop an Action Plan: This plan will take into account the knowledge gained by meeting with the client and carrying out the initial investigation and will set out the objectives to be achieved and the methodology to be utilized to accomplish them.
Obtain the relevant evidence: Depending on the nature of the case this may involve locating documents, economic information, assets, a person or company, another expert or proof of the occurrence of an event
.
Perform the analysis: The actual analysis performed will be dependent upon the nature of the assignment and may involve:
- calculating economic damages;
- summarizing a large number of transactions;
- performing a tracing of assets;
- performing present value calculations utilizing appropriate discount rates;
- performing a regression or sensitivity analysis;
- utilizing a computerized application such as a spread sheet, data base or computer model; and
- utilizing charts and graphics to explain the analysis.
Prepare the report : Often a report will be prepared which may include sections on the nature of the assignment, scope of the investigation, approach utilized, limitations of scope and findings and/or opinions. The report will include schedules and graphics necessary to properly support and explain the findings.
What should I consider when retaining a Forensic Accountant?
The following issues should be considered on retaining a Forensic Accountant:
- The experience and qualifications of the Forensic Accountant;
- A Forensic Accountant should be retained as early as possible in order to obtain maximum benefit. The assistance that a Forensic Accountant can provide early in the process can be significant in reducing the overall cost and maximizing the benefit. If retained early, a Forensic Accountant can assist with the Examination for Discovery, identify additional areas of damages, assist with settlement negotiations and provide a preliminary assessment of the quantum of damages;
- If a Forensic Accountant is engaged as an expert witness then he or she should be given access to all of the relevant documentation. If restrictions are imposed upon the scope of the investigation there may be an impact upon the acceptance of the findings; and
- In situations where counsel is involved, the Forensic Accountant should be retained by counsel so that the privilege which exists between the client and counsel will be extended to the work product of the Forensic Accountant.
What characteristics should a Forensic Accountant possess?
A capable Forensic Accountant should have the following characteristics:
- curiosity;
- persistence;
- creativity;
- discretion;
- organization;
- confidence; and
- sound professional judgement.
A Forensic Accountant must be open to consider all alternatives, scrutinize the fine details and at the same time see the big picture. In addition, a Forensic Accountant must be able to listen effectively and communicate clearly and concisely.
How do I become a Forensic Accountant ?
Several Canadian, USA and other European Institutes/ university runs their regular courses on Forensic accounting. They have established several bodies to encourage and recognize excellence in the provision of Financial Investigation, Forensic Accounting and Financial Litigation Support services by Chartered Accountants.
One of the objectives of the Alliance is to develop and manage a specialist certification program. Affiliates in several countries run some diploma courses to get their member equipped with specialised skill for Forensic Accounting. The Diploma Program is not restricted to Chartered Accountants. The Diploma in Investigative and Forensic Accounting (DIFA) is designed as a comprehensive program for someone who wishes to practice in the area of Investigative and Forensic Accounting.
The Forensic Accountant's prior audit and accounting experience will be of tremendous assistance. But ultimately, it is only through working with experienced Forensic Accountants on various cases that one can learn the skills necessary to become a capable Forensic Accountant.
