Until recently, detecting fraud was thought to be a part of the responsibility of the accountant. Fraud was something the internal or external auditors were expected to guard against by their periodic audits. We now know that auditors can only check for compliance of a company’s books to the Generally Accepted Accounting Principles (GAAPs) and to company policy; therefore, a new category of accounting had to be established, one which revealed the fraud for companies with suspected fraudulent transactions. This new area of accounting is known as forensic accounting.
To fully understand the definition of forensic accounting, we can use parts of the definition of forensic medicine and accounting, both taken from Webster’s Dictionary, to produce a clear definition. Forensic medicine is a “science that deals with the relation and application of facts to legal problems.” Accounting is “the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the result.” So, the combination of these two definitions would yield forensic accounting as an accounting method that deals with the relation and application of system used to record and summarize business and financial transactions to a legal problem. Within this area of accounting, there are two general categories of accountants or areas of practice. They are the following: litigation support specialists and investigative or fraud accountants.
This profession has not been around for long. However, this line of work is nothing new, as there were people dealing with “employee” crime thousands of years ago. Back in the 3300 and 3500 BC, the world’s first accountants, or scribes, can be found in Mesopotamia and Egypt. These “accountants” recorded commercial transactions onto damp clay tablets or papyrus. Fast forward to the 19th century, Scotland introduces the first official chartered accounting profession. It started out as a profession where legal work accounted for a large portion of an accountant’s job. However, by the early 20th century, chartered accountants expanded their services to a much wider field and court appearances shrank relative to the size of their business. As one can see, forensic accounting is not a new and exciting field in accounting; rather it is a return to where accounting had all started.
The demand for forensic accountants with CFE or CIRA credentials is increasing approximately 100% per year. Their average pay range is between $70 000 – $200 000. A reason for this increased demand for forensic accounting can be credited to the increase in white collar crime associated with society’s up and rising technology and expanded use of computers to handle increasingly complex private and business transactions.
Litigation support specialists provide professional assistance of an accounting nature in matters to laywers involving existing or pending litigation in the litigation process. Within the litigation support specialists, there are the following categories: business valuation, revenue analysis, expert witness testimony, and future earnings’ evaluation. Litigation support specialists deal primarily with issues related to the computations of economic damages. A typical litigation support assignment would be calculating the economic loss resulting from a breach of contract, or a fairly recent example would be the economic loss due to the damages resulting from September 11, 2001.
Investigative accountants, or sometimes referred to as fraud accountants, are associated with investigations of criminal matters. The investigative or fraud accountant have two areas of emphasis. They are to seek out evidence of criminal conduct and dispelling or supporting of damages. Examples of typical investigative accounting assignments would include the following: an investigation of employee theft, securities fraud, insurance fraud, kickbacks, and proceeds of crime investigations.
Forensic accountants are often retained to analyze, interpret, summarize, and present complex financial and business related issues in a manner which is both understandable and properly supported. Forensic accountants also have the option of being engaged in a public practice or being employed by organizations such as banks, insurance companies, police forces, government agencies, etc.
A Forensic Accountant is often involved in the following: Investigating and analyzing financial evidence; Developing computerized applications to assist in the analysis and presentation of financial evidence; Communicating their findings in the form of reports, exhibits, and collections of documents; Assisting in legal proceedings, including testifying in court as an expert witness and preparing visual aids to support trial evidence.
Forensic accountants must be familiar with legal concepts and procedures in order to properly perform these services. Also, forensic accountants must be able to identify “substance over form” when dealing with a given issue.
Forensic accountant become involved in a broad range of investigations spanning many different industries. Forensic accountants provide practical and in-depth analysis to cases which help uncover fraudulant trends and also bring light to the relevant issues. Forensic accountants are often involved in the following: criminal investigations, shareholders’ and partnership disputes, personal injury claims or motor vehicle accidents, business interruption or other types of insurance claims, business or employee fraud investigations, matrimonial disputes, business economic losses, professional negligance, and mediation and arbitration.
