Forensic Accounting and Financial Statement Fraud, Volume I: Fundamentals of Forensic Accounting 1631571486, 9781631571480

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Fundamentals of Forensic Accounting Zabihollah Rezaee The existence and persistence of high profile alleged financial statement fraud (FSF) have negatively affected the safety and soundness of financial markets and investors confident in public financial information. Forensic accounting has advanced as an important and rewarding field of accounting to prevent, detect and correct FSF. There has been significant demand for and intertest in forensic accounting as well substantial growth in both investigation and litigation services. The first volume addresses the relevance and importance of forensic accounting and fraud examination as well as the framework and structure of forensic accounting practices. The author presents an introduction to forensic accounting and financial statement fraud examination and their relevance and importance to businesses, financial markets, economies and society. Also discussed is forensic accounting opportunities, skills, and services; forensic accounting profession; and professional responsibilities and codes of conduct for forensic accountants. Finally, forensic accounting best practices, education, and research are touched on. Dr. Zabihollah (Zabi) Rezaee, PhD, CPA, CMA, CIA, CFE, CGFM, CSOXP, CGOVP, CGRCP, CGMA and CRMA, is the Thompson-Hill Chair of Excellence, PhD coordinator and professor of accountancy at the University of Memphis. He also served a two-year term on the Standing Advisory Group of the Public Company Accounting Oversight Board (PCAOB). He received his BS degree from the Iranian Institute of Advanced Accounting, his MBA from Tarleton State University in Texas, and his PhD from the University of Mississippi. Dr. Rezaee holds ten certifications, including certified public accountant (CPA) and certified fraud examiner (CFE). He served as the 2012–2014 secretary of the Forensic Accounting Section of the American Accounting Association (AAA) and is currently the editor of the Journal of Forensic Accounting Research (JFAR). Professor Rezaee has published over 220 articles and made more than 240 presentations, written 11 books including the two books on Corporate Governance and Audit Committees published by the Business Expert Press. He has testified before the Federal Courts as the expert witness.

Financial Accounting, Auditing and Taxation Collection Mark S. Bettner, Michael P. Coyne, and Roby Sawyers, Editors

Financial Accounting, Auditing and Taxation Collection Mark S. Bettner, Michael P. Coyne, and Roby Sawyers, Editors

FORENSIC ACCOUNTING AND FINANCIAL STATEMENT FRAUD, VOLUME I

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Forensic Accounting and Financial Statement Fraud, Volume I

REZAEE

THE BUSINESS EXPERT PRESS DIGITAL LIBRARIES

Forensic Accounting and Financial Statement Fraud, Volume I Fundamentals of Forensic Accounting

Zabihollah Rezaee

Forensic Accounting and Financial Statement Fraud, Volume I

Forensic Accounting and Financial Statement Fraud, Volume I Fundamentals of Forensic Accounting Zabihollah Rezaee

Forensic Accounting and Financial Statement Fraud, Volume I: Fundamentals of Forensic Accounting Copyright © Business Expert Press, LLC, 2019. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means— electronic, mechanical, photocopy, recording, or any other except for brief quotations, not to exceed 250 words, without the prior permission of the publisher. First published in 2019 by Business Expert Press, LLC 222 East 46th Street, New York, NY 10017 www.businessexpertpress.com ISBN-13: 978-1-63157-148-0 (paperback) ISBN-13: 978-1-63157-149-7 (e-book) Business Expert Press Financial Accounting, Auditing and Taxation Collection Collection ISSN: 2151-2795 (print) Collection ISSN: 2151-2817 (electronic) Cover and interior design by S4Carlisle Publishing Services Private Ltd., Chennai, India First edition: 2019 10 9 8 7 6 5 4 3 2 1 Printed in the United States of America.

Abstract The existence and the persistence of high-profile alleged financial statement fraud (e.g., Enron, WorldCom, Parmalat, Satyam), as well as the investment Ponzi schemes and credit crunch scandals, have negatively affected the safety and soundness of financial markets and investors’ confidence in public financial information. Forensic accounting has advanced as an important and rewarding field of accounting to prevent, detect, and correct these financial scandals and other types of fraud. In such an increasingly unstable economic and litigious environment, there has been significant growth in the demand for and interest in forensic accounting and investigative services. Forensic accountants provide litigation consulting, expert witnessing, valuation, and fraud investigation services. The organization of this book provides maximum coverage and flexibility in choosing the amount and order of materials on forensic accounting and financial statement fraud (FSF) theory, education, and practice. This book is organized into two volumes; each volume can be utilized separately or in an integrated form. The first volume, entitled “Fundamentals of Forensic Accounting,” consists of five chapters and addresses the relevance and importance of forensic accounting and fraud examination as well as the framework and structure of forensic accounting practices. The first chapter presents an introduction to forensic accounting and financial statement fraud examination and their relevance and importance to businesses, financial markets, economies, and society. Chapter 2 presents forensic accounting opportunities, skills, and services. Chapter 3 illustrates the forensic accounting profession. Chapter 4 presents authoritative guidelines for professional responsibilities and codes of conduct for forensic accountants. Chapter 5 describes forensic accounting best practices, education, and research.

Keywords forensic accounting; financial statement fraud; fraud examination; ­expert witnessing; litigation consulting; skill sets of forensic accountants; professional standards; codes of professional conduct; fraud and non-fraud forensic accounting services; forensic accounting research; forensic ­accounting education

Contents Preface...................................................................................................ix Acknowledgments....................................................................................xi Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5

An Introduction to Forensic Accounting............................1 Forensic Accounting Services and Skills............................25 Forensic Accounting Profession........................................43 Forensic Accounting Guidelines and Standards................65 Forensic Accounting Practices, and Education and Research...........................................................................91

About the Author.................................................................................127 Index..................................................................................................129

