Forensic accounting

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Forensic accounting, forensic accountancy or financial forensics is the specialty practice area of accounting that investigates whether firms engage in financial reporting misconduct. [1] Forensic accountants apply a range of skills and methods to determine whether there has been financial reporting misconduct. [2]

Contents

Financial forensic engagements may fall into several categories. For example:

History

Forensic accounting was not formally defined until the 1940s. Originally Frank Wilson is credited with the birth of Forensic Accounting in the 1930s. When Wilson was working as a CPA for the US Internal Revenue Service, he was assigned to investigate the transactions of the infamous gangster Al Capone. Capone was known for his involvement in illegal activities, including violent crimes. However it was Capone’s Federal Income Tax fraud that was discovered by Forensic Accountants. Wilson’s diligent analysis of the financial records of Al Capone indicted him for Federal Income tax evasion. Capone owed the government $215,080.48 from illegal gambling profits and was guilty of tax evasion for which he was sentenced to 10 years in Federal Prison. This case established the significance of Forensic Accounting. [3]

Forensic accountants

Forensic accountants, investigative accountants or expert accountants may be involved in recovering proceeds of serious crime and in relation to confiscation proceedings concerning actual or assumed proceeds of crime or money laundering. In the United Kingdom, relevant legislation is contained in the Proceeds of Crime Act 2002. Forensic accountants typically hold the following qualifications; Certified Forensic Accounting Professional [Certified Forensic Auditors] (CFA - England & Wales) granted by the Forensic Auditors Certification Board of England and Wales (FACB), Certified Fraud Examiners (CFE - US / International), Certificate Course on Forensic Accounting and Fraud Detection (FAFD) by Institute of Chartered Accountants of India (ICAI), Certified Public Accountants (CPA - US) with AICPA's [Certified in Financial Forensics est. 2008] (CFF) Credentials, Chartered Accountants (CA - Canada), Certified Management Accountants (CMA - Canada), Chartered Professional Accountants (CPA - Canada), Chartered Certified Accountants (CCA - UK), or Certified Forensic Investigation Professionals (CFIP). In India there is a separate breed of forensic accountants called Certified Forensic Accounting Professionals. [4]

The Certified Forensic Accountant (CRFAC) program from the American Board of Forensic Accounting assesses Certified Public Accountants (CPAs) knowledge and competence in professional forensic accounting services in a multitude of areas. Forensic accountants may be involved in both litigation support (providing assistance on a given case, primarily related to the calculation or estimation of economic damages and related issues) and investigative accounting (looking into illegal activities). The American Board of Forensic Accounting was established in 1993.

In 2016, the Forensic Auditors Certification Board (FACB) of England and Wales was established by the major forensic auditing and accounting bodies from across the world with its registered address in London. FACB is a professional bodies membership body comprising the International Institute of Certified Forensic Accountants (IICFA) of USA, Institute of Forensic Auditors of Zimbabwe (IFA), Institute of Forensic Accountants of Pakistan (IFAP), Institute of Certified Forensic Accountants (ICFA) of USA and Canada and the Institute of Forensic Accountants of Nigeria (IFA). FACB plays several roles and one the roles is standardization of the examination and certification of forensic auditors globally. Forensic auditors and accountants sit for one examination that is set by FACB and upon passing and meeting all the professional requirements, are awarded the credential, Certified Forensic Auditor (CFA) or the Registered Forensic Auditor (RFA) for practitioners who intend to go into public practice. All certification is renewed on an annual basis. Apart from practitioners certification, FACB is an oversight body which accredits prospective member organization before admission as part of quality checks. Persons with the FACB credential can practice as forensic auditors on a global scale.

Large accounting firms often have a forensic accounting department. [5] All of the larger accounting firms, as well as many medium-sized and boutique firms and various police and government agencies have specialist forensic accounting departments. Within these groups, there may be further sub-specializations: some forensic accountants may, for example, just specialize in insurance claims, personal injury claims, fraud, anti-money-laundering, construction, [6] or royalty audits. [7] Forensic accounting used in large companies is sometimes called financial forensics.  Forensic accountants combine knowledge of the law with their accounting skills.  They can assess companies, and help companies resolve issues.  This can help companies prevent corruption, fraud, embezzlement, etc. A forensic accountant performing an audit of a company should remain neutral.  Large companies mainly use forensic accountants when performing audits; however, there are other uses for forensic accountants in companies [8] Forensic accountants often assist in professional negligence claims where they are assessing and commenting on the work of other professionals. Forensic accountants are also engaged in marital and family law of analyzing lifestyle for spousal support purposes, determining income available for child support and equitable distribution.

Forensic accounting and fraud investigation methodologies are different than internal auditing. Thus forensic accounting services and practice should be handled by forensic accounting experts, not by internal auditing experts. Forensic accountants may appear on the crime scene a little later than fraud auditors, but their major contribution is in translating complex financial transactions and numerical data into terms that ordinary laypersons can understand. That is necessary because if the fraud comes to trial, the jury will be made up of ordinary laypersons. On the other hand, internal auditors move on checklists that may not surface the evidence that the jury or regulatory bodies look for. The fieldwork may carry out legal risks if internal auditing checklists are employed instead asking to a forensic accountant and may result serious consultant malpractice risks.

