FORENSIC ACCOUNTING AND ITS ACCOUNTING PROFESSIONS

INTRODUCTION

Forensic accounting is a method of investigating financial transactions and business

situations in order to obtain the truth of and develop an expert opinion regarding possible
fraudulent activity. Two areas of expertise make up the field of forensic accounting: litigation
support, and investigative or fraud accounting. Litigation support includes business valuation,
revenue analysis, expert witness testimony, and future earnings evaluation. Investigative
accounting is the process of gathering evidence of criminal conduct, and substantiating or
disproving damages (Fillmer, 2003).

Not a new profession, forensic accounting has been around for several decades; however,
the recent wave of corporate scandals, new accounting rules, and the Sarbanes-Oxley Act are
forcing companies to search more aggressively for fraud. Forensic accountants are now being
hired by boards of directors to assist with companies’ corporate governance and financial
reporting, in efforts to reduce fraud (Iwata, 2003).

According to D. Larry Crumbley, the phrase “forensic accounting” was coined in print
for the first time in 1946 by Maurice E. Peloubet, who stated that forensic accounting was not
only practiced in courtrooms, but was involved in what was essentially a type of forensic practice
(Crumbley, Heitger and Smith, 2005). Forensic accounting is the specialty area of the
accountancy profession, the results of which are used in actual or anticipated disputes and
litigation. “Forensic” means “suitable for use in a court of law”, and it is to that standard and
potential outcome that forensic accountants generally have to work (Ozkul and Pamukcu, 2012).

Forensic accountants, who in many countries are called forensic experts, fraud examiners
or forensic accounting investigators, perform these functions. These specialists work at different
police and state institutions, science institutes, large audit companies or operate in private
practice. Forensic accountants are trained and experienced in resolving financial disputes
through document analysis to include both financial and nonfinancial information, interviewing,
and third party inquiries. Forensic accountants are members of a broad group of professionals
that includes those who perform financial investigations, but it is actually wider (Skalak, Alas
and Sellito, 2006).
 Accounting examination may be criminal accounting expertise related to forensic crime
investigation or related to accounting of damages in civil proceedings, such as insurance. They
have further specializations: accounting, economic calculations, insolvency diagnostic, fraud
detection in financial statements, assets misappropriation, tax evasion, money laundering,
business evaluation, etc. There is a broad approach to defining the performance of accounting
examinations, since it can act in Labor, Civil and Criminal justice and in the extrajudicial area
(Santos Filho, Carlos and Costa, 2017).

HISTORY OF FORENSIC ACCOUNTING

The earliest known evidence of forensic accounting has been traced to and advertisement
in a newspaper in Glasgow, Scotland, appearing in 1824. At that time, arbiters, courts, and
counsels, used forensic accountants to investigate fraudulent activity. However, it was not until
the early 1900s in the United States and England, when articles providing guidance on giving
expert testimony appeared (Crumbley, 2003).
Need for forensic accounting has resulted from regulatory and criminal statutes passed
over time. In the early 1900s, the adoption of the Federal Income Tax created demand for
forensic accountants, due to income tax evasion. As a result, the Internal Revenue Service (IRS)
developed many of the forensic techniques used to detect tax evaders. One of the first income
tax evasion cases uncovered by forensic accountants was that of the infamous gangster, Al
Capone. During World War II, the Federal Bureau of Investigation (FBI) employed over 500
forensic accountants who were used to examine and monitor financial transactions (Ziegenfuss,
2003).
As the forensic accounting profession has grown over time, several publications have
been produced to provide guidance. In 1946, Maurice Peloubet, an accountant from New York,
published the article entitled “Forensic Accounting: Its Place in Today’s Economy.” The book,
Forensic Accounting: The Accountant as an Expert Witness was written by Francis C.
Dykeman, in 1982. The American Institute of Certified Public Accountants (AICPA) issued
Practice Aid 7 in 1986, which outlines six areas of litigation services including: damages,
antitrust, accounting, valuation, general consulting, and analyses. Also among the literature
featuring forensic accounting, is the Journal of Forensic Accounting: Auditing, Fraud &
Taxation. Due to the growth of the profession, the American Board of Forensic Accountants was
founded in March of 1997. Currently, there are at least sixteen universities and colleges offering
courses in forensic accounting (Crumbley, 2003).