In order to become a qualified forensic accountant, there are several degrees, certifications, and positions that an accountant can choose to attain in order to be considered an “expert” in this field. Forensic accountants, who are usually involved in litigation support or investigative accounting, must have some form of credentials to consider them capable of the work or career they are pursuing. First of all, they must complete the basic requirements for an undergraduate degree. After that, there are two main professionals certifications that are available to them. They are the Certified Fraud Examiner (CFE) and the Certified Insolvency and Reorganization Accountant (CIRA).
In order to obtain the CFE certification, they must have a bachelor’s degree in accounting, complete one or two years of professional accounting experience, and successfully pass all four portions of the CFE Examination. The examination includes four sections which are the following: financial transactions, investigation, legal elements, and criminology.
In order to obtain the CIRA certification, the accountant must have attained at least five years of professional accounting experience. Of these five years, 4 000 hours must be accumulated in insolvency and reorganizational accounting. There are three parts to the CIRA exam. They are the following: financial reporting and taxes, managing turnaround and bankruptcy cases, and plan development and accounting.
Other than a certificate to acknowledge that one is a forensic accountant, a forensic accountant should also possess the following characteristics: curiosity, persistence, creativity, discretion, organization, confidence, and sound professional judgement. A forensic accountant must also be open to consider all alternatives and options, be able to dissect the fine details and at the same time, see the big picture. Forensic scientists must also have excellent communication skills because they must be able to listen effectively and communicate clearly and concisely.
Al Capone, a name that has been infamous for many decades, was never convicted for any of the criminal activities normally associated with mobsters. The courts never caught him for assaults, murders, robbery’s etc, but rather he was jailed for what seems to be such a small crime in comparison: tax evasion. Back in the early 1900’s, the IRS Special Intelligence Unit was formed primarily to combat employee crime. An accountant by the name of Elmer Irey, the head of the IRS and the US Treasury Enforcement Branch, was a key component in pursuing Capone for his tax crimes. Irey was essentially America’s first well known forensic accountant. He and his team were named “the silent investigators”, due to their superior investigative and analytical skills which in the end cracked Capone’s financial scandals.
In the 1950’s and 1960’s, Atlantic Acceptance was one of Canada’s leading financial firms. It had 105 small loans offices and 35 sales finance offices across the country. The company collapsed in June of 1965 with $150 million of receivables still outstanding. Introducer, Tedd Avey, a pioneer of forensic accounting in Canada, recalling the scandal:
“Atlantic Acceptance was one of the first cases in which forensic accountants were used to present evidence in a Canadian court,” he says. “The enormous complexity of the financial documents — dozens of companies were either implicated or impacted — made the situation difficult for people to grasp. But the forensic accountants were able to take a roomful of complicated financial documents and boil them down. The evidence came to life through a series of charts and simple explanations.”
Without these scientific-minded accountants, such breakthroughs in the case would have been improbable. Being able to scientifically sort through complex accounting documents is not a skill many people have, and must go a lot of training in order to get to that stage.
In another case, forensic accountants were expert witnesses in some major court cases. In the murder trial of Helmuth Buxbaum, a millionaire from Komoka, Ontario, crown attorneys determined that his bankbook was as important to the case as his marriage bed. His financial records followed the motive for the murder, and were essential in confirming his guilt to the jury.
The field of forensic accounting seems to be becoming a very popular and demanding occupation for many. It is not a career that just anyone can choose to puruse because it requires a lot of hard work, effort, and personal characteristics that not many people possess. This career appears to be very appealing because it is not the ordinary “behind-the-desk” job. Although it is a subdivision of accounting, it is not what most people would consider the stereotypical form of accounting. Forensic accounting provides both a legal and accounting aspect in the career; therefore, probably appealing to many who may be interested in both law and accounting. After completing this report, I discovered another branch of accounting that I was unaware of that also appealed to me, and I will consider it as a potential future occupation.