Research Paper: Forensic Accounting in Practice

Pages: 5 (1557 words)  ·  Bibliography Sources: 5  ·  Level: Master's  ·  Topic: Accounting  ·  Buy This Paper

Forensic accountant must possess accounting skills, auditing skills, business skills, know investigative techniques, and have a clear understanding of human behavior. Each skill is applied to business operations and is used in the courtroom environment. These skills are vital in obtaining evidence needed by business and court cases in identifying fraud and prosecuting it. The forensic accountant must know how to use all the skills in a combination to be able to explain the evidence they collect and how the accounting systems work.

Accounting skills is a must to understand how the transactions are recorded according to General Accepted Accounting Standards (GAAP) and International Financial Reporting Standards (IFRS). These standards tell business how transactions must be recorded, assets be evaluated, and when expenses must be recorded in determining net income or loss at a given period of time. Accounting records tell the story of the business operations, how money is made, how money is spent, cash flows that determine the financial health of the business, and financial ratios that determine the different aspects of the financial health.

Auditing skills are important in forensic accounting to trace transactions back to the original place and time. By tracing transactions back to the original place, accountants can determine if previous transactions were recorded correctly, internal controls were in place to prevent and mitigate fraud and error, and tell the details of the accounting story, such as whether the transactions were valid or fake. It also enables the gathering of evidence to show that transactions were recorded, or not recorded correctly and how they developed in the business operations.

Even though each business operates differently than others, there are basic business skills that are industry, regional, and individual business specific. The biggest part to understanding the accounting story is to understand the business operations and how the business is conducted. Businesses are required to operate under state, federal, and industry specific regulations and laws, not just the accounting standards. By knowing business skills, areas of noncompliance can be evaluated for evidence.

Investigative techniques help in determining what the evidence is and what it proves. Investigative techniques require an analytical mind that asks questions and searches for answers to determine the exact story and what really happened on a given date or situation. This is especially vital in forensic accounting in order to determine the true story at any given time period. Tied with accounting and auditing skills, investigative skills help to find hidden facts in how transactions were recorded and can tie the acts to certain employees at certain times and situations within the business system.

Clearly understanding human behavior is a must to understand how and why fraud occurs (Homan, 2006). Fraudsters have certain behaviors of rationalizing and justifying fraudulent acts and look for various ways to perform fraud. In understanding human behavior it helps determine how fraud occurred, if fraud occurred, and the various ways that fraudsters try to conceal it. Understanding human behavior also helps in analyzing key evidence to determine the true situation or concern.

The main role of forensic accountants is to assist the court, solicitors, and clients in understanding the complex financial and accounting issues as well as presenting the information where all users can understand (Shields, 2010). Opinions or results are supported by evidence that holds up under cross examination or scrutiny. In the litigation process, forensic accountants assist in the initial discovery by asking the right questions, particularly top level questions first. They apply commercial knowledge and expertise in translating the story from the financial statements and tax returns. When things do not match, they find evidence and clues to support or disprove claims for damages. This is the most important role.

Forensic accountants provide expert evidence, both written and oral, that supports opinions and calculation in cross examination. Extensive experience in cross examination is a vital part to the effectiveness of how the forensic accountant presents the evidence collected. Because accountants must maintain independence, their opinions are viewed as objective and unbiased. Their professional expertise is upheld in the court room.

Forensic accountants have a legal responsibility while providing services to businesses. Integrity, objectivity, competence and due care, confidentiality, and proper conduct are all vital responsibilities of the forensic accountant (Code of Professional Ethics, 2012). The forensic accountant must resist the pressure to misrepresent the facts. Integrity includes honesty, trustworthiness, fair dealing, and truthfulness. The facts must also be well documented. Objectivity comes from judgments based on evidence. Reasonableness must prevail in identifying circumstances and relationships that are likely to impair objectivity, such as conflicts of interest. All relationships that can present conflicts of interest can impair the objectivity of the forensic accountant and deem evidence as not permissible in a court of law. This means evidence can be thrown out of court if it is deemed that conflict of interest is declared with the forensic accountant.

Competence and due care means the forensic accountant has specific education, training, and examination in professionally relevant subjects and work experience. They must not carry out services without being competent in skill and resources. Continuing awareness of developments in accountancy, including national and international standards in accounting, auditing, and other regulation and statutory requirements is maintaining the professional competency. Confidentiality is the obligation to respect confidential information even after the end of the relationship unless specific authority has been given or it is under legal or professional duty to disclose the information. Forensic accountants must act credible and maintain professional conduct through example, acting professional at all times, whether on the job or off.

Corporate executives are often under great pressure to meet analysts' expectations where company stock is concerned. John P. Miller was prosecuted by the Securities and Exchange Commission for implementing a scheme to fraudulently overstate net income to meet analysts' expectations in 1999 (Jury Finds Former Master Graphics, Inc. CEO Liable for Securityies Fraud Arising From Accounting Scheme, 2008). Mr. Miller had reclassified rent and salary expenses already paid to division presidents as assets on the balance sheet instead of expenses on the income statement. This caused a material overstatement of earnings for the first quarter of 1999 and material understatements of company losses for the second and third quarters of 1999.

Forensic accountants played a vital role in this case with auditing and investigation skills in determining how the fraud took place and when. For example, in the litigation process, the forensic accountant would first ask top level questions, such as why the expenses had huge variances from one quarter to the next. Because things did not add up, the forensic accountant applied knowledge and expertise to find to evidence and clues to support or disprove the claim. This also involved evaluating transactions by GAAP standards to evaluate the compliance of the accounting practice. The use of auditing would have been used to evaluate the internal control system for any weaknesses. Documentation would be done at each stage of the litigation process. After finding evidence, the forensic accountant would then analyze the evidence to investigate the accounting story. After determining the actual facts of evidence, the forensic accountant would then prepare and provide expert evidence in written and oral form in court with evidence to support opinion and calculation that stands firm against cross examination and any scrutiny.

Several executives were prosecuted for falsifying, manipulating, and misrepresenting financial statements. Securities and Exchange Commission prosecuted several executives for overstating financial results that caused the collapse of Enron (Skilling v. United States (No. 08-1394) 554F. 3d529, 2010). Jeffery Skilling had engaged in more than 25 substantive counts of securities fraud, wire fraud, false representations to auditors, and insider trading. Proceeds from borrowing transactions appeared as cash from operating activities. Earnings were manipulated through improper use of reserve accounts to conceal large amounts of cash and used… [END OF PREVIEW]

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