CHAPTER 4

Forensic Accounting
Guidelines and Standards

Executive Summary
Forensic accountants in conducting their professional services should
comply with a set of applicable laws, rules, regulations, and professional
standards. Practicing forensic accountants are subject to several profes-
sional responsibility standards and ethical codes of conduct. Responsibil-
ities of forensic accountants are governed by authoritative guidelines of
several professional organizations and government agencies. This chap-
ter presents authoritative guidelines for professional responsibilities and
codes of conduct for forensic accountants.

Introduction
Forensic accountants should perform their professional services in com-
pliance with standards and codes of conduct established by authoritative
bodies relevant to their practices. Forensic accountants should observe
authoritative guidelines of professional organizations that they belong to
and government agencies and other authoritative bodies that license them
to practice. Forensic accountants should observe and comply with many
laws, rules, regulations, and standards applicable to their professional ser-
vices and practices. For example, CPAs who perform forensic accounting
services should observe the AICPA professional responsibilities and code
of conduct. Forensic accountants who perform valuation services should
follow the National Association of Certified Valuators and Analysts
(NACVA) professional standards. Many public and private organizations’
professional standards are applicable to forensic accountants and this
chapter discusses their relevance and importance to forensic accounting
66 FORENSIC ACCOUNTING AND FSF, VOLUME I

practices. This chapter presents professional standards and codes of con-

duct of these organizations that influence forensic accounting practices as
well as forensic accounting best practices, education, and research.

Standards and Authoritative Guidance

for Forensic Accountants
Authoritative guidance issued by several public and private professional
organizations influence forensic accounting practices.

Court Systems

Forensic accountants investigate forensic cases including alleged fraud

incidents, perform forensic analyses, gather sufficient, competent, and
persuasive evidence, reach conclusions, and testify to their findings in com-
pliance with applicable laws, rules, regulations, and guidelines including
court deliberations. Thus, forensic accounting practices are influenced by
court guidelines. Forensic accounting services of expert witnessing, fraud
investigation, and litigation consulting among others require application of
specialized knowledge and investigative skills in gathering, analyzing, and
evaluating evidential matters, ascertaining their compliance with a set of
guidelines, and interpreting and communicating findings in the courtroom,
boardroom, or other legal or administrative venues that are suitable for use
in a court of law.1
There are many court systems in the United States, including the
federal court system and 50 state court systems with their own struc-
tures and procedures.2 Legal cases and forensic accountants’ investigation
of these cases often start at a lower court and may advance to a higher
court and possibly the federal court system. Thus, forensic accountants
in performing fraud, litigation, valuation, and expert witnessing services
among others should be familiar with all state and federal court systems.
In general, there are two types of court systems, state courts and federal
courts. Many of investigative and legal issues are initiated and resolved in
state trial courts that could be city or municipal courts, county or circuit
courts, or regional trial courts. These state trial courts can address differ-
ent types of cases with limited jurisdiction or specific jurisdiction. Lower
 Forensic Accounting Guidelines and Standards 67

court decisions can be appealed and be retailed by a higher-level court

of appellate courts and/or further be heard by the state Supreme Court.
The state Supreme Court decisions are final with a state court system and
can be appealed to the U.S. Supreme Court. Court systems in the United
States based on their structure and hierarchy are Supreme Court, District
Courts of Appeal, Circuit Courts, and County Courts.
Federal courts are typically divided into districts and circuits with at
least one federal district court in every state, whereas federal circuit courts
include more than one district. The U.S Supreme Court is the highest
level of federal courts and its legal interpretations are the ultimate court
decisions. The nine justices of the U.S Supreme Court are nominated by
the president, approved by the U.S. Senate, and tenured until they resign
or die. Forensic accountants should understand and follow the judicial
processes and decisions of the legal system in the United States, which is
based on the adversarial process. This adversarial process dictates that all
parties in a legal dispute have an equal opportunity to present their case
to a neutral jury or judge, with an equal chance to win subject to the same
set of rules to ensure the fairness of the process.

Professional Standards

Forensic accountants are required to follow the Professional Code of Con-

duct set out by many professional organizations. The following subsections
describe many of these guidelines. For example, the AICPA’s code of con-
duct consists of the following areas: Objectivity and Independence, Due
Care, Scope and Nature of work, Integrity, and Responsibility to the Pub-
lic. First, all actions taken must be in the public’s best interest. This is called
the public interest principle. The public contains groups such as creditors,
investor clients, and governmental agencies. Second, the due care principle
is required in observance of ethical and professional standards. It also re-
quires the member of the AICPA’s ability to adhere to quality control and
responsibility for actions taken. Third, the Scope and Nature of work prin-
ciple pertains to a member of the AICPA using the Code of Professional
conduct to determine the level of service for clients. Fourth, the Integrity
principle is designed to enhance the public’s trust in the member providing
professional service. Finally, the Objectivity and Independence principle
68 FORENSIC ACCOUNTING AND FSF, VOLUME I