Preface Financial statement fraud (hereafter, FSF) is a severe threat to investor confidence in financial information and thus capital markets. Reported financial scandals by high-profile companies (Enron, Global Crossing, Qwest, WorldCom, Parmalat) and ethical debacles in corporations have eroded investor confidence and public trust in corporate America, its corporate governance, financial reporting, and audit functions. These scandals and related FSF reinvigorated interest in education and practice of forensic accounting and financial statement fraud examination. Forensic accounting is gaining considerable attention because the American Accounting Association (AAA) has added a new educational and research section on “Forensic Accounting.” The Securities and Exchange Commission (SEC) has strengthened its FSF divisions and trained its staff in the area of forensic accounting and financial statement fraud, all international public accounting firms have established a forensic accounting department, and forensic accounting and fraud examination is becoming one of the fundamental components of business school’s curriculum in recent years. This book presents a comprehensive framework of the theory and practice of forensic accounting investigation and FSF examination in two volumes. The purpose of this book is to present a comprehensive primer of forensic accounting in areas of fraud and nonfraud services. At present, headlines have again been dominated by the investment Ponzi schemes and credit crunch scandals. Banks have been hit by record levels of fraud over the past several years, and the situation is likely to get worse as the full impact of the credit crunch unfolds. In such increasingly unstable economic and litigious environment, there has been significant growth in the demand for and interest in forensic accounting services. During the 2007–2009 global financial crisis, the focus on financial statement fraud prevention and detection become more important as regulators, investors, and companies seek better understanding of corporate malfeasance and misconduct.

x PREFACE

In this book, forensic accounting is defined as the practice of rigorous data collection and analysis in the areas of litigation support consulting, expert witnessing, and fraud examination. Furthermore, forensic and investigative accounting services range from expert report preparation to appearing in the witness box, and from carrying out a fraud investigation to interviewing witness and securing evidence. As a rapidly growing area within the accounting profession, forensic and investigative accounting has gradually been recognized by professionals and academics. Forensic accounting is viewed as one of the most secured career tracks. There appears to be a gap between forensic and investigative accounting practice and education given that there is only a limited number of forensic accounting modules/courses offered within accounting and business curricula in universities worldwide. This book is intended to develop an awareness and understanding of the main themes, perspectives, frameworks, and issues pertaining to forensic and investigative accounting. This book provides practitioners, academics, and students with the knowledge and the professional and personal skills in technical, analytical, and communication areas to equip them to become successful forensic accountants with adequate knowledge in FSF examination. The two volumes of this book present the essential and fundamental aspects, structure, theory, and practice of forensic and FSF, with a keen focus on a holistic approach in forensic accounting and fraud investigation. These two volumes should assist forensic accountants and fraud examiners with adequate knowledge and tools in effectively performing fraud and nonfraud forensic accounting services. Anyone who participates in the preparation of financial reports or uses financial information in making financial decisions should be interested in this book. Specifically, corporations and their executives, the boards of directors and audit committees, internal and external auditors, accountants, governing bodies, users of financial statements (investors, creditors, pensioners), business schools, other professionals (attorneys, financial analysts, bankers), forensic accountants, and fraud examiners will benefit from this book. Sincerely, Zabi Rezaee January 15, 2019

Acknowledgments I acknowledge the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the American Institute of Certified Public Accountants, the Big Four Accounting Firms and Corporate Governance Organizations, American Accounting Association, American Certified Fraud Examiner, and other forensic accounting organizations for permission to quote and reference their professional standards and other publications. The encouragement and support of my colleagues at the University of Memphis are also acknowledged. Especially, three of my graduate assistants, Mr. Charles Bell, Mr. Matthew Cantin, and Mr. Jon Paul Squitieri for providing invaluable assistance. I thank the members of the Business Expert Press team and S4Carlisle Publishing Services for their hard work and dedication in editing the book, including, Scott Isenberg, Mark ­Bettner, Michael Coyne, and Premkumar Narayanan. My sincere thanks are due to my family, my wife Soheila, and my children Rose and Nick. Without their love, enthusiasm, and support, this book would not have come to fruition when it did. Zabihollah (Zabi) Rezaee January 15, 2019

CHAPTER 1

An Introduction to Forensic Accounting Executive Summary Business and accounting scandals (Madoff, Satyam, Stanford F ­ inancial, and subprime mortgage fraud) have dominated the business news in the past several decades. Numerous cases of high-profile alleged FSF (e.g.,  Enron, WorldCom, Parmalat, Satyam) as well as the investment Ponzi schemes and credit crunch scandals have negatively affected the financial markets and investors’ confidence in public financial information. Forensic accounting has advanced as an important and rewarding field of accounting to prevent, detect, and correct these financial scandals and other types of fraud. In such an increasingly unstable economic and litigious environment, there has been significant growth in the demand for and interest in forensic accounting and investigative services. Forensic accountants provide litigation consulting, expert witnessing, valuation, and fraud investigation services. This chapter presents an introduction to forensic and investigative accounting.

Introduction Forensic accounting is a growing and ever-changing field of accounting with tremendous opportunities for advancements. Forensic accounting services of fraud investigations, litigation consulting, valuation, and expert witnessing are both rewarding and exiting. For example, tracking down criminals by holding them accountable for committed illegal acts can be a tedious task but rewarding in making our society safer and free from material wrongdoings and frauds. The field of forensic accounting

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FORENSIC ACCOUNTING AND FSF, VOLUME I

has grown significantly over the past decades and is expected to make further progress as the demand for, and interest in, forensic accounting services increases. There is also a growing need for business schools and accounting programs to train and educate the most competent and ethical future forensic and investigative accountants. This field is not specific to any country, industry, or organization; as such, there are numerous employment opportunities available. Forensic and investigative accounting is viewed by many as one of the most exciting, rewarding, and secured career tracks.1 However, there appears to be a gap between forensic and investigative accounting practice and education, given that there is only a limited number of forensic accounting modules/courses offered within accounting and business curricula in universities worldwide.2 A few existing textbooks in this area all primarily focus on occupation fraud with a limited coverage of Financial Statement Fraud (FSF). This chapter develops an awareness and understanding of the main themes, perspectives, frameworks, and issues pertaining to forensic and investigative accounting. This chapter presents an introduction to forensic accounting with a keen focus on the knowledge and the professional and personal skills needed to become successful forensic and investigative accountants, such as adequate knowledge in accounting, law, criminology, psychology, auditing, and business and (FSF) examination.

