FORENSIC ACCOUNTANTS AND FRAUD BASTERS

Forensic Accountants and Fraud Basters

Forensic Accounting

Forensic accountants are experienced accountants, auditors, and investigators of possible fraudulent cases in a company. A certified forensic accountant must have a CPA, CrFA and have investigative skills (James, 2010). They are hired to look into financial documents in cases where there is suspicion of fraud, or help the company prevent these cases by straightening their accounts. They provide services in the following areas: accounting, bankruptcy, insurance claims, personal injury claims, tracking terrorism, and audits. They work closely with agencies during investigations and at times appear as witness in fraud cases. This field is very in important in identifying malpractices by the managers in the company.

Skills Required

A good forensic accountant is not just a good accountant because of the numbers. Any good accountant will definitely be competent in accounting matters, and produce accurate results under the GAAP. Potential forensic accountants need more than confidence and integrity in order to be effective at what they do, they need the following qualities and skills to do a good job.

Inquisitive:The accountant needs to enjoy complicated puzzles and brain teasers. This will help in ensuring there is vast interest to solve crimes and find the truth. They should be intrinsically motivated to find challenging cases and work towards solving them. Tracy Coenen, a forensic accountant says (Crumbley, Heitger & Smith, 2007), “Some people say I have a nose for fraud. . . . The more complicated the puzzle, the better I like it.” This clearly shows that she likes what she does and is always looking for challenging cases to apply her skills. This helps in promoting efficiency in the practice because the accountant is doing it for something more than just money.

Analyze and interpret financial statements and information

The forensic accountant should be willing and ready to go through a large number of documents in their quest to find answers. They should scrutinize the financial information with accuracy in order to find the missing links in the information available. They should be fast and accurate in order to meet deadlines. This information is usually required for investigative procedures and often relied upon in order to make decisions on different issues. They need to be detail oriented and look for mishaps in the financial data available.

Good communication skills: The forensic accountants will be brushing shoulders with other accountants and managers in the organization. This means they will have to possess good command of the language being used in the organization to help them interact with the managers and workers (Stuart, 2006). This will help in clarifying information which helps them in beating the deadline. They should also have good writing skills in order to represent the data to users. The accountants should know the methods used to report and represent the output of an investigation.

Law and investigative techniques: They need to have a background understanding on how the law works in the country. The forensic accountants sit for an exam on investigative techniques in order to get a certificate in fraud examination. This helps in digging up the required information and knowing where to look in order to save time. They should also be acquainted on the different methods of reporting criminal activities if they uncover any malpractices. Understanding the legal process will be vital for the accountants in case a company does not want to act on the findings from the investigations.

Tenacity and attention to detail: The accountants should be keen not miss any details in the investigation process. They should be resilient in the process to come up with the truth whether it’s negative or positive (Stuart, 2006). Their judgment should not be biased to always be out to uncover wrongs, but to make sure the available statements are a reflection of the organization’s performance. They should exercise persistence and scrutiny while they investigate any malpractices.

Role of Forensic accountants within a courtroom environment

Forensic accounting is continuously becoming a topic of interest in recent years due to the increase in high profile cases of individuals and companies being charged with fraud. Forensic accountants are tasked with the job to unravel any cases of fraud in the financial sector. The fall of Enron, WorldCom, and the rise in the number of Ponzi schemes highlights the importance of this section of accounting to the economy (Cited in Crumbley, Heitger & Smith, 2007)

The main role of forensic accountants in courtrooms is to act as a key witness in fraud proceedings. The accountants are the people behind the findings, so they are required to testify in court on the methods used to get the results, and give more information regarding the outcomes of an investigation. They also provide expert evidence and information for scrutiny by the attorney, judges, juries, and the lawyers (Stuart, 2006).

The accountants help the courts by providing information and breaking it down for solicitors to understand. Their opinion is expected to be unbiased to both sides of the team. This will help uphold their integrity and reliability in regards to the findings on a case.

Analysis of the legal responsibility of a forensic accountant while providing service for a business

A business faces different challenges in its daily operations, which can be from the workers, the market, and insurance companies (James, 2010). The services of the forensic accountant can be required by the business at any time if a case arises. The following scenarios clearly outline the requirement of the accountant when representing the company in different cases.

Personal injury claim: The forensic accountant has to represent the business by investigating the injured party’s financial claims. It has to be determined whether the injury fits the compensation criteria of the business. They have to investigate the doctor’s findings on the case and how it will affect the earnings of the business. Wrongful termination, death cases, and medical malpractice often require a written report and an experts witness testimony (Rusell& Gordon, 2010).