demand that members strictly avoid conflicts of interest and relationships

that may subject the member to objective impairment.3
Outside of the AICPA Code of Professional conduct, several other
organizations have written its code of conduct for Forensic Accountants.
These organizations are the ACFEs, the American Accounting Association
(AAA), the International Forensic Accounting Association (IFAA), the
International Institute of Certified Forensic Accountants (IICFA) and the
American Board of Forensic Accounting. Each organization’s code of con-
duct resembles the AICPA’s guidance, as it is the main board in the United
States. The IFAA and IICFA are international organizations for forensic
accountants and their codes of professional conduct are very much similar
to their counterparts in the United States (e.g., AICPA, ACFE).
AICPA, AU-C Section 240 is a set of rules concerning the auditor’s dut-
ies when encountering fraud in an audit. The AICPA states that the primary
purpose of AICPA is to expand upon existing Sections 315 and 330 that
deal with risk of material misstatement and audit procedures, respectively.
The document also states that in fraud investigations, the main requirement
for the auditor is to be professionally skeptical; an auditor is skeptical when
observing data regarding material misstatement. Valuation standards are set
by the AICPA and cover the scope and engagement of practitioners perform-
ing valuations. VS 100 pertains to business ownership and intangible assets,
while VS 9100 are interpretations of VS 100. The AICPA is used heavily
during litigation, which is of importance to forensic accountants. The areas
that fall under litigation are disputes, dissolution, and bankruptcy.4

Nonauthoritative Guidelines

The AICPA offers nonauthoritative guidelines through its website. The

guidance is very thorough; however, and covers most relevant areas of
forensic accounting. The AICPA is the only organization that offers
nonauthoritative guidance to practitioners in America. In Canada, The
Chartered Professional Accountants (CFA) must follow the 2006 Stan-
dard Practices while conducting investigations and engagements. Similar
to public accounting, the standards must be applied to ensure integrity
and disclosure of accurate information to the public. The CFA web-
site contains seven sections—planning and accepting and engagement,
 Forensic Accounting Guidelines and Standards 69

information analysis, documentation and reporting, testimony, and ap-

plying the standards to the practice. These practices are authoritative, as
opposed to most standards in the United States, which are nonauthorita-
tive. The CFA standards are set by the Investigative and Forensic Account-
ing (IFA) committee. The standards provide guidance in seven major
areas—standard practices, engagement acceptance, planning and scope of
work, information collection and analysis, file documentation, reporting,
and expert testimony.5

Forensic Accountant Code of Ethics

Ethics in general is defined as an honorable behavior and “ethics includes:

action, foreseeable consequences and people, with their virtues or lack of
virtues, involved in any human activity.”6 The principles of accounting
theory and practice were founded upon the basis of moral principles and
ethical values; therefore, upholding a high standard of ethics is expected
of forensic accountants engaged in professional activities. The concept
of ethics in business as related to forensic accountants can be hard to
define because individuals have their own moral compass and they often
think differently, and every business has its own set of standards. Busi-
ness ethics consist of a set of codes of: business conduct, laws, rules, regu-
lations, and best practices. Business ethics focuses on upholding ethical
values in business, including values like honesty, integrity, trust, fairness,
and objectivity, whereas noncompliance with these standards can lead
to cases of unethical behavior and sometimes even illegal behavior. For-
ensic accountants should investigate for the truth and report the truth
on the basis of their investigation. They should avoid any conflicts of
interests and advocacies, should not compromise their objectivity and
professional responsibilities, hold the highest standards of integrity and
ethics, share their skills, knowledge, and experience with other forensic
accountants in a professional manner, express their opinions on the basis
of the evidence gathered, and keep abreast of the latest developments
in their profession through continuing education, seminars, workshops,
and other studies.
The above-mentioned rules are also addressed by several organizations
such as the American Accounting Association (AAA), American Institute
70 FORENSIC ACCOUNTING AND FSF, VOLUME I

of Certified Public Accountants (AICPA), Association of Certified Fraud

Examiners (ACFE), and the National Association of Certified Valuators
and Analysts (NACVA). Exhibit 4.1 presents these organizations and
their codes of ethics relevant to forensic accounting practices. The most
common codes of ethics and professional standards are as follows:

1. Integrity/Objectivity/Impartiality
2. Competency/Training/Proper skills
3. Confidentiality/Public trust
4. Independence/Duty to the Public
5. Conflicts of Interest/self-dealings
6. Transparency/Fair presentation
7. Good faith/Due diligence
8. Authority/Proper conduct
9. Professional Judgment/ Skepticism
10. Fairness/Mutual respect

Exhibit 4.1
Codes of Conduct for Forensic Accountants
Association Ethics Code Website
of Conduct
Association of The ACFE demands that its • Integrity and http://www
Certified Fraud members follow the highest Objectivity .acfe.com/
Examiners moral code and ethical • Professional code-of-
(ACFE) procedures when conducting Competence ethics.aspx
business. • Due Professional
Examples of some rules Care
include • Understanding
• Committing to with Client or
professional conduct Employer
and being mindful of • Communication
professional duties and with Client or
responsibilities Employer
• Act without bias in court • Confidentiality
procedures and testimony
• Keep private information
secure
• Continually improve skills
and effectiveness to offer
the best possible service.
 Forensic Accounting Guidelines and Standards 71