THE SCOPE OF FORENSIC ACCOUNTING (THE FIELD OF APPLICATION)

With the developments in the world, the application field of forensic accounting has also
expanded. The fields of application can be classified as; fraud, detection of fraud and litigation
support consultancy (Crumbley, 2001, p.204). It is possible to classify the scope of the forensic
accounting profession under three main headings.
 Litigation Support,
 Expert Testimony,
 Fraud Auditory (Investigative Accounting/Fraud Investigation)

Litigation support: Is the most comprehensive field of application for forensic accounting.
Until the 1980s, the main area of forensic accountants in the United States was criminal cases,
this area expanded with globalization and they began to support various cases (Kuloğlu, 2007,
p.101). In this context, forensic accountants collect reliable financial information, analyze the
data and prepare reports in the light of this information. In addition, as sworn witnesses, they
prepare the questions and direct the questioning (Owojori & Asaolu, 2009, p.185). Litigation
support is defined as the support provided to the relevant parties in all process evaluations
regarding the crime in dispute cases that have been submitted to the court. Forensic
accountants, in particular, assist judges and lawyers who do not have sufficient knowledge in the
field of accounting and finance, by providing information in a field of expertise (forensic
accounting) and by providing advice during the court process.

Forensic accounting provides accounting analysis that is suitable to the court, which will
form the basis for discussion, debate and ultimately dispute resolution. In the context of legal
dispute, the knowledge, skills and experience of a good forensic accountant are extremely useful
as a consultant to litigation counselor judges. Litigation often involves complex accounting, tax
and financial matters requiring the specialized knowledge and expertise of highly trained
accounting, finance and tax professionals (http//www.Pueleibowitzandchickic.com/1
itigation.shtml). Litigation support represents the Factual presentation of economic issues
relating to existing or pending litigation. It provides assistance of an accounting nature in a
matter involving existing or pending litigation. A typical litigation support assignment would be
calculating the economic loss resulting from breach of contract. In this capacity, the forensic
accounting professional quantifies

Support damages sustained by parties involved in legal disputes and can assist in
resolving dispute even before they reach the court room. Not every forensic accounting process
ends up in the court of law. However, if a dispute reaches the court room, the forensic accountant
may testify as an expert witness. Omoniyi (2004) stated that the function of an expert witness is
to assist the court reach a conclusion on matters on which the court itself may not have the
necessary knowledge to decide. What a forensic accountant can contribute to litigation will
depend substantially on the circumstances and the nature of each case.

Litigation consultants are usually engaged in legal action where financial information
requires critical analysis. It typically involves the forensic accountant being engaged by a lawyer
to make an assessment of financial losses involved. Engagements relating to civil disputes may
fall into several categories. Calculating and quantifying losses and economic damages, whether
suffered through tort or breach of contract, disagreement relating to company acquisitions
perhaps earn-outs or breach of warranties and business valuation. Forensic accountants often
assist in professional negligence claims where they are assessing and commenting on the work of
other professionals (http://en.wikipedia.org/wiki/Forensic-accounting). Messier, Jr (1997),
observed that there has been an increase in litigation against auditors ill recent years. One reason
for such lawsuit is that auditors are perceived as having 'deep pockets' and injured parties hope to
recover some or all of their auditors. In auditor malpractice suits a forensic accountant would be
used to explain what audit procedures or lack thereof, may have contributed to the company's
misstatement (http://www.norcrossgroup.com/forensciacct.ltml).

