Posted: May 25th, 2022
Skill Set for Forensic Accounting
Forensic accounting is the search of evidence and financial facts of legal problems for a civil or criminal court. This is a method for investigating business situations and financial transactions to gain the truth and opinion on fraudulent activities (Kushniroff, 2012). The field of forensic accounting has two main areas of expertise, these are investigative accounting fraud, and litigation supports (Bruce, 2009). Litigation support entails revenue analysis, business valuation, future earnings evaluation, and expert witness testimony. Investigative accounting fraud involves the process of getting evidence of disproving damages and criminal misconduct.
An accountant carrying out a forensic search on financial accounts searches for factual data on specific documentation and financial information. They carry out detailed investigation of facts and use supporting documentation to backup these facts (McLean, 2012). In presenting this data, they are not required to offer opinions, but state facts based on findings. To achieve this, different theorists identify key characteristics and skill sets for successful accounting.
First, forensic accounts need to posses the ability or know how of the law of evidence to be effective investigators. This involves their legal stipulation and legal mandate on carrying out forensic accounting activities, and the legal definition of forensic accounting separate from fraud detection (Ramaswamy, 2005). This also involves the legal issues of any type of accounting fraud, and the documentation required to prove the fraud. This is necessary in handling and investigation of business related accounting problems (Kushniroff, 2012). A forensic accountant with these skills can take the right legal action against a business or partners associated with a specific accounting problem.
Secondly, forensic accounts require the ability to identify legal issues (Malan & Smit, 2001). This implies they hold the skill to prevent corruption and fraud in situations they suspect and can prove there is accounting and financial misconduct. The forensic accountant possesses the professional abilities and knowledge competent, to identify effectively legal information on accounting malpractice.
Thirdly, the forensic accountant should “know how to interpret financial information” (Malan & Smit, 2001). This is the ability to understand the accounting and audit data, accounting and audit procedures, evidence, and litigation information. This is useful not only in identify problems or gaps in the information, but also assists the accountant to simplify the information for the business (Ramaswamy, 2005). A forensic account that understands and can interpret accounting information has the ability to simplify it for a business’s management and stakeholders.
Fourthly, the forensic account should possess knowledge and skills of investigative techniques. This implies the knowledge of using auditing and accounting procedures, in combination with investigate techniques, and evidence gathering (Kushniroff, 2012). Investigative techniques often used in forensics are analytical procedures, inspecting and observing, unpredictable audit tests, conducting interviews, and making inquiries (Ramaswamy, 2005). The use of these skills regular in a financial statement audit can identify accounting problems for a business early. This early detection makes it possible for the business and accountants to rectify and prevent fraud or corruption.
Lastly, the forensic accountant should posses the skill of presentation of findings. Presentation of findings entails to provision of documentation evidence to support claims, the legal foundations for the investigation and consequences for the accounting problems (Malan & Smit, 2001). Presentation of findings also includes effective communication skills and simplification of accounting jargon for the business stakeholders to comprehend.
A forensic accountant who possesses the five skills sets is able to create preventative and reactive strategies to any accounting misconduct (Ramaswamy, 2005). They can assist a business to create preventative strategies like codes of conduct, pre-employment screening, risk indication, corruption recovery plans, and corruption awareness campaigns. Reactive strategies are sorting and indexing documents, interrogation, assessing evidence, compiling reports for clients and courts, and preparing expert testimony (Malan & Smit, 2001).
Forensic accounting entails litigation services and investigative accounting. In each category, an account is required to provide forensic evidence of the crime and testify in the courtroom (Pagano, 2005). A forensic accountant works together with private investigators, attorneys, and federal agencies like the FBI, IRS, and law enforcement officials in financial crime (Bruce, 2009). The role of the forensic accountant is to create the relation and application of financial facts to social and business problems (Bruce, 2009). They make factual representation of economic issues associated with litigation. In the litigation process, parties involved in a legal dispute sustain forensic accounting. The forensic accountant assists in providing evidence to resolve the dispute in the court (Pagano, 2005). They act as expert witnesses in criminal matters associated with financial crimes like fraud, financial settlement, insurance fraud, and identity theft. Forensic accountants are to act as scientists that examine and interpret accounting facts and evidence in legal cases, give lawyers their expert opinions on findings to the court of law. Therefore, they analyze, summarize, interpret, and present complex business and financial documents in a manner understandable to the litigation team and courts.
Forensic accountants have a legal mandate to report all accounting scandals to businesses and the law. They are required to use transparency and honesty in reporting accounting scandals, along with the untangling complicated accounting maneuvers in financial statements (Bruce, 2009). This implies they must have the professional skills to identify, expose, and prevent problems in key areas like flawed internal controls, corporate governance, and financial statements (McLean, 2012). The forensic accountant reports to corporate governance all changes and regulatory actions required to rectify accounting problems. The accountant has the legal power to investigate company officers and directors ethical and legal scrutiny (McLean, 2012). Overall, the forensic accountant’s skills are needed as part of the corporate reporting system that creates accountability and responsibility to the business stakeholders.