Association Ethics Code Website

of Conduct
American • The AICPA has set forth • Integrity http://pub
Institute of many principles that • Objectivity .aicpa.org/
Certified practicing individuals • Independence codeofcon
Public must follow. duct/ethics-
Accountants Examples include resources/
(AICPA) • Duty to the public et-cod.pdf
Audit Quality • Impartiality and fairness
Center when examining and
using evidence
• A defined scope of the
work being done
American A waiver is required to • Due Diligence http://aaahq
Accounting be signed by all AAA • Honesty .org/Portals/
Association members. The code includes • Integrity 0/documents/
(AAA) • Due Diligence • Good Faith about/Policies
Forensic • Honesty • Competence &Procedures
Accounting • Integrity • Authority Manual/FIN
and • Good Faith • Judgment %201.1%20
Investigation • Competence • Confidentiality Code%20of
Section • Authority • Higher Education %20Ethics
• Judgment %20Policy
• Confidentiality .pdf
International The code of ethics has five • Integrity https://
Institute of sections. These are • Objectivity iicfaglobal
Certified • Integrity • Competence and .com/
Forensic Ac- • Objectivity Due Care membership/
countants • Competence and Due Care • Confidentiality code-of-
• Confidentiality • Proper Conduct ethics/
• Proper Conduct
National NACVA has very similar • Integrity and http://web
Association rules to those of the AICPA. Objectivity .nacva
of Certified Some rules include • Professional .com/TL-
Valuation • Adequate preparation Competence Website/
Analysts for the job Measured in • Due Professional PDF/
(NACVA) education, experience, Care NACVA_
skill, and so on • Understanding and Standards_
• Keeping client Communications FINAL.pdf
information confidential • Planning and
and secure Supervision
• Planning all actions • Sufficient Relevant
taken and ensuring best Data
practices are established • Confidentiality
• Acts Discreditable
• Client Interest
• Documentation
• Financial Interest

(Continued )
72 FORENSIC ACCOUNTING AND FSF, VOLUME I

Exhibit 4.1 (Continued)

Association Ethics Code Website
of Conduct
National NACVA has very similar • Integrity and http://web
Association rules to those of the AICPA. Objectivity .nacva
of Certified Some rules include • Professional .com/TL-
Valuation • Adequate preparation Competence Website/
Analysts for the job Measured in • Due Professional PDF/
(NACVA) education, experience, Care NACVA_
skill, and so on • Understanding and Standards_
• Keeping client Communications FINAL.pdf
information confidential • Planning and
and secure Supervision
• Planning all actions • Sufficient Relevant
taken and ensuring best Data
practices are established • Confidentiality
• Acts Discreditable
• Client Interest
• Documentation
• Financial Interest
American • I shall investigate for the • Objectivity http://abfa
Board of truth. • Neutrality .us/forensic-
Forensic • I shall report only the truth. • Accurate accountant-
Accounting • I shall avoid conflicts of Representation of code-of-
advocacies. Experience ethics/
• I shall conduct myself • Ethical Conduct
ethically.
• I shall seek to preserve
the highest standard of
my profession.
• As a forensic accountant,
I shall not have a monetary
interest in any matter in
which I am retained.
• I shall share my
knowledge and
experience with other
forensic accountants in a
professional manner.
• I shall avoid conflicts
of interest and will
continue my professional
development throughout
my career through
continuing education,
seminars, and other studies.
 Forensic Accounting Guidelines and Standards 73

Association Ethics Code Website

of Conduct
• As a forensic accountant,
I will express my expert
opinion only on the basis
of my knowledge, skill,
education, training, and
experience.
• The light of knowledge
shall guide me to the
truth, and with justice the
truth shall prevail.

Regulations Relevant to Forensic Accounting

The question that has currently and repetitively being asked is that
whether forensic accounting should be regulated.7 With many certifica-
tions relevant to forensic accountants including certified fraud examiners,
certified forensic specialists, certified financial crime specialists, certified
forensic accountants, certified forensic financial analysts among others
discussed in the previous chapter, it is perhaps time to regulate forensic
accounting practices. The regulation of forensic accounting is expected to
improve the quality of fraud and nonfraud services performed by forensic
accountants. Thus, the following subsections present laws, rules, regula-
tions, and standards relevant for forensic accountants.

Foreign Corrupt Practices Act of 1977 (FCPA)

The Foreign Corrupt Practices Act (FCPA) was released in 1977 in re-
sponse to several high-profile fraudulent schemes in the mid-1970s.8 The
FCPA itself pertains to disallowing upper management from engaging
in business activities with foreign agents that would aid in acquiring and
disposing of business through payment of illegal monies. To make the
FCPA as effective as possible, the Department of Justice (DoJ) requires
all U.S. upper management to abide by the rules contained within the
act. In 1998, another amendment was added to the FCPA that required
foreign companies that conducted business within the United States to be
subject to the same rules and regulations that U.S. firms had to follow. As
part of keeping track of all business processes, the DoJ also mandates that
74 FORENSIC ACCOUNTING AND FSF, VOLUME I

firms disclose and document all accounting activities in accordance with

­accounting provisions stated within United States Code 78m.9 Code 78m
deals with the periodical reports issued by securities firms during a normal
business year.10
Despite the FCPA being put into practice in 1977, there are concerns
about its effectiveness. On November 9, 2017, Steven R. Peiken of the
SEC shared his thoughts in a speech at the School of Law at the University
of New York. In the speech, there was a highlight regarding Halliburton’s
vice president violating FCPA guidelines.11 A counter to these concerns
has been presented by the Big 4 (Deloitte, PricewaterhouseCoopers, Ernst
& Young, and KPMG) accounting firms through forensic services. For ex-
ample, PricewaterhouseCoopers has 3,000 specialists that focus on the For-
eign Corrupt Practices Act (FCPA). The firm claims that forensic services
help implement strategies that mitigate the risk of FCPA violations.12
A framework was introduced by the DoJ in 2016 that listed rules that
companies must follow. These rules are13