In summary, a forensic accountant can be of assistance in litigation support in the

following ways:

 Assistance in obtaining the key document which should be made available as evidence.
This is very necessary in order to support or refute a claim
  Review of the relevant documents in the initial assessment of the case in order to identify
possible and probable areas of loss.
 Briefing council on the financial and accounting aspects of the case during pre-trial
preparation.
 Advising lawyers during trials, particularly in relation to cross examination of the
opposing expert.
 Review of the opposing expert's damages report and reporting on both the strengths and
weakness of the position taken.
 Assistance in settlement discussions and negotiations.
 Giving oral evidence at trial if the case must be settled in the court of law.

Expert Testimony (Expert Witnessing): In the cases requiring professional financial and
accounting information, forensic accountants are consulted and requested to witness within their
expertise as the transactions are complex and require expertise. Judges and lawyers, in order to
reach healthier and clearer results, they need the help of experts in the field of forensic
accounting (Bozkurt, 2006). In some complex accounting cases, the court may use experts to
clarify the information provided by the defendant and the plaintiff. The decision on which
expert is to be appointed is taken by the court or by referring to an expert recommended by both
parties. Tornhill (1995). Forensic accountants can provide support to lawyers and judges on
issues such as accounting fraud, embezzlement, deliberate misuse of business assets, earnings
management issues, shareholder disputes and tax evasion. Within the scope of this support,
services such as examination of accounting records and auditors' working papers are provided by
experts. Pagano (2005).

After the forensic accountants are appointed as experts, they carry out all the necessary
research and prepare all the materials to be submitted to the court. After completing their
research and presentation, they are expected to contribute to the realization of the truth. When
the forensic accountant submits an opinion to the court, he/she should express the facts
impartially as an expert rather than as a prosecutor, judge or lawyer. The forensic accountant
must make clear and comprehensible explanations when fulfilling his/her responsibilities
(Gülten, 2010).
Fraud Auditory (Investigative Accounting/Fraud Investigation): Fraud auditory is one of the
areas where forensic accountants frequently serve. Forensic accountants generally use fraud
auditing services for; deceptive abuse of assets, corruption, bribery and fraudulent transactions
(computer fraud, investor fraud, employee fraud, etc.) (Toraman et al, 2009). It is a sub-field of
forensic accounting applied by detecting the existence of allegations of fraud in line with the
wishes of the interested parties (owners, managers and employees) and it includes the deterrent
activities related to the detection of fraudulent actions and the prevention of fraud (Kaya, 2005).
It especially deals with the investigation of criminal practices such as theft by employees as a
result of fraud, real estate and insurance fraud and bribing (Pazarçeviren, 2005).

In fraud investigations conducted within the scope of fraud audit, standards should be
determined by the investigator. If the research is carried out in an enterprise, the intention and
expectations of the managers should be determined and the rules to be followed by all employees
should be prepared in the form of charts and be applied effectively. In addition, necessary
permissions must be obtained from the suppliers in order to examine the records of the
transactions carried out by the entity with its suppliers. Where fraudulent behavior and the
possibility of fraud are frequently encountered in the past should be investigated and fraud
hazards arising from the accounting information system should be examined. At this stage, the
shortest way to investigate whether there is any indication of fraud or evidence to support a claim
should be determined. The information to be obtained should be integrated with the accounting
system and the employees and the work environment should be observed. A skeptical approach
should be used to find evidence that could prove the possibility of fraud, and the findings of
fraud should be evaluated (Özdemir, 2017).

Fraud research is not an audit program that results from a series of simple control
activities. Here, along with the knowledge of accounting, knowledge of different components
such as human behavior, organizational behavior and fraud should be informed. Moreover, it is
different from accounting in many aspects because forensic accounting practices are carried out
in response to an event while auditing is performed at compulsory and regular intervals. While
professional skepticism is important in auditing, forensic accounting involves investigative
mentality (Akyel 2009). Saying this, fraud investigators should work in coordination with other
experts such as accounting auditors, private investigators, forensic document examiners and
consulting engineers in the cases in order to review the factual situation and provision of
suggestions regarding possible courses of action.

