Literature review on forensic accounting

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Chapter 2: Literature Review

2.0 Literature Review

2.1 Brief Background of the Mauritian Public Sector

The public sector is concerned with producing and providing certain goods and services to the population. The public sector generally controls and manages public property by concentrating on communal support services and production of goods. The sector can also be involved in mandated cooperative or parastatal bodies run by different government bodies. In Mauritius, the public sector is encompassed under 4 main categories:

  • Ministries for example Ministry of Social Integration and Economic Empowerment, Ministry of Environment and Sustainable Development, Ministry of Public Infrastructure, National Development Unit, Land Transport and Shipping etc…
  • Departments for example Employment Service, Income Tax Department, CPB etc…
  • Parastatal bodies for example CEB, Board of Investment (BOI), UOM, etc…
  • Others for example National Audit Office (NAO), National Human Rights Commission, etc….

2.2 History and Definition of Forensic Accounting

Forensic accounting is not a new field. Evidences proved that the profession has been in existence centuries ago during the time the profession was not yet being called forensic accounting. In ancient Egypt, forensic accountants who inventoried the Pharaohs’ gold, grain and other assets were called the ‘eyes and ears’ of the Pharaohs. A form of forensic accounting can also be traced back to an 1817 court decision which required the accountant who had examined the bankrupt’s account to testify. (Crumbley, 2001) However, the phrase ‘forensic accounting’ was first published in an article in 1946 by Maurice Peloubet, a partner in a New York accounting firm. (Peloubet, 1946)

According to Webster’s Dictionary, the word ‘forensic’ means “belonging to, used in or suitable to courts of judicature or to public discussion and debate.” Forensic accounting is an investigative style of accounting used to determine whether an individual or an organization has engaged in any illegal financial activities. Professional forensic accountant may work for the government of public accounting firm. Although, forensic accounting has been in existence for several decades, it has evolved over time to include several types of financial information scrutiny. (Okoye and Gbegi, 2013)

Bologna and Lindquist (1987) provide the following definition:

Forensic and investigative accounting is the application of financial skills and investigative mentality to unresolved issues, conducted within the context of the rules of evidence. As a discipline, it encompasses fraud knowledge, financial expertise, and a sound knowledge and understanding of business reality and the working of the legal system.

Simply put, forensic accounting is defined as a science dealing with the application of accounting, auditing and investigative skills to assist in legal matters. The ability to interpret and communicate findings is also vital.

2.3 Who is a Forensic Accountant?

The American College of Fraud Examiners (2006) defines Forensic Accountant as “an accountant who performs an orderly analysis, investigation, inquiry, test, inspection or examination in an attempt to obtain the truth and develop an expert opinion in matters of dispute”.

Forensic accountants are experienced auditors, accountants, and investigators of legal and financial documents that are hired to look into possible suspicions of fraudulent activity within a company; or are hired by a company who may just want to prevent fraudulent activities from occurring. They investigate and documents financial fraud and white-collar crimes such as embezzlement and investigate allegations of fraud, estimates losses damages and assets and analyses complex financial transactions. They provide those services for corporation, attorney, criminal investigators and the government. (Coenen, 2005) Zysman (2001) stated that the forensic accountant’s engagements are usually geared towards finding where money went, how it got there, and who was responsible. They are trained to look beyond the numbers and deal with business reality of the situation.

As an accountant they must have knowledge of the latest accounting standards and procedures, be proficient in many different Financial Reporting Systems being used, and be able to provide recommendations that will strengthen internal controls. As an auditor they must perform regular financial audits to prevent possible situations that could lead to fraud. As an attorney they must know the current State laws and regulations, and should be able to approve or disprove suspicions of fraud. They may also be called to be an expert witness in a court trial so they must be able to communicate well and at a level that is understandable by individuals without accounting knowledge. As an investigator they must investigate and gather evidence to be presented in a court of law; be able to investigate complaints, allegations, and tips of suspected fraud; must be able to sort, analyze, and compare data in support of an investigation; and must have a working relationship with the investigating and prosecuting agencies involved. They have and are continuing to evolve in terms of utilizing technology to assist in engagements to identify anomalies and inconsistencies. (Malamed, 2009)

2.4 Definition of Fraud

Dandago (1997) put forward that fraud is an intentional misrepresentation of financial information by one or more individuals among management, employees or third parties. It involves the use of criminal deception to obtain an unjust or illegal advantage. It is a deliberate cheating or deception intended to gain an undue advantage. Fraud is different from error, which refers to “unintentional misstatements or omissions of amount or disclosures from an entity’s accounting records or financial statements.” (Onochie, 2005).

2.5 Difference between the Traditional Accountant and the Forensic Accountant

2.5.1 The Skills Needed

Being an effective accountant does not necessarily translate into being an effective forensic accountant. Being an effective forensic accountant requires the professional to possess a broad spectrum of skills and knowledge. Solid technical accounting and financial skills which are the recipe to make a good traditional accountant form only the basis of the expertise of the forensic accountant. The latter require communication skills which are essential for obtaining information and presenting their findings verbally or in reports form.

