Forensic And Investigative Accounting Is The Application Of Financial Skills Accounting Essay

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When I hear the word Forensic the idea and image of a homicide investigation in which evidence gathered is analyzed at a laboratory to determine 'who done it'. Shows like CSI, Bones, Law and Order depicts the forensic aspect in their broadcast. Being a registered nurse, another thought comes to mind when hearing the term 'forensic'. I like to watch Dr. G Medical Examiner on the Discovery Channel. That is a reality show regarding investigative research on how a person died. This is done by performing an autopsy and analyzing the pathological reason for a death to determine if foul play was involved. However, I rarely placed the thought that accounting can have a forensic aspect, too. I was always under the impression that auditors were the forensic accountants. Internal Revenue Agents to audit income tax filings to make sure all income are reported, and deductions have receipts as supporting evidence. Certified Internal Auditors to look at business operations and financial statements within a corporation to make sure internal controls are in place, financial statements are properly recorded, and government regulations have been met. External auditors perform audits for SEC compliance and to attest that the company is in good standings to ensure protection of the public interest. These auditors, in essence, would be able to detect fraud in their job when reviewing audit trails and documentations. Needless to say, I my conception have been misconstrued. There is a whole new growing field of accounting that is on the rise, which specifically deals with fraud detection. This is called Forensic Accounting. This area sparks my interest.

In this paper, I will elaborate on (1) what is a forensic accountant? (2) What are the requirements to become one (3) what are the differences between an auditor and a forensic accountant (4) what is their full function of their job?  (5) Do they interview or interrogate when interacting with clients or suspects?  

Before I can start talking about the details of forensic accounting, let me provide you a synopsis as to how forensic accounting evolved. The famous accounting scandals of all time are Enron, WorldCom, Tyco, and Arthur Anderson. The Sarbanes Oxley Act of 2002 was introduced due to accounting scandals of these infamous publicly traded companies. In response to many fraudulent financial reports, the Act was intended to reform accounting, financial reporting, and auditing functions of a company to reinforce the importance of corporate ethics. The purpose of Sarbanes Oxley Act is to prevent publicly traded companies from falsifying financial statements with an intention to misleading their stakeholders and investors. "Three important points of the SOX influence the management of company records. The first point restricts the destruction, alteration, and falsification of records or documents. If a person attempts these activities, he will face severe penalties and imprisonment. Second point is that the businesses must follow a set of guidelines concerning communications recording, audits, records etc. Though Sarbane Oxley Act keeps large corporations from fraudulent behavior, it has made certain accidental burdens on smaller businesses, making it difficult for them to grow and flourish. Compliance with this act is not a heavy task" (Bainbridge, 2007). As a result, the new requirements of SOX have created a growing demand for forensic accounting.

The legal definition of forensic accounting is: "Forensic and investigative accounting is the application of financial skills and an investigative mentality to unresolved issues, conducted within the context of the rules of evidence. As a discipline, it encompasses financial expertise, fraud knowledge, and a strong knowledge and understanding of business reality and the working of the legal system. Its development has been primarily achieved through on-the-job training, as well as experience with investigating officers and legal counsel" (Bologna, Lindquist, Wells, & Jones, 2004). Basically, the forensic accountant holds the mindset, education, and skills of an experienced auditor, accountant and investigator, with the ability to perform extensive and comprehensive review of legal and financial documents, auditing accounting records, to detect, prove or disprove fraud existed. They do this by interviewing relate parties to obtain objective facts in order to establish a solid defense. And when fraud has been detected they serve as an expert witness in litigation cases. They are more predominantly used in fraud cases today.

Becoming a forensic accountant is not easy. Their knowledge and expertise are not something that stems from basic training. But before looking into the education aspect to becoming a forensic accountant, one has to answer the following question: Do I have the characteristic and personality to become a forensic accountant? This requires inner soul searching. One must be confidence and creditable. Furthermore, one must be an intelligent, concrete and abstract thinker who is able to think beyond the surface. Basically, they should be able to think outside of the box. A forensic accountant should also have the trait of good writing and communication skills. This is because they need to be able to communicate their findings and evidence logically and show that they are creditable. They also need the ability to adapt to different environment and situations, good organization skills, responsible, ambitious and resourceful. These are the key characteristics of a good forensic accountant.

Once, you figure out that a forensic accountant is what you want to become, the next step is to fulfill the requirements. The education and training may require jumping through some hoops and obstacles. However, it is not something that any UMUC accounting students will not be able to achieve, if they put their minds to it. In order to become a forensic accountant, a bachelorette degree in accountant is required. Master degree with an accounting specialization would add great value to the role, as well. Obtaining a certified public accountant licensure is also a requirement. In order to sit for the CPA exam, 150 educational credits must be obtained with satisfied completion of all required course. After passing a 4 part examination, 2000 hours of work experience supervised by a management CPA is required. Although some states vary on their CPA policy requirements. The exams are quite hard and costly. However, in the long run - CPA licensure will open up many doors in the field of accountant. This is just the basis of becoming an entry level forensic accountant. There are many more certifications that can be obtained to boost credentials and credibility of a forensic accountant. Examples of these certifications are: Certification in Financial Forensics, Certification of Forensic Accountant, and Certification of Fraud examiner.

In the beginning of this paper, I mentioned my misconstrued assumption that auditors were the forensic accountants. The auditors were supposedly responsible in investigating and detecting, and handling fraud cases. However, this notion is no longer valid. I would like to clarify some key difference between an auditor and forensic accountant and the full function of a forensic accountant.