• Firms must voluntarily report FCPA violations

• Firms that committed an FCPA violation must cooperate with
the DoJ
• Firms should act swiftly to repair the damage caused by the viola-
tion and must work to enact barriers to prevent another such event
from happening in the future14

The Sarbanes-Oxley Act of 2002 (SOX)

The wave of financial scandals of Enron, Global Crossing, WorldCom,

Tyco among others in the early 2000s eroded public trust and investor
confidence in public financial information and the financial markets.15
The turn of the twenty-first century was a challenging and rather difficult
year for corporate America as evidenced by the stock market’s swift decline,
a significant number of earnings management and financial restatements,
a rash of corporate and accounting scandals, and a resulting loss of confi-
dence in public financial information and financial markets. The Sarbanes-
Oxley Act (SOX) of 2002 was passed in July 2002 to improve investors’
confidence that had been eroded because of the reported financial scandals
 Forensic Accounting Guidelines and Standards 75

of high-profile companies (e.g., Enron, WorldCom, Global Crossing,

Qwest).16
The act was intended to rebuild investor confidence and protect invest-
ors by improving the reliability, completeness, accuracy, and transparency
of corporate disclosures, including financial reports.17 Many provisions of
SOX pertain to financial reporting, including Sections 302 and 404, which
require public companies’ management to certify financial statements and
report on the effectiveness of the company’s internal control over finan-
cial reporting (ICFR) and require auditors to attest to and report on both
financial statements and ICFR. Section 301 requires that the audit com-
mittee oversee the work of management and the independent auditor as
related to ICFR. The audit committee’s oversight of Section 404 is essential
as mandatory ICFR is becoming an integral part of financial reporting.
SOX provisions directed the SEC to issue rules and Interpretive Guidance
and the PCAOB to issue Auditing Standards No. 2 and 5 in requiring the
use of the Integrated Financial and Internal Control Reportingconcept.18
The provisions of SOX that were not previously practiced by public com-
panies and that are intended to benefit all companies include the following:

• Creating the PCAOB to regulate and oversee the audit of public

companies and to improve the ineffective self-regulatory environ-
ment of the auditing profession;
• Improving corporate governance through more independent and
vigilant boards of directors, particularly effective and mandatory
audit committees for public companies;
• Enhancing responsibilities of executives of public companies by re-
quiring certification of financial statements by both CEO and CFO;
• Improving internal control reporting for public companies by re-
quiring certification of ICFR by both CEO and CFO.
• Enhancing the quality, reliability, transparency, and timeliness of
financial disclosures through executive certifications of both finan-
cial statements and internal controls;
• Prohibiting nine types of nonaudit services considered to have an
adverse effect on auditor independence and objectivity;
• Regulating the conduct of auditors, legal counsel, and financial
analysts, and their potential conflicts of interest;
76 FORENSIC ACCOUNTING AND FSF, VOLUME I

• Increasing civil and criminal penalties for violations of security

laws; and
• Rebuilding public trust and investor confidence in public financial
reports and financial markets.

The primary focus of SOX is to improve the quality, reliability, and

transparency of public financial reports, quality of the audit process, and
the effectiveness of corporate governance. These provisions of SOX have
implications for forensic accounting practices. High-quality financial in-
formation can contribute significantly to the integrity and efficiency of the
capital markets. Financial reporting provisions of SOX and SEC-related
rules include the following:

• Certification of financial statements and internal controls by CEOs

and CFOs;
• Disclosure of off–balance sheet transactions;
• Disclosure pertaining to the use of non-GAAP (generally accepted
accounting principles) financial measures;
• Disclosure of material current events affecting companies;
• Mandatory internal control reporting by management;
• A study of principles-based accounting standards;
• Convergence of accounting standards;
• Recognition of adequate funding for the FASB as an accounting
standard-setting body; and
• The oversight function of the FASB by the SEC.

A fundamental objective of SOX was to enhance the reliability and

integrity of audit functions and the audit process as well as the cred-
ibility of audit reports provided in financial statements and to improve
investor confidence in the auditing profession. Provisions of SOX and
SEC-related rules addressing audit functions include the following:

• Creation of the PCAOB to oversee the accounting profession;

• Adoption of new rules related to auditor independence;
• Issuance of new rules related to improper influence on auditors;
• Issuance of new rules pertaining to retention of records and audit
evidence relevant to review and audit of financial statements;
 Forensic Accounting Guidelines and Standards 77

• The oversight function of the PCAOB by the SEC; and

• Attestation of and report on Internal Control over Financial Re-
porting (ICFR).

The following are some important provisions of the SOX that have rel-
evance to forensic accounting practices: The SOX (Sec. 301) explicitly re-
quires that every public company establish procedures for the confidential,
anonymous reporting by employees of concerns regarding questionable ac-
counting, internal control, or auditing matters. Yet, the act leaves great flex-
ibility to companies in their implementation of this requirement. Under the
SOX (Sec. 301), audit committees of public companies are responsible for
establishing and overseeing procedures for employees to confidentially and
anonymously report concerns regarding questionable accounting, internal
control, or auditing matters. This regulatory requirement is consistent with
the belief that the availability of an anonymous channel to report question-
able accounting matters can enhance an organization’s internal control by
fostering communication and bringing FSF to light as early as possible.
Anonymous reporting channels may be particularly useful in encourag-
ing the reporting of wrongdoing by organizational members because ano-
nymity should minimize personal “costs” of reporting, such as retaliation and
other potential penalties. A benefit of such channels is that employees often
discover FSF before other monitors (e.g., internal auditors, external audit-
ors, and/or regulators) and, consequently, often have the ability to inform
the organization earlier than others. In this regard, the 2018 Report to the
Nations issued by the Association of Certified Fraud Examiners (ACFE) re-
ports the results of a survey of their members indicating that “tips” including
unanimous information obtained from employees and nonemployees were
more effective in identifying and discovering fraud than any other methods
and mechanisms (40 percent).19 The other two main methods were internal
audit and management review, at 15 percent and 13 percent, respectively. As
a result of detection, corruption is the most prevalent scheme in every area
of the globe. In total, fraudulent behavior inflicted approximately $7 billion
in losses, with 22 percent of cases causing losses of more than $1 million.20
Many provisions of SOX pertaining to financial reporting, the audit process,
and corporate governance are relevant to forensic accounting practices as
discussed earlier and summarized in Exhibit 4.2.
78 FORENSIC ACCOUNTING AND FSF, VOLUME I