Definition of Forensic Accounting Forensic accounting is the application of technical accounting, investigative, and law as well as analytical and communication skills for the purpose of resolving financial and nonfinancial issues in a manner that meets the standards required by courts of law.3 Forensic and investigative accounting is generally defined as the practice of rigorous data collection and analysis in the areas of litigation support consulting, expert witnessing, valuation, and fraud examination.4 Thus, forensic accountants conduct investigative, financial analysis, and valuation services, the result of which could be used in a court of law. Forensic accountants apply special skills in accounting, auditing, finance, business, psychology, quantitative methods, analytical analyses, law, criminology, research, and investigative



An Introduction to Forensic Accounting

3

skills to collect, analyze, and evaluate evidential matters and to interpret and communicate findings.5 Forensic accounting is a field in which accountants use their accounting knowledge along with complex investigation skills to assist in fraud investigation, expert witnessing, valuation and litigation, and investigative services. Forensic accounting is a process of gathering and evaluating evidence and reaching conclusions when conducting a fraud investigation, performing litigation services, determining asset and liability valuation, or testing as an expert witness. Forensic and investigative accounting practices include fraud examination, investigation of corruption and bribery, business valuation, being an expert witness, cybercrime management/cybersecurity, and litigation support.6 Furthermore, forensic and investigative accounting services range from expert report preparation to appearing in the witness box and from carrying out a fraud investigation to interviewing witnesses and securing evidence. As a rapidly growing area within the accounting profession, forensic accounting has gradually been recognized by professionals, including the formation of a new professional certification—Certified Fraud Examiner, American Accounting Association forensic accounting section, development of new continuing professional development courses on the subject of fraud, Securities and Exchange Commission (SEC) focus on fraud, and forensic accounting divisions of public accounting firms. The academic community and research scholars have, in recent years, shown much interest in forensic accounting by publishing new forensic accounting textbooks and developing modules/courses about forensic accounting and conducting research on various aspects of forensic accounting published in the accounting and business journals. Exhibit 1.1 shows a list of selected books in forensic and fraud-related subjects. Within forensic accounting, fraud in general is defined as an intentional wrongful act to injure, damage, or deceive others, and thus, FSF is viewed as intentional manipulation or misstatement of material financial information to mislead users of financial statements.7 The Association of Certified Fraud Examiners (ACFE) classifies occupational fraud in three primary categories: asset misappropriation, corruption, and (FSF).8 This book is different and complements existing books listed in Exhibit 1.1 by focusing on both FSF and nonfraud (valuation, expert witnessing, litigation consulting) forensic accounting services.

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FORENSIC ACCOUNTING AND FSF, VOLUME I

Exhibit 1.1 Existing Forensic Accounting Books Author(s) Title

Publisher Year

Clayton, Golden, Pill, Skalak

A Guide to Forensic Accounting Investigation

Wiley

2006

This book provides a guide for practicing forensic accounting and fraud investigation. It includes the topics of deterrence, detection, and investigation and mentions tools that can be used in practice to combat fraudulent behavior.

Nigrini

Forensic Analytics: Methods and Techniques for Forensic Accounting Investigations

Wiley

2011

This book details techniques and tools that can be used by practitioners to detect fraud and mistakes. It explains the upsides and downsides of each technique and advises when to use a technique.

Singleton and Singleton

Fraud auditing and forensic accounting

Wiley

2006

This book covers fraud elements and simple concepts. Topics include red flags, fraud schemes, and risk assessment.

Nigrini

Benford’s Law: Applications for Forensic Accounting, Auditing, and Fraud Detection

Wiley

2012

This book covers the use of Benford’s Law in the forensic accounting profession. It covers topics ranging from the discovery of the law to application in Ponzi schemes.

Hopwood, Leiner

Forensic Accounting and Fraud Examination

McGraw-Hill 2012

This book is catered to practitioners and includes topics ranging from business valuation to civil and criminal litigation.

Karancher, Riley, Wells

Forensic Accounting and Fraud Examination

Wiley

This book provides newly developed tools for practitioners to tackle fraud in the civil and criminal environment.

2010

Synopsis



An Introduction to Forensic Accounting

Author(s) Title

Publisher Year

Crain, Hopwood, Pacini, Young

Wiley

Essentials of Forensic Accounting

2018

5

Synopsis This book is the most recently released forensic accounting book. It covers topics such as some business technologies to counteract fraud, the process of fraud investigation, and specialties in forensic accounting. Multiple-choice questions and case studies are at the end of each section to help with knowledge retention.

Status of Forensic Accounting Forensic accounting has been practiced for many decades and has become more relevant in the aftermath of the wave of financial scandals at the turn of the twenty-first century and the 2007 to 2009 global financial crisis. In 2013, CNNMoney reported that 1,216,900 individuals were employed as forensic accountants with an expected 10-year growth of approximately 16 percent.9 The median salary was $103,000 in 2013, which, when compared with over median auditor and tax accountant salary in 2016, is 51 percent higher.10 Employment in forensic accounting has significantly grown in the past decade with a steady annual rate of 18% from 2012 to 2017 according to a report published by market research firm IBISWorld.11 This increasing growth in forensic accounting services is expected to continue in foreseeable years as the accounting profession establishing more robust guidelines for forensic accounting engagements of a forensic standard is intended to improve consistency and quality. The growth rate for other accountants and auditors is only 10 percent, in comparison; thus, the steady growth in the forensic accounting profession is expected to continue.12 One important area of forensic accounting practices is fraud examination. FSF has been detrimental to the integrity and quality of public financial information, and Congress passed the Sarbanes–Oxley Act (SOX) of 2002, which was intended to combat FSF. However, in the several years post-SOX, the Department of Justice has obtained nearly 1,300 fraud convictions between 2002 and 2009.13 The 2010 Committee of Sponsoring Organizations (COSO) report indicates the following: (1) FSF persisted in the past two

6

FORENSIC ACCOUNTING AND FSF, VOLUME I

decades with 347 incidents between 1998 and 2007 compared with 294 cases from 1987 to 1997; (2) the magnitude (mean per cases) of FSF during 1998 to 2007 was about $400 million compared with a mean of $25 million per case between 1998 and 1997; (3) FSF cases were committed with some level of involvement of senior executives (CEO, CFO) in 89 percent of studied cases in 1998 to 2007 and about 83 percent of cases in 1987 to 1997; (4) almost 20 percent of alleged fraudulent executives were indicted from which more than 60 percent were convicted; (5) the most common FSF schemes continue to be improper revenue recognition followed by overstatement of assets; (6) over one-fourth of fraud firms changed auditors either during the fraud period or in the fiscal year preceding the fraud period; and (7) fraud firms experienced negative consequences of fraud either in terms of decline in stock prices, bankruptcy, or delisting from major stock exchanges.14 ­Exhibit 1.2 presents many career opportunities in forensic accounting.

