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					   Forensic Accounting


Alison Lane, Senior Lecturer &
       Admissions Tutor
•   Although relatively new to the accounting profession, the
    role of a forensic expert in other professions has been in
    place for some time

•   Forensic – ‘belonging to, used in, or suitable to courts of
    judicature or to public discussion or debate’

•   In the accounting profession the term ‘forensic’ deals with
    the relation and application of financial facts to legal
    problems
Forensic Accountant…An Auditor
by Another Name?
•   The term ‘forensic accounting’ is generally taken to refer
    to the comprehensive view of fraud investigation,
    including

•   The audit of accounting records to prove or disprove
    fraud

•   The interview of related parties

•   The act of serving as an expert witness
Key distinctions between the
roles…
•   The involvement of the forensic accountant is almost
    always reactive – they primarily respond to complaints
    arising in criminal matters, statements of claim arising in
    civil litigation and rumours and enquiries arising in
    corporate investigations

•   The primary role of a financial internal auditor is to be
    proactive in the prevention and detection of fraud or
    irregularity in a corporate or regulatory environment.
    External auditor is monitoring compliance with GAAP and
    fair representation of the financial condition of the
    company

•   ‘Watchdog’ v ‘Bloodhound’
•   Fraud Audit often regarded as a sub specialism within
    forensic accounting

•   Distinguishing difference – role played after the
    investigation has taken place.

•   The major contribution of a forensic accountant is in
    translating complex financial transactions and numerical
    data into easily understood terminology.
Who Needs Forensic Accounting?
  •   Corporate Investigations

  •   Association of Certified Fraud Examiners survey (2004)
      concluded that

  •   24% of wrongdoing within a corporate environment is detected
      as a result of routine internal audit

  •   11% by external audit.

  •   21% by accident

  •   18% by internal controls

  •   40% of cases are initially detected by tip-off
•   Official fraud statistics only based on reported frauds –
    the tip of the ice-burg?

•   Small businesses particularly vulnerable to occupational
    fraud
Litigation Support

Assisting lawyers in investigating and assessing the integrity
  and amounts relating to areas such as loss of profits,
  product liability, shareholder disputes, bankruptcies,
  breach of contract and marital disputes.
•   Criminal Investigations

Assess and report on financial transactions related to
  allegations against individuals and companies in a
  variety of situations including arson, embezzlement,
  money laundering, investment scams, stock market
  manipulations and identity theft.

Between January & December 2005 their were over
  685,000 consumer fraud and identity theft complains in
  the USA with total losses amounting to over $680
  million.

63% consumer related, 37% identity theft
•   IMF estimate that annually, laundered funds are
    equivalent to between 3 – 5% of the entire world
    monetary output.

•   In USA estimates suggest that nearly $2 million in
    laundered funds pass through the economy daily
•   Insurance Claims

Assisting in the assessment of both the integrity and
  quantum of a claim in a variety of areas, including loss
  arising from business interruption and personal injury
  matters

National Insurance Crime Bureau – claims involving some
  form of fraud
• 10% of car insurance claims
• 15% of car theft claims
• 20% of worker compensation claims
    What should a Forensic
    Accountant know and be able
    to do?
Many aspects of forensic accounting fall outside the traditional
  education, training and experience of accountants

•   Ability to identify frauds with minimal initial information –
    needs to be able to identify the possible scheme, the
    possible manner in which it was perpetrated and potentially
    effective procedures to prove or disprove the potential fraud

•   Identification of financial issues – when presented with a
    situation generated by complaint, allegation, rumour, enquiry
    or statement of claim, they must identify the financial issues
    significant to the matter quickly.
•   Knowledge of investigative techniques – when the issue has
    been identified it is imperative that further information and
    documents are obtained to assist in either refuting or
    supporting the allegation or claim. In dealing with criminal
    matters the primary concern is to develop evidence around
    motive, opportunity and benefit. In litigation support it is
    imperative to ensure that proper foundation exists for the
    calculation of loss or income.

•   Knowledge of rules of evidence – the forensic accountant
    must not only understand what constitutes ‘evidence’ but
    how to conduct an investigation to ensure that evidence will
    not be compromised, and will be admissible in a court of
    law. It is also imperative to understand the form that various
    accounting summaries can take to consolidate the financial
    evidence in a way that is acceptable to the courts.
•   Interpretation of financial information – it is unusual for
    a transaction or a series of events to have only one
    interpretation. It is important that transactions be
    viewed from all aspects to ensure that the ultimate
    interpretation fits with common sense and business
    reality.

•   Presentation of findings – the ability to communicate
    the findings of an investigation in a fashion
    understandable to the layperson is imperative. The
    role of the forensic accountant as a expert witness is
    the final test of the findings in a public forum and
    requires above average communication skills in
    distilling financial information in a manner that the
    average person can understand, comprehend, and
    assess to reach a sound conclusion.
Stages in the investigative
process

•   Understanding the issues involved – no two cases the
    same
•   Intelligence gathering
•   Interviewing witnesses
•   Documenting evidence
•   The process of proof – moving from point A to point B
Analysis Tools

•   Social network analysis – connections between individuals

•   Temporal analysis – modelling relationships over time
    (transaction flow diagrams, time lines)

•   Inferential analysis – establish lines of argument leading up to
    the final proposition we are trying to prove/disprove (direct and
    circumstantial evidence)
Computer assisted techniques – Data mining software,
  statistical software, spreadsheets may all be useful.

   Used in the process of analysing data to identify patterns
   or relationships that may not have previously been
   discovered.

   Computer forensic techniques are now common place as
   part of financial investigations.
The forensic accountant needs to
think like both a thief and a
detective…
   Creativity – where might I find evidence?
   Curiosity – recognise the warning signs
   Perseverance – paper or accounting irregularities may exist,
    but unless the evidence is connected to individuals, no fraud
    can be established
   Common sense – what is possible?
   Business sense – understanding of how a business
    functions
   Confidence – stand up in court and present evidence in a
    clear and concise manner
   Attention to detail – evidence must be gathered & preserved
    in such a way that it can meet the standard of proof test in
    court
   Communication skills
What really turns a well trained and experienced accounting
  professional into a good financial investigator is the
  knowledge of human behaviour, a sixth sense for ‘red
  flags’, and a good intuitive feel for the significance of
  evidence.

An investigative mindset and scepticism

				
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