CHARACTERISTICS OF FORENSIC ACCOUNTANTS

There is a definite need for forensic accountants in the business world today, but not
everyone possesses the many characteristics and qualities that comprise a high quality forensic
accountant. Forensic accountants need to possess strong written and oral communication skills.
In this profession it is imperative to have a strong accounting background; a thorough knowledge
of auditing, risk assessment, and control and fraud detection; and a basic understanding of the
legal system. It is important for forensic accountants to possess the ability to interview and
effectively elicit information from people who may not be willing to give truthful answers.
Therefore, it is important for forensic accountants to be skeptical of those people that they deal
with. Knowledge and experience in financial planning and management techniques, as well as
advanced computer skills, including an ability to understand and apply various information
technology and accounting systems, are also key characteristics of forensic accountants
(Crumbley, 2003).

There are many skills and characteristics that are necessary for successful forensic
accountants. Effective forensic accounting requires:

 Education and training,

 Advanced and continued education in appropriate disciplines,
 Diversified accounting and auditing experience,
 Communication skills – oral and written,
 Practical business experience,
 Diversified forensic auditing experience,
 Ability to work in a team environment, and
 People skills and flexibility (Grippo, 2003).

However, the most important skill is experience. This experience is gained through
natural maturing in the profession. In experience, the forensic accountant acquires skills in
accounting and auditing, taxation, business operations and management, internal controls,
interpersonal relationships, communication, and people. Knowing how a business operates and
effective types of internal controls is a critical part of being a forensic accountant (Grippo, 2003).
It is also recommended that an accountant that wants to become a fraud expert should go work
for a law enforcement agency. The experience of working on complex fraud cases in law
enforcement for several years offers invaluable knowledge (Wells, 2003).

FORENSIC ACCOUNTING DISTINGUISHED FROM TRADITIONAL

AUDITING
• The forensic accountant employs a much higher degree of professional skepticism when
conducting his work. He is not apt to accept explanations and documents at face value.
• A forensic accountant burrow much deeper into the facts and issues than a tradition
auditor.
• A forensic accountant is more familiar with how employees can abuse and misuse
controls and processes and with the various types of fraud, schemes and methods used to
circumvent internal controls.
• In gathering facts and evidence, a forensic accountant is more experienced in where to
look, what types of evidence to look for, how to extract it and what constitutes relevant and valid
support. For instance, in an auditor malpractice suit, a forensic accountant would be used to
explain what audit procedures, or lack thereof, may have contributed to the company's
misstatements.
• The forensic accountant is more adept at interviewing and eliciting information from
company personnel, witnesses and subjects.
• A forensic accountant is more experienced at interpreting facts and evidence as well as
presenting his/her findings in a manner that is meaningful and can be used to support the civil,
criminal, administrative and political processes. In order to combat fraud, a company would
bring in a forensic accountant, a professional with a combination of financial expertise and
investigative prowess, to determine exactly what's going on.
• A forensic accountant has a keen understanding and sixth sense for the fact and
evidence that are not, obvious, but that indirectly may verify, support or refute a given
explanation, transaction or activity.
 ACCOUNTING
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.
Accounting can be divided into several fields including financial accounting,
management accounting, external auditing, tax accounting and cost accounting. Accounting
information systems are designed to support accounting functions and related activities.
Financial accounting focuses on the reporting of an organization's financial information,
including the preparation of financial statements, to the external users of the information, such as
investors, regulators and suppliers; and management accounting focuses on the measurement,
analysis and reporting of information for internal use by management. The recording of
financial transactions, so that summaries of the financials may be presented in financial reports,
is known as bookkeeping, of which double-entry bookkeeping is the most common system.
Accounting is thousands of years old and can be traced to ancient civilizations. The early
development of accounting dates back to ancient Mesopotamia, and is closely related to
developments in writing, counting and money; there is also evidence of early forms of
bookkeeping in ancient Iran, and early auditing systems by the ancient Egyptians and
Babylonians. By the time of Emperor Augustus, the Roman government had access to detailed
financial information.
Double-entry bookkeeping was pioneered in the Jewish community of the early-medieval
Middle East and was further refined in medieval Europe. With the development of joint-stock
companies, accounting split into financial accounting and management accounting.
The first published work on a double-entry bookkeeping system was the Summa de
arithmetica, published in Italy in 1494 by Luca Pacioli (the "Father of Accounting").
Accounting began to transition into an organized profession in the nineteenth century, with local
professional bodies in England merging to form the Institute of Chartered Accountants in
England and Wales in 1880.
PROFESSIONAL BODIES