Exhibit 1.2 Forensic Accounting Careers Topic

Summary

Careers and professional standards in forensic accounting

Forensic Auditor for FBI, Certified Internal Auditors (CIA), Internal Revenue Service (IRS), Law firms, accounting firms, and corporate Enterprise Risk Management (ERM) Forensic Accounting does not have its own authoritative guidance, instead it uses AICPA code of conduct and other non-autoreactive standards to form a framework.

Promoting Antifraud education and practice

The Association of Certified Fraud Examiners (ACFE) created an antifraud program that has 12 resources. Many schools across the United States have forensic accounting courses, such as Iowa State and Bucknell University.

Investigating Types of Fraud

Occupational fraud such as asset misappropriation and financial statement fraud (FSF), and employee fraud.

Expert testimony and witness and litigation consultation techniques

Experts are called upon to testify in court proceedings. Consultants aid in the trial process using certain techniques.

Enforcing Principles of ethics, corporate code of conduct, and ethical misconduct

The ACFE, AICPA, and others provide a code of ethical conduct. Laws often address how to deal with ethical misconduct.



An Introduction to Forensic Accounting

Topic

Summary

Engaging in fraud detection, deterrence program, and the Fraud Triangle

Fraud Triangle: Pressure to commit fraud, opportunity to commit fraud, and rationalization for actions taken. Fraud detection: Deterrence Program:

Internal control assessment and reporting

Internal control is tested for effectiveness and reports are issued regarding efficacy.

Resolutions of allegations of misconduct

Once a decision is made, the allegations are resolved. The resolution can be tried again later.

Identifying red flags

Used to identify/warn of fraud within an organization.

Promoting corporate governance and compliance with laws and regulations

Corporate governance participants Consist of board of directors, audit committee, internal auditor, CEO and CFO, external auditor, and regulators.

Preventing earnings management

Legally making judgments on presentation and disclosure of financial statements.

Identifying cooking the books and problems in accounting

Intentionally altering financial statements to meet targets.

7

Forensic accounting is a growing field of accounting. All “Big 4” accounting firms of Deloitte, Ernst and Young, KPMG, and PricewaterhouseCoopers (PwC) and many of other national and international accounting firms have forensic accounting departments and specialists now and are hiring forensic experts in increasing numbers. Common services include all manner of cyber risk management (security, risk, and analytics), eDiscovery, computer and cybercrime forensics, managing fraud risk, and all manner of dispute resolution. Exhibit 1.3 presents specifications of the forensic accounting departments of top 10 public accounting firms, including the Big 4, as well as their forensic accounting services provided, their roles, responsibilities, commitments, and websites. The steady growth and expansion of forensic accounting services is driven by the downturn in the economy and financial challenges and as corporations struggle, crime and FSF increase. As the forensic accounting field is growing, there is a noticeable disconnect between the number of jobs available and the number of professionals available. With a high demand for forensic accountants, firms have been able to raise their fees and have higher hiring standards. This is evidenced by many professionals expecting growth in forensic accounting from 2015 to 2020.15 Each Big four firm, as well as other accounting

8 https://www.bdo.com/ services/consulting/ forensic-accountinginvestigations/ overview

BDO’s Forensic Accounting and Investigations Practice provides a wide variety of services to organizations, their counsel, and their stakeholders. We conduct forensic analyses of books and records, computer forensics and data analytics, and assist clients with interviews and background checks. When required, we also provide oral or written testimony and

• Corporate Investigations • Due Diligence • Anticorruption Compliance and Investigations • Forensic Technology Services • Financial Reporting Disputes • False Claims Act

BDO USA

http://www.bakertilly .com/services/forensiclitigation-valuation/ forensic-investigations

Baker Tilly’s forensic accountants research, quantify, and present the financial impact related to disputes and allegations of financial misconduct. Attorneys and their clients rely on our team because of our demonstrated ability to analyze complex financial and accounting issues, and to present findings and opinions in a manner that is clear and understandable by all stakeholders, including the courts.

• Bankruptcy disputes • Computer forensics • Corporate securities disputes • Data mining and analyses • Internal investigations • False Claims Act and government contracts investigations • Labor investigations • Monitor-ship • Postacquisition disputes • Shareholder and partnership disputes • Tax controversy • Marital dissolution

Baker Tilly Virchow Krause

Websites

Roles/Responsibilities/Commitments

Forensic Accounting Services

Firm

Forensic Accounting Services Performed by Accounting Firms

Exhibit 1.3

9

Crowe Horwath

Digital forensics: • Using proper chain-of-custody methodology for field triage and acquisition of target ESI; • Working with virtually any digital storage medium; • Investigating and analyzing forensic images; • Recovering, reconstructing, and preserving lost and deleted data; • Providing expert witness testimony; • Coordinating with counsel, forensic accountants, and other litigation professionals; • Interacting with human resources to handle management-level changes; and • Providing training, education, and reporting.

• Fraud Prevention • Information Governance • Digital Forensics and Cyber Investigations • eDiscovery • Data Analytics • National Security Compliance/CFIUS • Investigations • Reporting disputes • False claims act • Forensic technology

https://www. crowehorwath.com/ services/advisory/ forensic-services.aspx

Crowe Horwath LLP’s forensic experts use insights gained from extensive technical and industry knowledge to cut beneath the surface and help uncover the real story behind the numbers. In the event of litigation, Crowe’s professionals tell the story to the judge, jury, or arbitrator through clear, convincing expert testimony and compelling visual presentations.