Forensic accountants utilize an understanding of economic theories, business information, financial reporting systems, accounting and auditing standards and procedures, data management & electronic discovery, data analysis techniques for fraud detection, evidence gathering and investigative techniques, and litigation processes and procedures to perform their work. [9]

This process can employ one or more of the following techniques: Review of Public records, Background investigations, Interviews of knowledgeable parties, Analysis of Real evidence to identify possible Forgery and/or document alterations, Surveillance and inspection of business premises, Analysis of individual Financial transactions or statements, and Review of Business records to identify fictitious vendors, employees, and/or business activities. [10]

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.

See also

Related Research Articles

Accounting Measurement, processing and communication of financial information about economic entities

Accounting or accountancy is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "language of business", measures the results of an organization's economic activities and conveys this information to a variety of users, including investors, creditors, management, and regulators. Practitioners of accounting are known as accountants. The terms "accounting" and "financial reporting" are often used as synonyms.

Professional certification, trade certification, or professional designation, often called simply certification or qualification, is a designation earned by a person to assure qualification to perform a job or task. Not all certifications that use post-nominal letters are an acknowledgement of educational achievement, or an agency appointed to safeguard the public interest.

Accountant

An accountant is a practitioner of accounting or accountancy. Accountants who have demonstrated competency through their professional associations' certification exams are certified to use titles such as Chartered Accountant, Chartered Certified Accountant or Certified Public Accountant. Such professionals are granted certain responsibilities by statute, such as the ability to certify an organization's financial statements, and may be held liable for professional misconduct. Non-qualified accountants may be employed by a qualified accountant, or may work independently without statutory privileges and obligations.

American Institute of Certified Public Accountants

The American Institute of Certified Public Accountants (AICPA) is the national professional organization of Certified Public Accountants (CPAs) in the United States, with more than 418,000 members in 143 countries in business and industry, public practice, government, education, student affiliates and international associates. Founded in 1887, the organization sets ethical standards for the profession and U.S. auditing standards for audits of private companies, non-profit organizations, federal, state and local governments. It also develops and grades the Uniform CPA Examination. The AICPA maintains offices in New York City; Washington, DC; Durham, NC; and Ewing, NJ.

Certified Public Accountant Title of qualified accountants in many countries

Certified Public Accountant (CPA) is the title of qualified accountants in numerous countries in the English-speaking world. It is generally equivalent to the title of chartered accountant in other English-speaking countries. In the United States, the CPA is a license to provide accounting services to the public. It is awarded by each of the 50 states for practice in that state. Additionally, almost every state has passed mobility laws to allow CPAs from other states to practice in their state. State licensing requirements vary, but the minimum standard requirements include passing the Uniform Certified Public Accountant Examination, 150 semester units of college education, and one year of accounting related experience.

Audit Systematic and independent examination of books, accounts, documents and vouchers of an organization

An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon" It also attempts to ensure that the books of accounts are properly maintained by the concern as required by law. Auditing has become such a ubiquitous phenomenon in the corporate and the public sector that academics have started identifying an "Audit Society". Auditors perceive and recognize the propositions before them examination, obtain evidence, evaluate the same and formulate an opinion on the basis of their judgement which is communicated through their auditing report.

Financial audit

A financial audit is conducted to provide an opinion whether "financial statements" are stated in accordance with specified criteria. Normally, the criteria are international accounting standards, although auditors may conduct audits of financial statements prepared using the cash basis or some other basis of accounting appropriate for the organisation. In providing an opinion whether financial statements are fairly stated in accordance with accounting standards, the auditor gathers evidence to determine whether the statements contain material errors or other misstatements.

Chartered accountant Professional designation for accountants

Chartered accountants were the first accountants to form a professional accounting body, initially established in Scotland in 1854. The Edinburgh Society of Accountants (1854), the Glasgow Institute of Accountants and Actuaries (1854) and the Aberdeen Society of Accountants (1867) were each granted a royal charter almost from their inception. The title is an internationally recognised professional designation; the certified public accountant designation is generally equivalent to it. Women were able to become chartered accountants only following the Sex Disqualification (Removal) Act 1919 after which, in 1920, Mary Harris Smith was recognised by the Institute of Chartered Accountants in England and Wales and became the first woman chartered accountant in the world.

Association of Chartered Certified Accountants

Founded in 1904, the Association of Chartered Certified Accountants(ACCA) is the global professional accounting body offering the Chartered Certified Accountant qualification (ACCA). ACCA's headquarters are in London with principal administrative office in Glasgow. ACCA works through a network of over 104 offices and centres in 52 countries - with 323 Approved Learning Partners (ALP) and more than 7,300 Approved Employers worldwide, who provide employee development.

External auditor

An external auditor performs an audit, in accordance with specific laws or rules, of the financial statements of a company, government entity, other legal entity, or organization, and is independent of the entity being audited. Users of these entities' financial information, such as investors, government agencies, and the general public, rely on the external auditor to present an unbiased and independent audit report.