Exhibit 4.2
Important Provisions of the
Sarbanes-Oxley Act (SOX) 2002
Provisions Summary
Public Company An independent Not-for-Profit that sets rules regarding
Accounting Standards audit, quality control, independence, and ethical
Board (PCAOB) conduct. The PCAOB is subservient to Security and
Exchange Commission rulings and oversight.
Auditor Independence Cannot perform nonattest services with audit services
with partners required to do a 5-year rotation.
Corporate Members of audit committee are on the board, engage
Responsibility in counsel, and bear responsibility for oversight of public
accounting firms.
Enhanced Financial Executives, particularly CEOs and CFOs, must adhere to
Disclosure strict financial reporting guidelines and disclosure.
Trading, Disclosure, and Prohibits insider trading, requires disclosure of all
Conflicts of Interest transactions, and prevents conflicts of interest.
Corporate Misconduct Securities fraud is a crime with a 25-year, federally
and Crime appointed, sentence.

Financial Reform and Consumer Protection Act of 2010

(Dodd-Frank Act)

The existence and persistence of financial crisis in the United States and the
resulting global economic meltdown is commonly viewed as serious since
the Great Depression. The global competitiveness of U.S. capital markets
to a significant extent depends on the reliability of financial information in
assisting investors to make sound investment decisions, cost-effective regula-
tion in protecting investors, and efficiency in attracting global investors and
companies. The U.S. free enterprise system has transformed from a system
in which public companies including banks and other financial institutions
were traditionally owned and controlled by small groups of investors to a sys-
tem in which businesses are owned by global investors. The United States has
achieved this widespread participation by adopting sound regulations, main-
taining high-quality disclosure standards and enforcement procedures that
protect the interests of global investors. Recent financial regulatory reforms
including the SOX and the Dodd-Frank Wall Street Reform and Consumer
 Forensic Accounting Guidelines and Standards 79

Protection Act of 2010 (DFA) are intended to protect global investors and
consumers.21 Dodd-Frank Act is named after Senate Banking Committee
Chairman Christopher Dodd (D-CT) and House Financial Services Com-
mittee Chairman Barney Frank (D-MA) and its provisions pertain to banks,
hedge funds, credit rating agencies, and the derivatives market.
Investor confidence in public financial information and the financial
markets is the key driver of global competition, financial stability, and
economic growth. Investors are confident when stock prices are on an
upward trend and the news about future stock performance is optimistic.
The Dodd Frank Act (DFA) is intended to restore investor confidence
in corporate America and its financial system and financial services pro-
vided through the banking system. Reliable and transparent financial in-
formation contributes to the efficient functioning of the capital markets
and the economy. In recent years, investment banks and the major bro-
kerage firms have grown rapidly and generated record revenue. Failures
of the five major financial institutions of Goldman Sachs Group Inc.,
Bear Stearns Co., Morgan Stanley, Lehman Brothers Holdings Inc., and
Merrill Lynch & Co and subsequent government costly bailout of these
firms raise serious concerns about the value-adding activities of financial
services firms, their ethics and governance as well as the professional ac-
countability of their board of directors, senior management, internal and
external auditors, and other corporate governance participants. The lack
of public trust and investor confidence in corporate America, the Wall
Street and its financial dealings and reports, has continued to adversely
affect the vibrancy of the capital market as bailout banks and subsequent
continuous excessive executive compensation have left us with a legacy of
mistrust. This challenged policy makers and regulators to establish and
enforce more effective and efficient regulatory reforms as well as business
leaders to change their culture, behavior, and attitudes to restore confi-
dence and trust in the Wall Street.
Provisions of the Dodd Frank Act (DFA) that are relevant to forensic
accounting practices are summarized as follows:

1. Broadening the supervisory and oversight role of the Federal Reserve

Board to regulate all entities that own an insured depository institu-
tion and other large and nonbank financial services firms that could
threaten the nation’s financial system.
80 FORENSIC ACCOUNTING AND FSF, VOLUME I

2. Establishing a new Financial Services Oversight Council to iden-

tify and address existing and emerging systemic risks threatening the
health of financial services firms.
3. Developing new processes to liquidate failed financial services firms.
4. Establishing an independent Consumer Financial Protection Bu-
reau to oversee consumer and investor financial regulations and their
enforcement.
5. Creating rules to regulate over-the-counter derivatives.
6. Coordinating and harmonizing the supervision, standard-setting
and regulatory authorities of the SEC and the Commodities Futures
Trading Commission.
7. Mandating registration of advisers of private funds and disclosures of
certain information of those funds.
8. Empowering shareholders with a say on pay of nonbonding votes on
executive compensation.
9. Increasing accountability and transparency for credit rating agencies.
10. Creating a Federal Insurance Office within the Treasury Department.
11. Restricting and limiting some activities of financial firms, including
limiting bank proprietary investing and trading in hedge funds and
private equity funds, as well as limiting bank swaps activities.
12. Maintaining consistency in adhering to international financial and
banking standards.

