Forensic accounting Essay

FORENSIC ACCOUNTINGAlthough forensic accounting is not a new discipline, it is not that is rapidly developing and gaining status in the accounting and legal communities. The media have been energetically covering accounting scandals and intrigues, which are often characterized as the forensic accountant’s “bear”. If the number of articles written on the topic is any indication, readers of such esteemed newspapers as The Wall Street Journal and The New York Times are captivated by the forensic accounting topic. The good news for accounting students is that if current trends persist, forensic accounting and its many subspecialties will provide some very interesting and lucrative career opportunities.Accountants, long the butt of bean counter jokes are viewed a bit differently these days. Major scandals certainly have tarnished the image of the accountant, but the “forensic accountants” is getting a lot of respect.

After the terrorist attacks of September 11, 2001, it was determined that a number of the perpetrators used debit cards that had been set up by cash – largely untraceable brought into the country. There were even some transactions with no moving money, possibly using offsetting receivables and payables that were still traceable. The FBI agents employed forensic type techniques when looking at credit cards, phone records, and interviews with terrorist’ neighbors and friends. Shutting down the cash flowing into the terrorists’ network was accomplished using financial sleuths.Defining Forensic AccountingMany people believe forensic accounting and fraud auditing are synonymous.

They are not. A fraud auditor is an accountant especially skilled in auditing who is generally engaged in auditing with a view towards fraud discovery, documentation and prevention. A forensic accountant may take on fraud auditing engagements and may in fact be a fraud auditor, but he or she will also use other accounting, consulting, and legal skills in broader engagements. In addition to the accounting skills that should certainly be present in the fraud auditor, the forensic accountant 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.

Concisely defined, forensic accounting is the use of accounting for legal purposes. Hal Rosenthal gives modern definition of forensic accounting as “the use of intelligence gathering techniques and accounting/ business skills to develop information and opinion for use by attorneys involved in civil litigation and give trail testimony is called upon. But in order to establish a context for understanding all the various forensic activities that are associated with forensic accounting today.The forensic Science Society of the UK describes forensic science as the application of science to the law and the used in public in a court or in the justice system. Purpose is also important. Forensic accounting is accounting performed in some circumstances for a specific legal forum; in other circumstances it is accounting performed in anticipation of presentation before a formal forum. One could argue that all accounting work might presuppose that work performed may be destined for review or argument in a legal forum, but the forensic purpose is more explicit. Thus, it’s possible to construct a good broad working definition for forensic accounting that reflects real-world use of the term.

Forensic accountant qualifications work together and support each other like a three-layered wedding cake. The largest bottom layer is a strong accounting background. A middle, smaller layer is a thorough knowledge or auditing, risk assessment and control, and fraud detection. The smallest top layer of the cake is a basic understanding of the legal environment. The icing on the cake is a strong set of communication skills, both written and oral. A forensic accountant is engaged in a combination of fraud detection and litigation support, both requiring an inquisitive mind and attention to details.Forensic accounting is a growing and exciting career that reduces the complexity by distilling information and slicing away deceptions to help a judge or jury to see the essence of a financial scam.

The field is broader than fraud auditing because it involves accounting, auditing and litigation support. In addition to the broader perspective forensic accounting also requires a different mindset. Many accountants are trained that numbers do not lie. Auditing is about following the rules. Forensic accountants take the opposite tack because they cannot assume books and financial statements are correct. Books may be cooked; financial statements may be deceptively constructed; records may be false, and invoices may be fake, forensic accountants look beyond the records and invoices.

Forensic accountants follow the motto: “nothing is as it seems”. What kind of knowledge, skills and abilities does the forensic accountant need? What specific courses help ensure the competencies of the financial sleuth who unearths fraud by delving into the form 10ks, Form 10Qs and all the other records and documents.Forensic Account’s Knowledge baseEducation of the Forensic Accountant.How does one get an education that will provide the knowledge, skills and abilities on needs for a forensic accountant career? Accounting majors are already well on their way. The fundamentals provided in such programs – accounting courses, auditing, risk assessment and controls – must be port of the curriculum.

However, there is a need for legal and investigative skills that are needed.Forensic accountant’s techniquesThe crisis in accounting is again focusing attention on fraud detection and the use of forensic accounting techniques. Companies and their auditors should focus not only on detection of fraud, but also on deterrence and prevention.External auditors too are largely responsible for creating safeguards against employee fraud or at the very least, unraveling how it may have occurred once it has occurred. A panel of SEC experts suggest that auditors should make unannounced visits to company locations, conduct surprise counts of inventory items, and request that customers or vendors provide written confirmation of information related to certain transactions.Covert surveillance observes activities while not being seen.