The South African Institute of Chartered Accountants (SAICA), is a professional accountancy body in South Africa.

Institute of Chartered Accountants of India Indian professional body of accounting

The Institute of Chartered Accountants of India (ICAI) is the national professional accounting body of India. It was established on 1 July 1949 as a statutory body under the Chartered Accountants Act, 1949 enacted by the Parliament to regulate the profession of Chartered Accountancy in India. ICAI is the second largest professional Accounting & Finance body in the world. ICAI is the only licensing cum regulating body of the financial audit and accountancy profession in India. It recommends the accounting standards to be followed by companies in India to National Financial Reporting Authority and sets the accounting standards to be followed by other types of organisations. ICAI is solely responsible for setting the Standards on Auditing (SAs) to be followed in the audit of financial statements in India. It also issues other technical standards like Standards on Internal Audit (SIA), Corporate Affairs Standards (CAS) etc. to be followed by practicing Chartered Accountants. It works with the Government of India, Reserve Bank of India and the Securities and Exchange Board of India in formulating and enforcing such standards.

Accountancy in Hong Kong is regulated by the HKICPA under the Professional Accountants Ordinance. The auditing industry for limited companies is regulated under the Companies Ordinance, and other Ordinances such as the Securities and Futures Ordinance, the Listing Rules, etc.

Grant Thornton International

Grant Thornton is the world's seventh-largest by revenue and sixth-largest by number of employees professional services network of independent accounting and consulting member firms which provide assurance, tax and advisory services to privately held businesses, public interest entities, and public sector entities. Grant Thornton International Ltd. is a not-for-profit, non-practising, international umbrella membership entity organised as a private company limited by guarantee. Grant Thornton International Ltd. is incorporated in London, England, and has no share capital.

The following outline is provided as an overview of and topical guide to accounting:

The Association of International Accountants (AIA) is a professional accountancy body. It was founded in the UK in 1928 and since that date has promoted the concept of ‘international accounting’ to create a global network of accountants in over 85 countries worldwide.

Forensic accountants are experienced auditors, accountants, and investigators of legal and financial documents that are hired to look into possible suspicions of fraudulent activity within a company; or are hired by a company who may just want to prevent fraudulent activities from occurring. They also provide services in areas such as accounting, antitrust, damages, analysis, valuation, and general consulting. Forensic accountants have also been used in divorces, bankruptcy, insurance claims, personal injury claims, fraudulent claims, construction, royalty audits, and tracking terrorism by investigating financial records. Many forensic accountants work closely with law enforcement personnel and lawyers during investigations and often appear as expert witnesses during trials.

Certified in Financial Forensics (CFF) is a specialty credential in financial forensics issued by the American Institute of Certified Public Accountants (AICPA).

References

  1. Honigsberg, Colleen (2020-10-13). "Forensic Accounting". Annual Review of Law and Social Science . 16 (1): 147–164. doi:10.1146/annurev-lawsocsci-020320-022159. ISSN   1550-3585.
  2. W.S. Hopwood, J.J. Leiner & G.R. Young, Forensic Accounting, McGraw-Hill Irwin (2008), as quoted by Stephen Pedneault, Frank Rudewicz, Michael Sheetz & Howard Silverstone, Forensic Accounting and Fraud Investigation, John Wiley & Sons, Inc. (4th ed. 2017).
  3. kimberly.vigil (2016-03-31). "What is Forensic Accounting?". The University of Scranton Online. Retrieved 2019-09-12.
  4. "Forensic Auditor Courses catching up in India". business-standard.com. Retrieved 2014-05-18.
  5. "Service of Forensic Accountants". big4accountingfirms.org. Retrieved 2014-04-08.
  6. Cicchella, Denise (2005). Construction audit guide: overview, monitoring, and auditing. Altamonte Springs, FL: IIA Research Foundation. ISBN   0-89413-587-2.
  7. Parr, Russell L.; Smith, Gordon V. (2010). Intellectual property: valuation, exploitation, and infringement damages. Hoboken, N.J.: Wiley. pp. Chapter 33. ISBN   978-0-470-45703-0.
  8. Shapiro, David M. "Beyond the courtroom." Strategic Finance, vol. 97, no. 3, Sept. 2015, p. 46+. Gale OneFile: Business, https://www.northeaststate.edu:2081/apps/doc/A429090770/ITBC?u=tel_a_nestcc&sid=ITBC&xid=87cb0a01. Accessed 23 Sept. 2020.
  9. "Background of Fraud Auditing and Forensic Accounting", Fraud Auditing and Forensic Accounting, Hoboken, NJ, USA: John Wiley & Sons, Inc., pp. 1–37, 2011-12-20, doi:10.1002/9781118269183.ch1, ISBN   978-1-118-26918-3 , retrieved 2020-09-09
  10. Gottlieb, CPA/ABV/CFF, ASA, CVA, CBA, MST, Mark S (2020). "Forensic Investigations & Litigation Support". ForensicAccountingNYC.com. Retrieved 2020-08-28.CS1 maint: multiple names: authors list (link)