FORENSIC AUDITING AND ACCOUNTING

FORENSIC AUDITING & ACCOUNTING

Richard Mayungbe PhD, MSc, MBA, BSc, CPFA, ACFE, Ch.MC

Dr. Richard Mayungbe

PortHarcourt, Nigeria

27^th-29^th September, 2012

FORENSIC ACCOUNTING 101

Introduction:
 George A. Manning in his book “Financial Investigation and Forensic Accounting" defines Forensic Accounting as the science of gathering and presenting financial information in a form that will be accepted by a court of jurisprudence against perpetrators of financial and or economic crimes. Forensic accounting is a new and rapidly growing area of accounting and is concerned with the detection and prevention of financial fraud and white-collar crimes.   The integration of accounting, auditing, and investigative skills combined to give birth to the specialty known as Forensic Accounting, which focuses very closely on detecting or preventing economic and financial crimes. "Forensic," according to the Webster’s Dictionary means, "Belonging to, used in or suitable to courts of judicature or to public discussion and debate."  The word accounting is defined as "a system of recording and summarizing business and financial transactions and analyzing, verifying, and recording the results." The term ‘forensic accounting’ refers to financial fraud investigation which includes the analysis of accounting records to prove or disprove financial fraud and serving as an expert witness in Court to prove or disprove the same. Thus, basically, forensic accounting aims at using accounting report in a form suitable for legal purposes.

The History of Forensic Accounting

Forensic accounting can be traced back as far as 1817 to Meyer v. Sefton, a Canadian case that allowed an ‘expert witness’ to testify in court. The term ‘forensic accounting’ was first published in an article in 1946 "Forensic Accounting- Its Place in Today’s Economy" authored by Maurice E. Peloubet, a partner in Price Waterhouse. He stated that, "during the war both the public and industrial accountant have been engaged in the practice of forensic accounting." Interest in forensic accounting spread through the United States and England early in the twentieth century. One of the first institutions to use the services of Forensic Accountants was the Inland Revenue Service to control tax evasion. The FBI used forensic accountants and employed nearly 500 such agents during World War II. As a profession, forensic accounting continued to grow during the latter half of the century, as the Generally Accepted Accounting Practice and tax laws became widespread and mandatory.

The need for Forensic Accountants

Forensic Accounting is a fast emerging field in the control and management of Economic and Financial Crimes, otherwise known as white-collar crimes. Although it has been around for a long time, it has become increasingly popular and much relevant today in view of global financial crisis arising from high profile cases like Lehman Brothers, Enron, World.com and recently Goldman Sachs with their ripple effects across the globe.  Although Investigative Accounting has been around for years, it has only recently begun to transform into a new branch of accounting, popularly called Forensic Accounting. Forensic accountants unlike traditional accountants, look beyond the numbers, in fact, while the traditional accountants look at the numbers, Forensic Accountants look behind the numbers.  The word forensic has nothing to do with the dead as is erroneously believed.  It is the application of scientific knowledge to legal problems and legal proceedings. Forensic Accounting is like the bridge which connects accounting system to legal system. Thus, we can say that forensic accounting is an accounting that is used to help the court to arrive at the truth about a particular case in a court of law. Enron scandal was one of the high-profile cases in the recent past; where large numbers of American forensic accountants were deployed. The wave of financial crisis primarily caused by corporate malfeasance and fraudulent financial activities eroded public trust and investors’ confidence in financial reports and audit services and need was felt to look beyond the conventional accounting function which only fulfilled the compliance requirements i.e. company’s books of accounts are kept in accordance with rules & regulations. In view of the increasing number of financial frauds committed by conspiracy with complex accounting schemes, creative accounting, records manipulation, and outright falsification of books of accounts, it was felt that a new breed of Accountant is needed to detect the financial fraud in companies with financial, accounting, auditing, and investigative skills, even some regulatory knowledge, and also assist in legal matters. This area of accounting came to be known as ‘forensic accounting’. There is a global awareness to fight the cases of economic and financial frauds as well as general corruption. Though many strategies have been formulated and many actions have been taken to fight against these vices, the problems still persist. One major hindrance in fighting financial crime cases is due to lack of forensic accounting professionals to carry out qualitative forensic analysis of financial statements and accounting records. So many cases of financial crimes have faced the dearth of qualified forensic accounting experts who could have come handy on time and offer accurate investigation to unearth the complex modus operandi adopted by the fraudsters who are themselves in some cases highly qualified financial professionals. The reason why there has been rampant increase in white collar financial crimes is because fraudsters think that they can always get away with it. However, the conviction rate in the financial fraud cases is very low due to weak law enforcement which is attributable to weak litigation support in prosecution process and cumbersome legal processes that are often abused in order to waste time. Of great importance in this part of the world is the ignorance and general apathy on the part of the populace, imagine a case involving a big political stalwart who was provided a carnival like support at the premises of the court of law, with his supporters singing and raining abuses on all those who brought their (accused) bread winner to the court. Without full support of Forensic accounting experts, prosecutors often fail to prove and provide strong evidence to put the fraudsters behind bar. Here, the Forensic Accountant can play an important role by providing accounting or financial information or other evidentiary inputs for legal purposes. To achieve this aim, forensic accountant besides having financial accounting expertise, should also have proven skill in financial regulatory frame works, scientific investigative technique, interpersonal and communication skills etc.