Professional accounting bodies include the American Institute of Certified Public Accountants
(AICPA) and the other 179 members of the International Federation of Accountants (IFAC),
including

 Institute of Chartered Accountants of Scotland (ICAS),

 Institute of Chartered Accountants of Pakistan (ICAP),
 CPA Australia,
 Institute of Chartered Accountants of India, Association of Chartered Certified
Accountants (ACCA) and
 Institute of Chartered Accountants in England and Wales (ICAEW).

Professional bodies for subfields of the accounting professions also exist, for example the

 Chartered Institute of Management Accountants (CIMA) in the UK

 Institute of management accountants in the United States. Many of these
professional bodies offer education and training including qualification and
administration for various accounting designations, such as certified public
accountant (AICPA) and chartered accountant.

FIRM

Depending on its size, a company may be legally required to have their financial
statements audited by a qualified auditor, and audits are usually carried out by accounting firms.

Accounting firms grew in the United States and Europe in the late nineteenth and early
twentieth century, and through several mergers there were large international accounting firms
by the mid-twentieth century. Further large mergers in the late twentieth century led to the
dominance of the auditing market by the "Big Five" accounting firms: Arthur Andersen,
Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers. The demise of Arthur Andersen
following the Enron scandal reduced the Big Five to the Big Four.

STANDARD-SETTERS
 Generally accepted accounting principles (GAAP) are accounting standards issued by
national regulatory bodies.

 the International Accounting Standards Board (IASB) issues the International

Financial Reporting Standards (IFRS) implemented by 147 countries. While standards for
international audit and assurance, ethics, education, and public sector accounting are all set by
independent standard settings boards supported by IFAC.
 The International Auditing and Assurance Standards Board sets international
standards for auditing, assurance, and quality control;
 the International Ethics Standards Board for Accountants (IESBA) sets the
internationally appropriate principles- based Code of Ethics for Professional Accounts
 the International Accounting Education Standards Board (IAESB) sets
professional accounting education standards;
 International Public Sector Accounting Standards Board (IPSASB) sets accrual-
based international public sector accounting standards.
Never, in its lengthy history, has the accounting profession been required to deal with the
kinds of challenges that it must confront today. A seemingly unending series of sensational
accounting scandals has grabbed newspaper headlines over the last three years, eroding public
confidence in the accounting profession and leading to the most sweeping amendments to United
States securities law since the Securities Act was passed by Congress in 1934. The Sarbanes-
Oxley Act of 2002, as well as the Public Company Accounting Oversight Board (PCAOB)
established as a result of the Act, now forces the profession – and all of those who rely on its
services – to rethink its most fundamental principles and practices. The accountancy profession
has always helped to shape and support businesses, other organizations, and economies of all
types and sizes. To continue to add value, professional accountants – and those who educate and
employ them – must be able to meet current needs and anticipate emerging demands. Above all,
professional accountants will be expected to make professional judgments and, in doing so, to
exercise the highest standards of integrity, independence and skepticism.

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