External auditors might watch employees clocking onto a work shift, observing whether they use only one time card. Traveling hotel auditors may check in unannounced, use the restaurant and entertainment facilities and watch the employees skimming receipts and tickets.Uncovering elusive fraudBoth external and internal auditors should perform some forensic type procedures on every audit, but suppose the fraud prevention program fails and the external or internal auditors or the audit committee suspects fraud: what then? If the company or auditors have in-house forensic accounting talent, managers should call them into the audit. Lacking that home-grown talent or in cases where the fraud is complex, and outside forensic accountant may be engaged.

So the investigatory steps may be as follows: traditional audit, expanded investigative audit, and inside or outside forensic accountant. As an audit moves closer to a forensic investigation, the auditor must comply with the litigation services standards. The outside forensic accountant should be Cr. FA, CFFA, or a CFE or a combination.Jack Burk’s forensic firm uses seven investigation techniques.1.

                 Analyze account records and trace funds.2.                 Research background and search for assets.3.                 Develop confidential sources.4.

                 Interview/interrogate persons and find witnesses.5.                 Conduct surveillance efforts.6.                 Guide undercover operations.7.                 Recognize and preserve physical evidence.

Money talked in Enron Audits:David Duncan, the Arthur Andersen lead auditor for the Enron Audit team, was too close to Enron and make to much money from the corporation to be objective ($1 million per year for Duncan). For the year ending August 2000, Andersen received total fees of $58 million from Enron, more than $1 million a week. Duncan was fired by Arthur Andersen and later pleaded guilty to shredding documents in return for cooperating with federal prosecutors. When Duncan invoked his Fifth Amendment rights before congress, Representative James Greenwood opened questioning by saying “Enron had robbed the bank, Anderson provided the getaway car and you were at the wheel.”Duncan had a decade-long relationship with Enron and had been lead auditor for five years. His office was in the Enron building, and he launched with Enron’s CEO and attended U.

S. Masters Gold tournaments with him. Duncan, “hewed to this client’s wishes and sparred with his partners” to help Enron to realize its goals with Byzantine transactions. His personality was soft, and he was happiest when playing gold with Risk Causey. Anderson’s most important client, eventually he directed the effort to shred a ton of Enron-related records after Anderson received a request from the SEC for information about Enron. After Enron collapsed, Duncan’s pastor talked about the pressure Enron put on Duncan.

He was under constant pressure from year to year to push the line. Duncan pressed the Enron point of view with Andersen’s professional standards group and sometimes he was less than forthcoming with member of the group.ConclusionIn the absence of internal auditors and external auditors who take responsibility for fighting fraud, the forensic accountant must step into this void. The SEC seems to be moving the traditional players in like, but despite improvements in fighting fraud on all sides, there will be a need for forensic accountants who are specially trained and more suited personality-wise to remain independent and detect and fight fraud. These specialists may become part of one of the auditing teams or may be engaged separately.

A comparison can be made between a forensic accountant and a management consultant. Whereas the skilled management consultant arrives from the outside and cuts through the personalities to make the tough calls about waste and assess things like customer focus, marketing prowess, proper infrastructure and sales organization effectiveness, the forensic accountant can be engaged to take an independent look at controls, systems, personal data, etc to detect fraud.Efforts of Congress, the SEC, the various stock exchanges, accounting associations and authorities and other will continue to place more pressure on management, audit committees, accountants and auditors to fight fraud. Still, the stakes are high and the special skills and knowledge to effectively fight fraud are substantial. Counting on internal auditors and independent public accountants engaged for the financial audit to uncover financial statement fraud in all its complexities is unrealistic. Specialists in fraud detection who posses the required mindset, the proper objectivity and the required skills will be necessary. Whether these fraud fighters are part of the internal audit team, independent audit team committee, or some yet-unknown entity to approach the problem from another angle remains to be seen.

Although the task is daunting, the fraud-fighting toolset will continue to develop. As more fraudulent activities of the past several years are examined in detail, more inside information will become available and will be used to develop more sophisticated fraud detection skills and techniques.ReferencesThomas W.

Golden, Steven L. Skalak, and Mona M. Clayton, (2005), A Guide to Forensic Accounting Investigation D. Larry Crumbley, Lester E.

Heitger, and G. Stevenson Smith, (2005),Forensic And Investigative AccountingHoward Silverstone and Michael Sheetz (2006), Forensic Accounting and Fraud Investigation for Non-ExpertsTommie Singleton, Aaron J. Singleton, G. Jack Bologna, and Robert J. Lindquist (2006), Fraud Auditing and Forensic Accountinghttp://www.forensicaccounting.com/http://www.forensic-accounting-information.com/