(Continued )

https://www.bdo .com/services/ consulting/forensictechnology-services/ overview

serve as monitors and independent reviewers or as forensic accountants to monitor independent reviewers.

10

Deloitte

Firm

• Anticorruption and fraud • Business intelligence services • Cyber risk • Discovery • Foreign Corrupt Practices Act (FCPA) consultation

eDiscovery: • Working with counsel to extract pertinent data from forensic images; • Uploading and providing access to documents; and • Performing OCR (optical character recognition) scanning, deduplication, and indexing of documents. • Forensic Technology • Insolvency

Data analysis/Data mining: • Detecting data anomalies; • Reconstructing accounting records and transaction tracking through coordination with forensic accountants; • Completing data set analysis using statistical methodologies; • Providing custom analysis database programming; and • Delivering robust reporting with rich graphics and written narrative.

Forensic Accounting Services

We help our clients predict, detect, and respond to the risks and vulnerabilities that come from global corruption, litigation, fraud, financial mismanagement, and other threats. Learn how Deloitte’s Forensic Advisory professionals are helping organizations lead, navigate, and disrupt to turn complex issues into opportunities for resilience and long-term advantage.

Roles/Responsibilities/Commitments

Exhibit 1.3 (Continued)

https://www2 .deloitte.com/us/ en/pages/advisory/ solutions/forensicsand-investigationssolutions.html

Websites

11

EY

• Antibribery/anticorruption analytics • Antifraud analytics • Computer forensics, data mining, and analysis • Cybercrime investigation • Cyber breach diagnostics • Cybercrime forensics • Cyber analytics • Dispute and damage analysis • Early case assessment • eDiscovery • eDiscovery advisory services • Forensic data analytics • Incident preparedness and response services • Information governance • Insider threat analysis • Investigation and Dispute Managed document review • Predictive modeling • Preservation and collection of ESI • Risk assessment • Technology-assisted review

• Financial risk, transactions and restructuring • Internal audit and assurance • Investigations • Investigations on the corporate level • Litigation and dispute consulting • Strategic and reputation risk management Our forensic accountants and technologists, certified fraud examiners, and anticorruption and antimoney laundering specialists work with our clients’ legal counsel and internal audit and compliance departments investigating complex issues and developing practical solutions that address operational challenges. We apply the collective knowledge and insight gleaned from working across industries and geographies to help our clients conduct fraud risk assessments, institute proactive anticorruption programs, and utilize forensic data analytics that enable corporations to manage risk and regulatory compliance.

(Continued )

http://www.ey.com/ us/en/services/ assurance/fraudinvestigation--dispute-services/ ey-how-we-canhelp-2

12 Our forensic technology professionals utilize state-of-theart hardware and software—along with advanced discovery processes, methodologies, and proprietary analytical routines— to identify, collect, recover, reconstruct, and preserve electronic evidence. This sophisticated protocol of testing complete data populations allows our team to reach accurate and defensible conclusions, whether those conclusions represent simple control deficiencies or are indicators of potential corruption, waste, or abuse.

KPMG Forensic works with organizations to help them in their efforts to achieve the highest level of integrity. We assist businesses to effectively manage the costs and risks of complying with new regulations and enforcement activity. We help assess, design, and implement internal controls and compliance programs to mitigate vulnerabilities to fraud and misconduct and assist in the prevention, detection, and response to fraud, waste, abuse, and other forms of misconduct.

• eDiscovery • Forensic Data Analytics • Analyzing suspicious transactions • Identifying hidden relationships • Analyzing large volumes of transactions more efficiently • Monitoring fraud threats and vulnerabilities • Assessing effectiveness of internal controls • Considering unique organizational and industry issues • Corporate Intelligence • Digital Forensic • Fraud Risk Management

Grant Thornton

KPMG

Roles/Responsibilities/Commitments

Forensic Accounting Services

• Computer forensics • eDiscovery • Data analytics (i.e., predictive coding) • Records and risk management • Incident response and data breach investigations • Analyzing suspicious transactions • Identifying hidden relationships • Analyzing large volumes of transactions more efficiently • Monitoring fraud threats and vulnerabilities • Assessing effectiveness of internal controls • Considering unique organizational and industry issues • Cybersecurity • Investigation • Insurance • Disputes

Firm

Exhibit 1.3 (Continued)

https://home.kpmg .com/us/en/home/ services.html

https://www .grantthornton.com/ services/advisory/ business-risk/forensicadvisory.aspx

Websites

13 Our purpose is central to our business. For more than 160 years, the role we play has always been underpinned by the need for trust and our ability to deliver solutions. Our purpose brings meaning to our daily work, guides our decision-making, and inspires action in a dynamically changing environment. It demonstrates our ongoing, clear commitment to working collaboratively and innovatively to deliver the highest-quality outcomes for our people, clients, and society.

• Anticorruption services • Antibribe and fraud • Capital projects and infrastructure • Cybersecurity • Digital forensics • Dispute services • Financial Fraud • Fraud risk mitigation • Global intelligence • Government contractor services and export controls • Insurance claims • Investigation services • Technology solutions • A crimes unit

Corporate investigation services • Asset tracing, misappropriation, waste and embezzlement • Construction-related • Fidelity claims • Financial fraud, including misrepresentation and FSF • Regulatory-related investigations

PwC

RSM US

RSM’s forensic accounting and investigative professionals have the skills and experience to resolve high-stakes issues from the board room to the courtroom. Our team provides analytical and investigative services to major law firms, insurance companies, financial institutions, governmental entities, private equity firms, venture capital funds, and corporate counsel and executive management. Team members include expert testifiers, witness

Delivering a full spectrum of accounting, consulting, and wealth management services, we dive deep into each industry to bring greater contextual understanding to every engagement. As a result, conversations are more illuminating and solutions more precise.