Forensic accountants have assisted in investigating major financial and accounting frauds like the collapse of Enron. After Enron collapsed, forensic accountants investigating the company revealed that for many years, the company executives issued false financial statements (Boone & Kurtz, 2011). These financial statements had grossly exaggerated the earnings of the company, thereby increasing the stock prices. The financial statements also have painted an image of a steady increase in the profits, which met the earning expectations of investors (Kushniroff, 2012). However, in reality, the company and its investors were performing poorly, as the profits did not exist. In fact, Enron had been losing money for many years (Boone & Kurtz, 2011). Enron was dealing with limited liability from corporations it controlled, and allowed them to hide their losses and debts from financial statements. The forensic accountants revealed the company’s accounting firm was aware of the close to bankruptcy situation but hid it from stakeholders, employees, and consumers (Boone & Kurtz, 2011). The accounting scandal was made worse by the insistence of the executives to issue false financial statements, even when the truth began to leak out and stock prices fell. Accounting forensics was useful for it provided evidence that led to the prosecution and conviction of two Enron executives for securities and wire fraud, and conspiracy.
Another accounting fraud revealed and investigated by forensic accounting was at Koss. In December 2009, Sujuta Sachdeva, the Vice President of Finance at the company was fired. This followed a discovery of her embezzlement of funds for four years to pay credit card debts, buy jewelry, and furs (Singleton & Singleton, 2010). At first, the estimate for the fraud loss was $4 million, but further investigations revealed that the actual amount was $31 million. By the end of the Fiscal year 30th June 2009, Koss had made sales of $38.2 million and profits of $2 million (Singleton & Singleton, 2010). The figures for the previous Fiscal year were $50 million and $4.5 million. Given that Sujata stole $8 million each year, the logical conclusion made was that her theft was purely material. At the time of the theft, Koss had hired an auditing firm, Grant Thornton, which was fired for not revealing the discrepancies in the financial records (Singleton & Singleton, 2010). The forensic accounting done on Koss reveals the importance for a business’s auditing firm’s responsibilities. It also shows that an auditing firm is liable to face legal charges for failing to find a fraud in their accounting activities in a business.
The forensic accounting carried out on Koss revealed that the Vice President Sujata and the former Senior Accountant, Julie Mulvane, engaged in a range of accounting fraud cover ups of Sujata’s embezzlement from Koss (Singleton & Singleton, 2010). The investigation revealed that the yearly amounts stole from the company were significant for the amounts were relative to sales and shareholder’s equity. The forensic audit also revealed that the lack of adequate internal controls by Koss and Michael Koss, Mulvaney was able to hide substantial embezzlements by Sujata. Internal controls at the time required Koss to approve invoices for payments of $5,000 or more. However, these systems did not prevent Mulvaney and Sujata to make large cashier’s checks and wire transfers in accounts payable system to pay for personal purchases.
The two fraud cases provide excellent examples of auditor liability and the ability of forensic accounting to reveal the lack of liability. This is more useful following the lack of auditor liability in audit firms for firms like Enron in 2001, and World Com 2002, and Koss 2009 (Singleton & Singleton, 2010). Forensic accounting has proven useful and vital in the revealing of financial statement frauds audited by accounting firms. The forensic accountants involved in such major cases revealed the need for tighter legislation to increase the consequences of altering, fabricating, and destroying financial records in investigations or defrauding stakeholders. The details of the fraudulent cases led the government to require accounting firms and accountants to uphold a high degree of accountability remain unbiased, and independent to clients.
Boone, L.E. & Kurtz, D.L. (2011). Contemporary Business. 14th ed. Wiley Publications.
Bruce, a.C. (2009). The Direct Examination of a forensic accountant. Family Advocate, 31(4), 39-41.
Kushniroff, M. (2012). Forensic accounting demystified. GSTF Business Review (GBR), 1(4), 19-24.
Malan, F. & Smit, B. (2001). Ethics and Leadership: In Business and Politics. Gazelle Distribution.
McLean, M. (2012). Forensic accounting 101. Journal of Business, 27(6), 19-19.
Pagano, W.J. (2005). Expert Eye Witnessing in Forensic Accounting. R.T. Edwards, Inc.
Ramaswamy, V. (2005). Corporate Governance and the Forensic Accountant. The CPA Journal, 75, 69-70.
Singleton, T.W. & Singleton, a.J. (2010). Fraud Auditing and Forensic Accounting. Wiley, John & Sons, Inc.
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