PIPFA Journal Jul-Dec 2012

Articles PIPFA Journal Role of the Forensic Accountant/Auditor (FA) in the prevention and detection of business fraud By: Majid Latif Bhatti, PIPFA Student Forensic refers to something pertaining to or and business valuation. uncover the facts. used in a court of law. However, in practice, These investigations occur in contexts such As many damage calculations require forensic typically refers to the method of as civil litigation, alternative dispute resolution, construction of a theoretic reality “but for the obtaining evidence related to any investigation, insurance claim adjustment, internal fraud event,” the team must also be adept at working not just a crime or legal matter. In the latter investigation, securities class action and through the facts and a hypothetical situation context, the forensic financial expert internal corporate investigations. The as if no damage event occurred.The investigates and analyzes financial evidence questions posed to the forensic financial expert complexity of the financial issues posed in with the goal to provide expert testimony on are increasingly more complex, requiring skill litigation and forensic investigations requires financial damages for parties in litigation. sets beyond a typical understanding of a very broad, multidisciplinary approach to The definition of forensic accounting is financial records and Generally Accepted the investigative and damage calculation changing in response to the growing needs Accounting Principles (GAAP). phases of the legal process. of corporations. Bologna and Lindquist (in Fraud Auditing and Forensic Accounting, Knowledge of forensic accounting is only The new professional field of financial 1995) defined forensic accounting as “the part of the equation. More often, a team of forensics and the variety of experts that fill application of financial skills, and an forensic financial specialists with a variety of this bill provide corporations and attorneys investigative mentality to unresolved issues, skill sets is needed to address the many with the tools required to respond to complex conducted within the context of rules of challenges posed by a case. For example, the litigation and dispute resolution. evidence. logistics of finding data in numerous locations Types of fraudulent acts such as tape drives, personal computers and As a discipline, it encompasses financial BlackBerry wireless devices require forensic Fraud can be committed through many expertise, fraud knowledge and a sound technology specialists who are familiar with media, including mail, wire, phone, and the knowledge and understanding of business electronic data systems and who can identify Internet (computer crime and Internet fraud). reality and the working of the legal system.” and ferret through electronic storage devices The international dimensions of the web and This implies that the forensic accountant to find case critical documents. ease with which users can hide their location, should be skilled not only in financial the difficulty of checking identity and An allegation of market manipulation often accounting, but also in internal control systems, legitimacy online, and the simplicity with requires an understanding of economics, the law, other institutional requirements, which hackers can divert browsers to dishonest finance and how financial investment firms investigative proficiency, and interpersonal sites and steal credit card details have all operate to fully document issues of causation skills. contributed to the very rapid growth of and actual loss sustained. Permanent Internet fraud. Corporations can rely on these skills for impairment of a company’s value due to an developing a consistent system of corporate alleged act will necessitate the use of accepted Types of criminal fraud include: governance, disseminating such information valuation skills. • Advance-fee fraud within and outside the company, ensuring that governance policies and objectives are This complexity has created a need for a • Bait and switch multidisciplinary profession of “Financial interwoven into the internal control system, • Bank fraud to obtain money, assets, or Forensic Experts” who are proficient in setting up fraud prevention systems, and other property owned or investigating any existing fraud. accounting, finance, economics, computer technology, statistics, valuation and legal Held by a financial institution The role of the forensic accountant has processes. Specific industry expertise is also • Bankruptcy fraud expanded significantly during the last several an important element in the equation, making • Benefit fraud, committing fraud to get years for many reasons, including the this team a group of highly-specialized experts government benefits requirement for greater scrutiny on corporate indeed. governance brought about by the Sarbanes- • Counterfeiting of currency, documents The investigative forensic team rarely has Oxley legislation and the widespread or valuable goods recognition of the risks and prevalence of access to all of the relevant information related • Charlatanism financial fraud in today’s business to a case. Therefore the ability of the team to environment. respond with absolute certainty is not always • Confidence tricks such as the 419 fraud possible. Manipulation of records, destruction and Spanish Prisoner As a result, forensic financial specialists are of evidence, time limitations on completing • Creation of false companies or "long usually retained to support special the investigation and restrictions imposed by firms" investigations related to a broad range of the litigation investigative process by the subjects. This can include the financial impact parties involved are some of the reasons that • Embezzlement, taking money which of marketplace events, such as intellectual certain data cannot be found. With this in one has been entrusted property infringement and anti-trust actions, mind, the forensic team must utilize a number with on behalf of another party financial reporting fraud, asset impairment of skills and techniques to reconstruct or • False advertising 14 Articles PIPFA Journal • False billing because of some false information that B gave of a payment for an illegal act, a Forensic • False insurance claims to A. For example, if John tells his mother Accountant (FA) may take the lead on that that he is taking a college course on aspect of the case. • Forgery of documents or signatures, handwriting analysis, and for his homework, In rarer situations, a Forensic Accountant • Franchise fraud where the real profit is he needs her to read and sign a pretend deed. (FA) may be asked to help determine whether earned, not by the sale of the product, If Mom signs the deed believing what he or not a suspect is under financial pressure, but by the sale of new franchise licenses. told her, and John tries to enforce the deed, which can be part of a legal strategy when • Fraud upon the court Mom can plead "fraud in the factum." showing adequate motivation for a crime. In • Health fraud, for example selling of Fraud in the inducement is an equitable these kinds of cases, a Forensic Accountant products known not to be effective, such defense, and occurs when A signs a contract, (FA) may be called as an expert witness to as quack medicines, knowing that it is a contract and (at least interpret and explain data before a jury. having a rough idea) what the contract is Forensic Accounting at a Federal Level • Identity theft about, but the reason A signed the contract Forensic Accountants (FAs) working for the • Impersonation was because of some false information that federal government may be tasked with even • Impostery B gave to A. For example, if John tells his greater responsibility, and more complex mother to sign a deed giving him her property, projects, than those serving in other private • Insurance fraud Mom refuses at first, then John explains that or public arenas. • Investment frauds, such as Ponzi the deed will be kept in a safe deposit box According to spokespeople at the Federal schemes and Pyramid schemes until she dies. If Mom signs the deed because Investigation Agency (FIA), Forensic • Marriage fraud to obtain immigration of this statement from John, and John tries Accounting is a key part of the FIA‘s strategy rights without entitlement to enforce the deed prior to Mom's death, in cases as diverse as criminal matters, Mom can plead "fraud in the inducement." • Moving scam counterterrorism, and even foreign Forensic accountants utilize an understanding counterintelligence investigations. Forensic • Religious fraud of economic theories, business information, Accounting in the Private Sector Forensic • Rigged gambling games such as the shell financial reporting systems, accounting and Accountants (FAs) are also employed by game auditing standards and procedures, data businesses that are seeking to identify and • Securities frauds such as pump and management & electronic discovery, evidence prevent fraud within their own companies, dump gathering and investigative techniques, and or with business partners. litigation processes and procedures to perform A Forensic Accountant (FA) may be • Tax fraud, not reporting revenue or their work. Forensic accountants are also illegally avoiding taxes. In some countries, employed by a corporation that wishes to increasingly playing more proactive risk prove it has clean practices to its stockholders, tax fraud is also prosecuted under false reduction roles by designing and performing billing or tax forgery

Load more