SEC Enforcement Actions

The SEC was created by Congress to ensure proper disclosure of fi-

nancial information by public companies. The SEC has taken enforce-
ment actions against firms that are identified as having violated the
financial reporting requirements of the Securities Exchange Act of 1934.22
The SEC Enforcement Manual (SEC 2010b) provides guidance to ­employees
about the handling of complaints, tips, and referrals (leads) r­ eceived concern-
ing violations of SEC requirements. The SEC obtains leads for investigation
from several sources: (1) public complaints and tips from short sellers and
others; (2) the reporting requirements of federal, state, and local law enforce-
ment agencies under the Bank Secrecy Act; (3) the enforcement staff of the
PCAOB; (4) the enforcement of “blue sky laws” by state securities regulators;
(5) complaints and other information from members of Congress on behalf
 Forensic Accounting Guidelines and Standards 81

of constituents whom they represent; and (6) trading-related referrals from

domestic self-regulatory organizations (SEC 2010b).
SEC staff members from the Division of Corporation Finance exam-
ine financial statements and other filings for routine screening criteria
violations and for suspicious subjective factors. When the initial inves-
tigation exposes factors that warrant further investigation, an informal
investigation is conducted, and persons with relevant information are in-
vited to provide pertinent documents and testimony. The SEC need not
formally notify the target firm during this investigation, thus protecting
firms that are cleared by the informal investigation. If strong evidence of
a securities law violation is uncovered during the informal investigation,
then the SEC may pursue a formal investigation. If the SEC informs the
target of the formal investigation, the 1934 Act Release No. 5092 requires
disclosure to shareholders by the firm, and the investigation may become
public. The SEC policy is to make its enforcement activities public only
when it files a formal complaint alleging securities law violations and seeks
settlement with the enforcement target. The formal investigation grants
subpoena power to compel testimony and the production of documents.
The issuance of an Accounting and Auditing Enforcement Release
(AAER) by the SEC signifies that a failure has occurred in the systems
that are put in place by companies to prevent opportunistic behavior by
company management. AAERs result when companies and/or their aud-
itors accept an administrative action, such as a fine or other reprimand,
and agree not to engage in the behavior that brought about the SEC in-
vestigation rather than formally plead guilty to a misdeed. Even though
these AAERs are not legally considered an audit failure, they can be in-
terpreted as evidence of an audit failure as well as evidence of a corporate
governance failure. The discovery of firm-specific corporate governance
and audit weaknesses would help auditors, investors, forensic account-
ants, and regulators assess the likelihood that management will engage in
self-serving activities that would lead to the issuance of an AAER.
The SEC has issued AAERs during or at the end of an investigation
against a company, an auditor, or an officer for alleged accounting and/or
auditing misconduct since 1982.23 These releases provide varying degrees of
detail on the nature of the misconduct, the individuals and entities involved,
and their effect on the financial statements that could be of much interest to
forensic accountants. The AAERs dataset as of September 2018 consists of
82 FORENSIC ACCOUNTING AND FSF, VOLUME I

3,052 SEC AAERs (1,214 firm misstatement events) issued ­between May 17,
1982 and September 1, 2018. It contains 3941 firm misstatement events that
affect at least one of the firms’ quarterly or annual financial statements. The
dataset consists of three data files: The ­Details, Annual, and Quarterly files.

The Detail file contains

• Firm name and its identifiers
• AAER numbers (e.g., 1 to 3,180) pertaining to each firm
• A description of the reason the AAER was issued
• The balance sheet and/or income statement accounts affected by
the violation
• One observation per firm misstatement event.

The Annual and Quarterly files are compiled from the Detail file and
are formatted by reporting period when the misstatement occurred.

The Annual and Quarterly files contain

• AAERs with alleged financial misstatements
• Firm name and identifiers
• The year and/or quarter-end when the misstatements occurred
• Information on whether earnings or revenues are understated
• One observation for each year or quarter affected by the violation

Exhibit 4.3 presents the timeline of SEC investigation as

­reflected in AAERs. This timeline starts with Model Imperial Inc. on
­January 5, 2000 and ends with RSM LLC. 3943, on June 14, 2018.

Exhibit 4.3
Sample of the selected SEC Accounting and Auditing
Enforcement Releases (AAERs) 2000–2018
Date Event ID
June 14, 2018 RSM LLC, AAER 3943
June 6, 2016 Michael Mona, Jr., AAER 3942
 Forensic Accounting Guidelines and Standards 83