Does not have information concerning forensic accounting online

Moss Adams

(Continued )

http://rsmus.com/ what-we-do/services/ financial-advisory/ forensic-accountingand-fraudinvestigations.html

https://www.pwc .com/gx/en/services/ advisory/forensics .html

Does not have information concerning forensic accounting online

14

Firm interviewers, data mining and computer forensic specialists, fraud examiners qualified as international investigators, and CPAs and others you may need to document the facts of your situation.

• Financial institution and health care fraud • Foreign Corrupt Practices and UK Bribery Acts • USA PATRIOT Act DOJ, SEC, and State Attorneys General inquiries and investigations • Whistleblower investigations • White-collar defense

Litigation support, including expert testimony • Billing, earn-out, working capital, and postacquisition purchase price disputes • Breach of fiduciary duty • Director and officer liability • Business interruption/insurance coverage disputes • Securities and shareholder litigation • Background investigations/due diligence • Data mining and computer forensics • Management fees and related-party transactions

Bankruptcy services • Bankruptcy fraud • Fraudulent conveyance actions • Preferential payments

Roles/Responsibilities/Commitments

Forensic Accounting Services

Exhibit 1.3 (Continued) Websites



An Introduction to Forensic Accounting

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firms, has its own website. On the website, there is a page related to forensic accounting services that the firm offers. For example, PwC offers digital forensics, fraud risk mitigation, a crime unit, investigation solutions, and many others. The services offered by PwC, KPMG, Deloitte, and Ernst & Young (EY) are similar but deviate highly from the smaller firms, such as Moss Adams and Baker, Tilly, Virchow, and Krause. The existence of this gap can be explained by firm size, technological capability, human capital, and revenue available to spend on forensic services. The Federal Bureau of Investigation (FBI)’s forensic accountants investigate terrorists, spies, and criminals who are involved in financial crime. For the FBI, these accountants participate in court proceedings using knowledge of legal procedure and policies, principles for evidence gathering and presentation, and security protocols dictated by law. Prior to engaging forensic accountants to practice, the FBI administers a live course to understand the systems, skills, techniques, and expertise that the field offices require.16 The responsibilities of FBI forensic accountants include performing thorough forensic financial analyses of the records of those suspected of illegal activity, gathering evidence, preparing search warrants/ affidavits, going with case agents on subject/key witness interviews, piecing together funding sources and interrelated transactions, generating investigative reports, meeting with prosecutors to strategize, offering support during proceedings, and acting as expert witnesses. After the training session, the FBI assigns accountants to various teams, including forensic accounting squads and the Forensic Accountant Support Team.17 Forensic accountants can be employed by public accounting firms, the FBI, insurance firms, governmental agencies, law firms, and/or finance companies.18 A prominent case in recent history is a $200 million Medicare fraud in which two employees of American Therapeutic Corporation recruited beneficiaries. Another case involved insider trading of hedge funds by Raj Rajaratnam. More information on these cases is included in Exhibit 1.4. On the cases, several techniques were used to help find the perpetrators guilty. First, interviewing was used heavily in these cases. Interviewing is often used to gather specific information to be used during trial. Second, the verification of red flags is used. In the above-mentioned cases, kickbacks and prior legal troubles are probable causes of wrongdoing as illustrated in Exhibit 1.4. In the aftermath of financial scandals and the 2007 to 2009 global

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financial crisis, the focus on FSF prevention and detection has become more important as regulators, investors, and companies seek better understanding of corporate malfeasance and misconduct. However, nonfraud forensic accounting services such as litigation consulting, valuation, and expert witnessing are gaining considerable attention in recent years.

Exhibit 1.4 FBI Forensic Accounting Cases Case

Details

American Therapeutic Corporation

Twenty persons were charged with participation in a health care fraud scheme resulting in $200 million in damages. One doctor was sentenced to 15 years in prison and the case has set a precedent for the FBI, Department of Justice, and the Florida government in dealings with health care fraud.

Raj Rajaratnam

The founder of the Galleon Hedge Fund, with $7 billion in asset worth, was found guilty of insider trading and sentenced to 11 years in prison. Goldman Sachs, IBM, Intel, Polycom, and many others were involved in this scheme. Galleon went defunct after this fraud, and many other employees of various firms were sentenced.

Crime occurs across countries and continents, so forensic accountants have opportunities for careers worldwide. Even though technology has brought the world closer together, technology has not changed cultural differences or human beings’ responses to pressure, incentives, and opportunities to engage in fraudulent and wrongful actions. The role of information technology has greatly increased in the detection of fraud and the committing of fraud. Forensic accountants need to possess a different skill set from that of traditional accountants. They need to be analytical, detail-oriented, skeptical, and ethical. Forensic accountants provide a wide range of services, including financial data analysis, evidence integrity analysis, computer application design, writing reports, compiling information, testifying as an expert witness, eliciting other experts’ assistance, maintaining documentation, making damage assessment, tracing illicit funds, locating hidden assets, exercising due diligence reviews, gathering forensic intelligence, and conducting business valuation. The ACFE’s 2016 report to the nations indicates that the median loss caused by the occupational fraud cases was $160,000; the most common



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form of fraud was FSF, causing a median loss of $975,000; corruption schemes were in the middle, comprising just under one-third of cases and causing a median loss of $200,000; and asset misappropriation schemes were the least costly, causing a median loss of less than $125,000.19 More than 80 percent of fraud cases were committed by individuals in one of six departments: accounting, operations, sales, executive/upper management, customer service, or purchasing, and about 85 percent of fraudsters had never been previously charged or convicted for a fraud-related offense.20 The ACFE has updated its report to the nations on occupation, fraud, and abuse annually in the past several years. The ACFE’s 2018 report focuses on five critical areas of occupational fraud. These five areas include the methods and means by which occupational frauds are committed and detected, the characteristics of the organizations that are victimized, and people who commit occupational fraud and results of the cases.21 The 2018 study shows the analysis of 2,690 cases of occupational fraud, and results are similar to those of 2016 study, with 89 percent of occupational fraud committed being related to asset misappropriation with the median loss of $114,000, 38 percent of cases pertaining to corruption with the median loss of $250,000, and 10 percent of cases being related to FSF with the median of $800,000 loss per year.22 The long-term sustainability of the specialized field of forensic accounting and fraud examination will depend on the ability to test (using scientific methodologies) those tools and techniques currently used in the field, as well as the ability to research new innovative ideas to address fraud and forensic accounting issues, but also issues associated with law, sociology, psychology, criminal justice, intelligence, computer forensics, and application tools and techniques pulled from other forensic sciences. The need for trained fraud and forensic experts continues to growth.