"To the untrained eye, an auditor and a forensic accountant are the same job with different titles. But while both positions work with financial records and analysis, the fields are different and should not be confused" (Steensma, 2010). That is, forensic accountants and auditors share the same goal but their roles, knowledge, skills and function are note the same. A Metaphoric analogy of an auditor would be a 'watchdog' or a "patrolman" and a forensic accountant is a 'bloodhound' or "private detective". What does this mean? It means that auditors are responsible for error detection and prevention by reviewing and monitoring business operations. Therefore, auditors are involved in error protection and detection by checking internal controls, sampling random transactions in the financial statement rather than reviewing every single document trial. The key to auditors is to seek materiality and identify if there is an audit risk from the material errors found. Finally, attesting and providing assurance through an unqualified standard report against the evidence found.

In contrast, a forensic accountant is out to hunt and investigate for fraud detection and to assist in prosecution of offenders - as they are the 'bloodhounds.' Most of the time, if an auditor comes across fraud it is passed onto a forensic accountant. They play a reactive role to information found by general auditors. This is because forensic accountant's possess (1) the ability to identify fraudulent schemes (2) identification of financial issues (3) knowledge of investigative techniques (4) knowledge of evidence (5) interpretation of financial statements (6) presentation of findings (7) investigate mentality to prove intent and lastly (8) interviewing skills. Therefore, forensic accountants makes good auditors because they are trained to utilizes accounting, auditing, and investigative skills to conduct an examination into a company's financial statements by looking beyond the numbers and dealing with the business reality of a situation.

Now that we have covered the basic, let's move on to the nitty gritty of forensic accounting. What is the full function of a forensic accountant? Besides the corporate world of detecting fraud and embezzlement, forensic accountants are much more useful than that. Divorce cases in which finances and assets are divided accordingly to the legal arrangements. A forensic accounting would make sure that all assets are accounted for, off shore accounts, hidden business transactions etc to ensure a fair division between the assets of both spouse as stated in the court order or divorce decree. Business cases, such as capital crimes, require a forensic accountant to find laundered money. The FBI uses forensic accountant to help investigate suspects to determine the cause of the homicide. Shows like CSI depict this concept quite often. The forensic accountant would investigate if money was involved. Was there a motive causing the death? Which paper trails leads to prosecution of the criminal? Internal Revenue Agent has forensic accountants to detect tax evasions. An example of a forensic case is Al Capone's tax evasion case of 1991. A team of forensic accountant was "pursuing every possible avenue, seeking any written record for clues, tracking down those who wrote records and doing their best to get testimony from any key player - certainly no easy job at all.   The premise was to somehow show Capone was spending a significant amount of money that was "earned" so they could therefore prove he didn't pay any income tax on that income" (Ness, & Hoover, 2010). CIA and FBI use forensic accountants to track terrorist. Potential suspected terrorist are financially monitored trying to find connection of money laundering and threats.

Once a forensic accountant is assigned to a case, besides the paper and audit trail involved in the job function they have to interact with suspects. So, considering they work for the FBI, IRS, CIA, and many other 3 letter acronym agencies, do they have interrogate their suspects like government officials or law enforcements? I imagine that forensic accountants only interview witnesses and suspects. The role of the forensic accountant is to detect and be an expert witness. This means that they do not get involved in the interrogation. Although at times, it can be a thin line between interrogation and interviewing.

According to SAS 99 ("Interviewing technique for," 2010), in a forensic audit it is required to perform several analytical procedures, which involve interview of key personnel's, clients, and anyone direct and indirect with the case. The goal and objective of the interviewing process is to acquire knowledge. According to the AICPA ("Interviewing technique for," 2010), in an interview process it must be in a non-threaten format, tone should be non-accusatory, interview process should only be 15 minutes or in a relevant short time frame, and recorded or written report gathered from the interview process would add value. Let say that an internal auditor finds materiality in the sampling. Suspicion of fraud is detected. Forensic accountants play the reactive role and the suspicion part. Their main focus is to gather as much evidence as possible to prove that fraud exists by starting with the inquiry and interview process. The forensic accountant will interview all the employees and key players to clarify unobservable issues. They observe the interviewee's response to the issue to gather more evidence as to why materiality was found. Questions asked are modified based on the response given. According to Aren (2009), there are three types of interview tones used in the process: informational inquiry, assessment inquiry and interrogative inquiry. In an informational inquiry, facts and details are being gathered through simple open ended questions. The next step is the assessment inquiry. Key players are interviewed again for the second time to match testimonies. It helps the forensic accountant to finalize the conclusion as to whether fraud was detected. The last phase is the interrogative inquiry. Remember that I mentioned there was a fine line between interviewing and interrogating. Although, forensic accountants interrogate to some extent it is not the same method that law enforcements uses on criminal suspects, or how prosecutor cross examines the witness. Their method is a milder manner and mostly 'yes or no' questions are asked in order to test the interviewee's psychological response to the questioning. This is a method used to detect if the interviewee is lying, evading the question, or show any form of defensiveness in their response to suggest that they may be guilty of fraud. "It is apparent that the interview process is utilized by business and accounting professionals, while the interrogation process is best left to security personnel or to law enforcements" ("Interviewing technique for," 2010).

In Conclusion, the accounting field has grown substantially over the years with challenges in the business and financial world. Challenges results in illegal activities, such as fraud, embezzlement, money laundering, tax evasion and many others. Therefore, forensic accountants have evolved to meet these challenges their job function is more extensive than an auditor by education (requiring other certifications beyond CPA), training, extensive accounting background, and legal expertise. This is why forensic accountants will make good auditors.