Other requirements would include interpersonal skills, listening skills, general administrative and organization skills, investigative skills and computer skills to be able to sniff out fraud and criminal transactions. (Bologna and Lindquist, 1987)

2.5.2 Area of Operation

Forensic accountants operate with the following groups unlike traditional accountants who are retained by the business community (Bishop, 2002; Zysman, 2003):

  • Lawyers and attorneys
  • Court
  • Police forces
  • Banks and insurance companies
  • Government regulatory bodies and agencies

2.5.3 The Goals

A major difference between a forensic accountant and other accountants is related to the goals of their respective tasks. (Bologna and Linquist, 1995). An auditor’s duty is to give an opinion whether financial statements give a true and fair view and are prepared in all material respects in accordance with an identified framework. Forensic accountants, by virtue of their skills, knowledge and experience, audit for evidence of fraud. The purpose is to detect fraud and translate their findings to the suitable authority.

2.5.4 The Orientation

It is important for every forensic accountant to understand the legal process in an engagement because any investigation may lead to court action, requiring him to give testimony as an expert witness. (Bremser, 2005) The quality of the work of the forensic accountant is different in that its orientation is to courts of law. (Bologna and Lindquist, 1987)

2.5.5 The concept of materiality

For the traditional accountant only material misstatements are pointed out but for a forensic accountant, evidence is not rejected as being immaterial. Indeed, the smallest item can be the clue to the truth. A famous Sherlock Holmes’ quote goes as “it has long been an axiom of mine that the little things are infinitely the most important.” Hence every detail requires the attention of the forensic accountant.

2.5.6 The perception

Traditional accountants are generally perceived by the public to “bean counters” without many original ideas. (Mounce and Johnson, 2002) The emergence of forensic accountants has brought a touch of glamour to the accounting profession as they are labeled as “designing accountants” or “fraud busters.” (Crumbley, 1990)

Finally, we can say that accountants look at the numbers while forensic accountants look behind the numbers as they put their nose and eyes deep into financial documents and records to unveil fraud.

2.6 Advantages of the Forensic Accountant over a Traditional Accountant

2.6.1 Risk-Reduction services

Forensic accountants are playing more proactive risk reduction roles by designing and performing extended procedures as part of the statutory audit, acting as advisers to audit committees. They also put together and implement systems and controls to prevent fraud from happening.

2.6.2 Objective Approach

Bologna and Lindquist (1987) pointed out that the independence of the forensic accountant helps to ensure that his approach is always objective. This is one of the many reasons to seek the help of a forensic accountant to examine financial and business aspect of a dispute. In cases of conflicts of interest, the accountant of the company may not be seen as independent as he tends to become friendly with his client.

2.6.3 Other benefits

Forensic accountants make quick responses, carry out thoroughly researched reports and are able to meet tight deadlines as they have to provide court room evidence to support their conclusions. They deal in secrecy to ensure confidentiality and give out a diplomatic and professional approach.

However, there are some constraints in the engagement of forensic accountants.

2.7 Constraints in Engaging a Forensic Accountant

2.7.1 Expensive Costs

Forensic accounting is seen as an expensive service which only big companies can afford. Thus, this service is beyond the reach of many business corporations, especially the small ones and in cases where the benefits of such a service might not outweigh its cost.

2.8 Reasons for the emergence of Forensic Accountants

2.8.1 Increase in Fraud and White-Collar Crime

Gottschalk (2011, p.25) defined white-collar crime as a crime against property for personal or organizational gain by concealing or deceiving, which are often committed by persons who are employed by and in a legitimate organization with wealth, higher education and social connection. He also added that due to the nature of white-collar crime, fraudsters are often difficult to detect as events are often not uncovered until approximately 18 months to two years after they began. In the UK, the first six months of 2009 saw the highest fraud with more than 160 cases of serious fraud costing £636m and experts at KPMG predicted that in 2010 a recession-fuelled spate of bribery and corruption is set to keep fraud at record highs.

Nurse (2002) added that the increase in the past two decades in forensic accounting worldwide is due, partly, to an explosion of white-collar crime. Now, it can be seen that virtually every major accounting firm contains a forensics division. But it is also a consequence of the economic, political and technological complexity of our times.

2.8.2 Globalization

The origination of forensic accountants is contributed largely by globalization. (Albrecht, 2003) As the society becomes more globalized, the business world becomes much more complex and competitive with huge level of business transactions being done daily, making our systems more vulnerable to abuses. To counter those abuses, forensic accountants are required frequently to assist in the investigation of complex financial and business related issues. (Zysman, 2003)

2.8.3 Technology

PriceWaterhouseCoopers (2011) suggested that “cybercrime” will be a major concern for organizations over the next five years, which will require a greater level of computer expertise to mitigate the risk. Therefore, investigative skills of forensic accountants including written and oral communication, interviewing techniques, specialized computer skills and the ability to map spurious financial transactions will prove critical to those investigating fraud-related matters.

2.8.4 High Profile Financial Scandals

The role of the forensic accountant has been in the spotlight due to corporate scandals such as those of Enron, WorldCom and Parmalat. These scandals have led to increasing government regulations and pressures from other stakeholders which have made businesses acutely aware of the consequences of employees’ misdeeds and inadequate internal controls. Companies are now beginning to be more determined than ever to ensure their operations are above board and in no way connected with illegal activities. This resulted in a steadily growing demand for professionals trained in the art of detecting, correcting and preventing fraud as well as deceptive accounting practices. Because also of the legal aftermath of these high profile accounting scandals, forensic accounting has become an important feature for most businesses and corporations.