Partnership and shareholders disputes: In case of complains from shareholders, forensic accountants are often required to perform a detailed analysis on accounting records to trace, identify, and quantify the dividends the shareholders receive (Rusell& Gordon, 2010). This will help in retaining shareholders and attracting potential investors due to the transparency of the business.

Commercial damages: The forensic accountants are often required to be expert witnesses to any issues of lost profits or unjust enrichment. They represent the business in litigation matters involving disputes such as breach of contract, fraud, productive liability, construction claims and property infringement. They provide evidence in court that will support claims made by the business (Rusell& Gordon, 2010).

Business/Employee Fraud: The forensic accountants can trace lost funds, and investigate loss of assets by the business. They can also help in trying to retrieve these assets if they belong to the business and were wrongfully acquired by another party.

The forensic accountants are expected to be loyal while representing the company. They should not offer biased results or unlawfully be swayed away from their venture. They are expected to operate professionally and be discreet with their results (Rusell& Gordon, 2010).

Two cases where forensic accountants played an important role

The Enron case: The collapse of Enron played a major role in highlighting the importance of forensic accounting on large companies (Cited in Crumbley, Heitger & Smith, 2007). Enron had floated its share on the New York stock exchange and was seen to be performing well before its collapse. The managers of the company were giving false statements to the shareholders and attracting potential investors to buy the stock. This helped in maintaining a steady rise in the share price of the company. The shareholders had no idea that they were buying themselves into a loss making company. The company kept on feeding false information to the buyers before it was discovered by a financial analyst. After it was reported that the company was not making profits, the managers released another financial statement to the public on the profits they had made for that quarter. The company later collapsed and the managers awarded themselves large benefits for the scheme they had pulled off. However, forensic accountants were called to investigate the reason why the company went under. They found a lot of inconsistencies in the financial statements and the profits that were being reported. The managers were later hunted and taken to court, but some died due to stress from the crisis. This is one of the cases where investors lost millions of dollars to managers due to bad management practices.

The Sunbeam case: In 1997, a small appliances manufacturing company known as Sunbeam, exercised bill and hold (Crumbley, Heitger & Smith, 2007). This is when a company records sales for its product in the first quarter while waiting to deliver the product at a later date. In a typical situation sales are not recorded before the products are shipped out of the warehouse. Sunbeam was selling a huge amount of the products to other companies while the products were still in the warehouse. They recorded huge profits in their books but the products were still in their warehouse. This malpractice was unraveled by a financial analyst at Paine Webber investment firm, who devalued Sunbeam’s stock.

Even though bill and hold isn’t illegal, the shareholders felt cheated and filed a lawsuit against Sunbeam’s accounting firm. In the audit firm, Arthur Anderson reported that the books were accurate and in accordance with federal guidelines. It was later discovered that the audit firm had deals with Enron which questioned the credibility of their report (Crumbley, Heitger & Smith, 2007). The board of directors hired Deloitte & Touché to review the audit report by Arthur Anderson. This follow up showed that the numbers had been manipulated. The Securities and Exchange Commission later investigated Sunbeam, and the CEO Alfred Dunlop was fired and forced to pay $500000 in fines and millions to settle law suits. The CEO was banned from holding any public office after this scandal.

Conclusion

Forensic accounting is becoming a core part in business dealings every day, because of the increase in its practicability in the business environment. Companies are applying this practice to help boost transparency in the system of governance and retaining shareholders loyalty. The practice is being applied in more fields outside accounting to help solve disputes among different parties. A lot is expected from forensic accounting in the future as the business environment keeps on evolving.

 

 

References

Crumbley, D.L., Heitger, L.E., & Smith, G.S. (2007). Forensic and Investigative Accounting. London: CCH

James, A. (2010)DiGabriele, “Applying Forensic Skepticism to Lost Profits Valuations,”Journal of Accountancy, Retrieved 12 Sep 2012, http://www.journalofaccountancy.com;

Mark, N. (2011). Forensic Analytics: Methods and Techniquesfor Forensic Accounting investigations. New York. John Wiley & Sons

Rusell, L., & Gordon, V. (2010). Intellectual Property: Valuation, Exploitation, and Infringement Rights. Hoboken, N.J. Wiley

Stuart, P. (2006). A Moral Theory of White Collar Crime. Oxford. Oxford University Press

 

 

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