Growth of Forensic Accounting

Western Countries are utilizing the forensic accounting expertise to address financial fraud cases, and economic crimes. United States and Canada are pioneers in the development & implementation of Forensic Accounting. Forensic Accountants offer specialized services in areas such as:

*fraud and economic loss quantification,
*investigating and analyzing financial evidence;
*testifying as an expert witness;
*becoming involved in criminal investigations and uncovering financial evidence in employee or insurance fraud cases;
*Investigating in the rapidly evolving area of computer and Internet fraud.

*Business Valuations

*Assets Valuation for Matrimonial Cases

*Royalty Audits

*Damage Computation

*Determination of Compliance

*Financial Surveillance

*Anti Money Laundering Programs

*Background Checks etc, etc.

Forensic Accounting in Africa

Forensic accounting is yet to be fully deployed by the government and the private sector in Africa, despite the alarming increase in complex financial crimes and lack of adequately trained professionals to investigate them. The Institute of Chartered Accountants of Nigeria, not quite long ago created its Forensic Accounting Faculty in order to jump start the training of specialist in this all important field. Other African nations are expected to create a pool of experts too.
 Growing financial fraud cases, bank failures, despite regular inspections,    recent stock marker scams, and the almighty world-wide- wipe-out of investment in stocks and derivatives, failure of non banking financial companies, and failure of the regulatory mechanism to curb it requires extra investment in forensic accounting skills. However, the main important law enforcement agency involved directly in combating white-collar crimes is the Police Special Fraud Unit, and specially created anti fraud/anti corruption establishments in Africa.  I am not sure these law enforcement agencies do train their investigators in the specialized usage of forensic accounting. It is very common that investigation of major financial crimes is handled by ordinary investigating officers who after spending some time in investigation of conventional crimes are transferred to the economic offence wing and they are expected to handle financial crime cases involving complex and intricate financial records which must be analyzed to unearth crime or unique Modus Operandi adopted by the white collar criminal. The result is obvious, the case dies a natural death and the criminals roam freely on our Streets, as the Investigating Police Officer soon get bored with cumbersome financial records, given his lack of specialized knowledge and qualification. On the other hand if we look at the western countries particularly USA, the law enforcement agencies like FBI, CIA have properly marshaled their pool of special agents with forensic accounting backgrounds, who are the backbone of the bureau’s financial crimes squad. They investigate with professional acumen, complex financial crimes like money laundering, cyber crimes, financial institution fraud and other economic crimes. Today, there are more than 600 FBI agents with accounting backgrounds.

In Nigeria and Africa today, how many Forensic Accountants do we have in the battle against fraud and corruption?

GROUP CASE STUDY 1

Take a look at the result of the Association of Certified Fraud Examiners Survey on various cases of fraud in 2012

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