Date Event ID
May 4, 2018 David Leboe, CPA AAER 3941
May 4, 2018 Kevin McAller, CPA AAER 3940
May 4, 2018 Winter, Kloman, Moter & Repp. AAER 3939
April 30, 2018 Panasonic Corporation AAER 3938
April 24, 2018 Altaba Inc. AAER 3937
April 23, 2018 The Dun & Bradstreet Corporation AAER 3936
March 13, 2018 KPMG AAER 3927
March 13, 2018 Deloitte & Touche AAER 3928
March 13, 2018 BDO LLP AAER 3926
July 27, 2017 Halliburton Company and Jeannot Lorenz AAER 3884
January 19, 2017 Homestreet Inc and Darrell Van Amen AAER 3852
January 18, 2017 General Motors Company AAER 3850
December 6, 2016 KPMG LLP AAER 3834
November 17, 2016 JP Morgan Chase & Co. AAER 3824
October 20, 2016 FMC Technologies, Jeffrey Favret, and Steven Croft AAER
3816
October 18, 2016 Ernst & Young LLP, Crag Fronckiewicz, and Sarah Adams
AAER 3814
September 30, 2016 GlaxoSmithKline plc AAER 3810
September 28, 2016 Anheuser-Busch AAER 3808
September 19, 2016 Ernst & Young AAER 3803 and 3802
March 1, 2016 Qualcomm Inc. AAER 3751
February 9, 2016 Monsanto AAER 3741
December 2, 2015 Grant Thornton AAER 3718
January 28, 2015 First National Community Bancorp Inc AAER 3622
December 8, 2014 BKD, LLP AAER 3603
September 29, 2014 Bank of America Corporation AAER 3588
September 25, 2014 Mayer Hoffman McCann P.C. AAER 3587
April 8, 2014 CVS Caremark Corp. AAER 3549
September 19, 2013 JP Morgan Chase AAER 3490
April 24. 2013 Capital One Financial Corporation, Peter Schnall, and David
LaGassa AAER 3456
August 8, 2012 Pfizer AAER 3399
February 6, 2012 Smith & Nephew PLC AAER 3363
April 8, 2011 Johnson & Johnson AAER 3261

(Continued )
84 FORENSIC ACCOUNTING AND FSF, VOLUME I

Exhibit 4.3 (Continued)

Date Event ID
February 28, 2011 KPMG Australia AAER 3248
November 4, 2010 Tidewater AAER 3207
October 21, 2010 Office Depot AAER 3199 and 3198
July 27, 2010 General Electric, Ionics, and Amersham AAER 3159
July 22, 2010 Dell, Michael Dell, Kevin Rollins, James Schneider, Leslie
Jackson, Nicholas Dunning AAER 3156
January 21, 2010 Assurant Inc. AAER 3109
August 12, 2009 Terex Corporation AAER 3035
April 1, 2009 Take-Two Interactive Software AAER 2957
March 4, 2009 Krispy Kreme Doughnuts AAER 2941
August 8, 2008 Prudential Financial AAER 2860
June 17, 2008 NEC Corporation AAER 2839
June 6, 2008 Citigroup AAER 2838
October 15, 2007 Nortel Networks Corporation AAER 2740
September 27, 2007 Federal Home Loan Mortgage Corporation AAER 2728
August 7, 2007 First BanCorp AAER 2664
May 8, 2007 Motorola AAER 2607
January 12, 2007 Lattice Semiconductor Corp.
September 27, 2006 Lantronix AAER 2485
June 30, 2006 Greentech USA and Roland Breton AAER 2455
April 27, 2006 Ingles Market Incorporated AAER 2422
April 12, 2006 Dollar General AAER 2411
February 7, 2006 Cummins AAER 2370
January 4, 2006 McAffe AAER 2360
September 22, 2005 Bio One Corporation AAER 2317
June 23, 2005 Healthsouth Corporation AAER 2263
April 18, 2005 The Coca-Cola Company AAER 2232
February 5, 2005 Elan Corporation AAER 2181
January 19, 2005 PricewaterhouseCoopers LLP AAER 2169
November 19, 2004 Robotic Vision Systems AAER 2137
November 4, 2004 Morgan Stanley AAER 2132
August 25, 2004 Aurora Foods AAER 2089
August 4, 2004 Bristol-Myers Squibb Company AAER 2075
 Forensic Accounting Guidelines and Standards 85

Date Event ID
May 5, 2004 Moore Stephens Chartered Accountants (United Kingdom)
and Peter D. Stewart, A Partner, Sanctioned by Institute of
Chartered Accountants in England and Wales for Failures in
Connection with Audits of Financial Statements Filed with
the SEC; AAER 2002
January 16, 2004 Corrpro Companies, Inc. AAER 1944
November 10, 2003 WorldCom Inc. AAER 1909
July 16, 2003 Xaibe, Inc. and Lowell Nicholas AAER 1814
April 1, 2003 Thomas & Betts Corporation, et al. AAER 1747
January 13, 2003 Anika Therapeutics, Inc., J. Melville Engle and Sean F.
Moran AAER 1699
September 19, 2002 Motorcar Parts and Accessories, Inc. and Peter Bromberg
AAER 1629
July 17, 2002 Avon Products, Inc. AAER 1595
June 21, 2002 Rite Aid Corporation AAER 1579
June 3, 2002 Microsoft Corporation AAER 1563
March 27, 2002 Kimberly-Clark Corporation and John W. Donehower
AAER 1533
January 15, 2002 BellSouth Corporation AAER 1495 and 1494
December 6, 2001 Pinnacle Holdings, Inc. AAER 1476
October 2, 2001 Millionaire.com and Robert L. White AAER 1462
June 19, 2001 Arthur Andersen LLP AAER 1405
February 5, 2001 Secure Sign, Inc. (formerly YourBankOnline.com)
AAER 1366
December 21, 2000 International Business Machines Corporation AAER 1356
September 19, 2000 Pier 1 Imports, Inc. AAER 1303
June 30. 2000 Allegheny Health, Education and Research Foundation
AAER 1283
January 5, 2000 Model Imperial, Inc. AAER 1214