Contrasting Forensic Accounting with Conversional Accounting and Auditing Forensic and investigative accounting is a subfield of accounting with its own set of purposes, specializations, skills, and requirements. However, there are many similarities and differences between conventional accounting/auditing and forensic accounting. Similarities are the common goal of identifying,

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measuring, classifying, analyzing financial information, preparing reports, and communicating results to interested users of these reports. The main differences between a conventional accounting and forensic accounting are the intended purposes and users. Conventional accounting is a process of identifying economic events and business transactions, measuring, classifying, and recognizing their financial impacts, preparing a set of financial statements reflecting results of operations and financial positions, and conveying such useful, reliable, and relevant financial information to interested users of financial statements including investors and other users of financial statements. Users of financial reports use financial information in making decisions. There are also some similarities and differences between traditional auditing and forensic accounting. Auditors typically gather evidence relevant to reported financial statements, evaluate its sufficiency and competency, reach audit conclusions, and communicate their audit opinions to users of financial statements. The audit opinions are intended to lend more credibility to the reported financial statements. Auditors provide reasonable assurance that the audited financial statements are free from material misstatements whether caused by error or fraud. Auditors are professional independent contractors who opine on financial statements by maintaining their objectivity, independence, and impartiality from their clients and do not compromise their professionalism in benefiting one user at the expense of other users of financial statements. Forensic accountants often use the same methods as traditional auditors in gathering and evaluating both financial and nonfinancial information in reaching conclusions about its relevance and reliability and use such information in expressing professional opinions on issues pertaining to judicial guidelines on evidence and the applicable law. In this respect, forensic accounting is similar to conventional auditing. Forensic accountants use similar audit procedures in gathering and evaluating evidence and use professional skepticism in expressing opinions. There are some overlaps between the work of fraud forensic accounting, nonfraud forensic accounting, and internal and external auditing as depicted in Exhibit 1.4. However, the objectives of audit engagements are different from those of forensic accounting. The objectives of a traditional audit are to provide reasonable assurance that audited financial statements are free from material misstatements



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whether caused by error or fraud. The objectives of a forensic accounting engagement are also to express an opinion on a set of financial and nonfinancial information and communicate findings and make recommendations and testify to the findings.23 Exhibit 1.5 compares traditional internal and external auditing with fraud and nonfraud forensic accounting. In fraud forensic accounting, investigators investigate allegation of fraud, gather ­evidence to substantiate the fraud allegation, and report on the ­findings. In nonfraud forensic accounting, accountants serve as litigation consultants, expert witnesses, or valuation experts in gathering evidence and opining on the disputed matters.

Exhibit 1.5 Contrasting External Auditing, Internal Auditing, and Fraud and Nonfraud Forensic and Investigation Practices External Auditing Internal Auditing Advisory & Consulting Services to organizations to improve the efficiency, effectiveness, and economy of performance.

Planning Risk Assessment Internal Controls Audit Evidence Reviewing Reporting

Non-Fraud Forensic Accounting

Fraud Forensic Accounting

Accounting and Legal Matters

Prevention and Deterrence

Expert Witnessing

Investigation

Valuation

Remediation

Litigation Consulting

Detection

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Professional guidelines and standards used by auditors and forensic accountants are different. Audits of public companies in the United States, post-SOX, should be performed in compliance with the auditing standards of the Public Company Accounting Oversight Board (PCAOB).24 Forensic accountants comply with all applicable laws, rules, regulations, and standards, rules of evidence, criminal and civil procedures, and other professional guidelines and pronouncements in conducting their forensic accounting services. Forensic accounting and traditional financial auditing have a different foundation. For example, the certified public accountants (CPAs) who perform forensic accounting services should observe Consulting Services section 100 of “consulting Services: definitions and Standards of the American Institute of CPA (AICPA) Professional Standards.”25 Forensic accounting standards arise from courts and the precedents (law) set by them. Financial accounting standards are developed by the SEC and its designated professional organization, the Financial Accounting Standards Board (FASB) in establishing guidelines for the preparation of financial statements of public companies. The accounting standards provide guidelines for identification, classification, measurement, and recognition of business transactions and for the preparation of related financial statements (balance sheet, income statement, the statement of cash flow, and the statement of owners’ equity). Auditing standards for auditors of public companies are set forth by the PCAOB in the post-SOX era to provide guidelines for auditors in lending more credibility to published financial statements. Forensic accounting standards are tailored to identification and prevention procedures. External auditors primarily focus on discovery of material misstatements whether caused by error or fraud, whereas forensic accountants focus on fraud prevention and detection. When auditors detect allegations of fraud through the normal practice of audit of financial statements, it becomes cumbersome for them to prove that fraud occurred. External auditors typically employ and retain forensic accountants to detect the alleged FSF. On the contrary, forensic accountants consider fraud detection as their main goal, and when they discover fraud, they have fulfilled their responsibility. Audit procedures and processes are essential to any investigative effort, and they differ between forensic accountants and traditional auditors.



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Both forensic accounting and auditing involve standard auditing procedures, such as evidence gathering, future analytical tests, and sampling. Forensic accountants also utilize several, unique areas to benefit the workload. These areas are criminalistics, forensic evidence, testimony from experts, and using computer technology to conduct forensic investigations. Criminalistics is a process in which gathering and analysis of evidence occurs. The evidence can range from fingerprints taken to computer and handwritten documentation. Forensic accountants mostly use evidence relating to computer and written documentation. This type of evidence is defined as being physical and tangible in nature. The two above-­ mentioned specialties of forensic accountants are applied through practice and instruction; however, to apply these correctly, the accountant must be knowledgeable in expert testimony. This requires the accountant to have sufficient and competent evidence to present in court. The forensic accountant works alongside lawyers to aid in the resolution of cases. In recent years, computer technology has provided forensic accountants, the ability to assimilate data and decipher it at an ever-increasing rate. This process is referred to as digital forensics when using forensic investigation on digital devices such as computers.