Exhibit 4.4 shows that two events are associated with disclosure of al-
leged FSF. The first event is when the allegation of FSF was initially
publicly disclosed (public disclosure) and the second event is when
the SEC or the DoJ officially and publicly disclose their enforce-
ment against public companies for the allegation of FSF (enforcement
disclosure).
86
Exhibit 4.4
The Timeline for Financial Statement Fraud (FSF) and the SEC Actions

Public Disclosure
of SEC
First Public Disclosure
Investigation
of alleged FSF

Stage 1 Stage 2 Stage 3

Time

Occurrence of FSF Discovery of FSF Disclosure and

Enforcement of
Beginning End FSF
of FSF of FSF

Occurrence Period Discovery Period Discovery and

Enforcement Period

Revelation Period
 Forensic Accounting Guidelines and Standards 87

Conclusion
Forensic accountants in practicing forensic accounting services must
comply with their professional standards and codes of conduct of sev-
eral authoritative bodies and governmental agencies. This chapter pre-
sented authoritative guidelines applicable to forensic accountants. Many
professional standards applicable to forensic accountants are integrity
and objectivity, skepticism, confidential information, competency, and
due professional care. Professional responsibility standards and codes of
conduct were discussed in this chapter. The demand for and interest in
forensic accounting education and research are expected to continue to
increase as more scholars conduct research in fraud and nonfraud-related
issues and universities offer courses and programs in forensic accounting.

Action Items
1. Comply with applicable professional responsibility standards.
2. Observe applicable codes of conduct and professional ethics.
3. Understand all rules and regulations relevant to practice of forensic
accounting.
4. Comply with all applicable laws, rules, regulations, standards, and
best practices.

Endnotes
1. AICPA. 2017. Forensic Accounting.https://www.aicpa.org/interestareas/
forensicandvaluation/resources/litigation.html
2. The United States Courts. 2018. http://www.uscourts.gov/
3. AICPA. August 31, 2017. AICPA Code of Professional Conduct. http://
pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf, (accessed
December 5, 2017).
4. AICPA. 2007. Statements of Standards for Valuation Services. https://
www.aicpa.org/interestareas/forensicandvaluation/resources/standards/
downloadabledocuments/ssvs_full_version.pdf
5. Chartered Professional Accountants of Canada. n.d. Standard Practices.
https://www.cpastore.ca/Catalogue/ShowSampleToc.aspx?productID
=1&spID=8&expID=345608949~1
88 FORENSIC ACCOUNTING AND FSF, VOLUME I

6. J. Fotrodona, D. Mele, J.M. Rosanas. 2017. “Ethics in Finance and

Accounting: Editorial Introduction,” Journal of Business Ethics 140,
no. 4, pp. 609–613.
7. D. Huber, and E. Charrier. 2015. Is It Time to Regulate Forensic Account-
ing? https://hal.archives-ouvertes.fr/hal-01277534/document
8. The Foreign Corrupt Practices Act (FCPA). 1977. Anti-Bribery and
Books & Records Provisions of the FCPA. https://www.justice.gov/sites/
default/files/criminal-fraud/legacy/2012/11/14/fcpa-english.pdf
9. Department of Justice. 2017. Foreign Corrupt Practices Act. https://
www.justice.gov/criminal-fraud/foreign-corrupt-practices-act
10. Legal Information Institute. 2017. 15 U.S. Code 78m- Periodical and
Other Reports. https://www.law.cornell.edu/uscode/text/15/78m
11. S. Peiken. November 9, 2017. Reflections on the Past, Present, and
Future of the SEC’s Enforcement of the Foreign Corrupt Practices Act.
https://www.sec.gov/news/speech/speech-peikin-2017-11-09
12. PricewaterhouseCoopers. 2017. FCPA, Anticorruption & Compliance:
PwC Forensic Services. https://www.pwc.com/us/en/services/forensics/
anti-bribery-corruption-program-integrity.html
13. Ibid.
14. Department of Justice. April 5, 2016. The Fraud Section’s Foreign
Corrupt Practices Act Enforcement Plan and Guidance. https://www
.justice.gov/archives/opa/blog-entry/file/838386/download
15. Much of the discussion about rules and regulations, particularly the
SOX of 2002 and DOF of 2010 comes from Z. Rezaee. 2018. Corporate
Governance in the Aftermath of the 2007–2009 Global Financial Crisis,
Vol. 1–4, Business Expert Press.
16. Z. Rezaee. 2007. Corporate Governance Post-Sarbanes–Oxley (­Hoboken,
NJ: John Wiley & Sons).
17. Sarbanes–Oxley Act of 2002 (SOX). The Public Company Accounting
Reform and Investor Protection Act. www.sec.gov/about/laws/soa2002.
pdf.
18. Ibid.
19. Association of Certified Fraud Examiner (ACFE). 2018. Report to
the Nations. https://www.acfe.com/report-to-the-nations/2018/
20. Ibid.
 Forensic Accounting Guidelines and Standards 89

21. Dodd–Frank Wall Street Reform and Consumer Protection Act (DOF).
H.R.4173. Available at https://www.congress.gov/bill/111th-congress/
house-bill/4173/text
22. Securities and Exchange Commissions (SEC). Accounting and Au-
diting Enforcement Releases (AAAERs). http://www.sec.gov/divisions/
enforce/friactions.shtml
23. Ibid.