Conclusion Forensic accounting is a growing and changing field that is both challenging and rewarding. Forensic accountants are commonly hired to uncover fraud, discover fraudsters, minimalize the effects of fraud, and try to prevent fraud in the future. They can also be utilized in other cases such as divorce, terrorist activities, business valuations and criminal investigations. Forensic accountants must be able to detect fraud, trace illicit funds, implement activities to prevent future fraud, and provide an adequate burden of proof. Forensic accountants need to possess different skill sets, from traditional accountants to investigators and digital forensic practitioners. They need to be technical, analytical, detail-oriented, good communicators and ethical. This specific set of skills for forensic accountants helps plead the case for higher education institutions to provide courses that will train future forensic professionals. The need for formal and consistent educational programs focusing on

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the indicators of fraud and nonfraud schemes is beneficial to all business students. Moving forward, this will hopefully become a priority in higher education to prepare all students, not just accounting students, to become competent and ethical future leaders in the business world.

Action Items 1. Forensic accounting is a field of accounting with specific expertise, knowledge, and skill sets. 2. Forensic accounting skill sets are in areas of technical skills (accounting, auditing, finance, law, psychology, and criminology), analytical skills (data gathering and analyses), and soft skills (communication and interviewing). 3. Forensic accounting is gaining considerable attention in the aftermath of the financial scandals at the turn of the twenty-first century and the 2007 to 2009 global financial crisis. 4. Forensic accounting is a challenging, demanding, and rewarding field of accounting.

Endnotes 1. Z. Rezaee, J. Wang, and B. Lam. January–June, 2018. “Toward the Integration of Big Data into Forensic Accounting Education,” Journal of Forensic & Investigative Accounting 10, no. 1. 2. Ibid. 3. Z. Rezaee, L. Crumbley, and R. Elmore. 2004. “Forensic Accounting Education: A Survey of Academics and Practitioners,” Advances in Accounting Education Teaching and Curriculum Innovations 6, pp. 193–232. 4. Ibid. 5. W.S. Hopwood, J.J. Leiner, and G.R. Young. 2008. Forensic ­Accounting (1st ed., Boston, MA: McGraw-Hill Irwin). 6. L. Crumbley, L. Heitger, and S. Smith. 2015. Forensic and ­Investigative Accounting (7th ed., Chicago, IL: Commerce Clearing House).



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7. Z. Rezaee, and R. Riley. 2009. Financial Statement Fraud: Prevention and Detection (2nd ed., Hoboken, NJ: John Wiley & Sons). 8. D. James, and C. Ratley 2016. Report to the Nations on Occupational Fraud and Abuse (Austin, TX: Association of Certified Fraud Examiners). 9. CNNMoney. 2013. Best Jobs in America. http://money.cnn.com/ pf/best-jobs/2013/snapshots/24.html 10. Ibid. 11. IBISWorld. 2019. IBISWorld Industry Report 54121c: Accounting Services in the US, February 2019. Available at https://clients1.ibisworld.com/search/default.aspx?st=Forensic%20Accounting%20Jobs 12. Bureau of Labor Statistics. 2016. Accountants and Auditors. https:// www.bls.gov/ooh/business-and-financial/accountants-and-auditors .htm#tab-1 13. Rezaee and Riley. 2009. 14. Committee of Sponsoring Organizations of the Treadway Commission (COSO). 2010. Fraudulent Financial Reporting: 1998-2007: An Analysis of U.S. Public Companies. www.coso.org 15. F. Vinluan. March 1, 2015. “Finding Growth in FVS,” Journal of Accountancy. https://www.journalofaccountancy.com/issues/2015/mar/ cpa-forensic-and-valuation-services.html 16. FBI. March 9, 2012. FBI Forensic Accountants. https://www.fbi.gov/ news/stories/fbi-forensic-accountants 17. Ibid. 18. ACFE. n.d. Career Path—Forensic Accountant. http://www.acfe.com/ career-path-forensic-accountant.aspx, (accessed November 21, 2017). 19. Association of Certified Fraud Examiners (ACFE). 2016. ACFE Report to the Nations, Downloads. https://www.acfe.com/rttn2016/ resources/downloads.aspx, (accessed October 7, 2017). 20. Ibid. 21. Association of Certified Fraud Examiners (ACFE). 2018. Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse. https://www.acfe.com/uploadedFiles/ACFE_Website/Content/ rttn/2018/RTTN-Government-Edition.pdf 22. Ibid.

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23. D. Gray. 2008. “Forensic Accounting and Auditing: Compared and Contrasted to Traditional Accounting and Auditing,” American Journal of Business Education 2, no. 2. 24. Public Company Accounting Oversight Board (PCAOB). 2018. ­Auditing Standards. https://pcaobus.org/Standards/Pages/default.aspx 25. The American Institute of Certified Public Accountants (AICPA). 2018. Professional Standards: Forensic and Valuation Services Professional Standards. https://www.aicpa.org/interestareas/forensicandvaluation/ resources/standards.html

CHAPTER 2

Forensic Accounting Services and Skills Executive Summary Forensic accounting has advanced as an important and rewarding field of accounting to prevent, detect, and correct financial scandals and other types of fraud. In such an increasingly unstable economic and litigious environment, there has been significant growth in the demand for and interest in forensic accounting and investigative services. Forensic accountants provide litigation consulting, expert witnessing, valuation, and fraud investigation services. This chapter presents forensic accounting fraud and nonfraud services and skill sets required by forensic accountants to effectively conduct their services.

Introduction The existence and persistence of high-profile alleged FSF (e.g., Enron, WorldCom, Parmalat, Satyam), as well as the investment Ponzi schemes and credit crunch scandals have negatively affected the safety and soundness of financial markets and investors’ confidence in public financial information. Forensic accountants perform a variety of fraud and nonfraud services, including expert witnessing, valuation, and litigation consulting. To effectively conduct their services, forensic accountants should have knowledge, education, and expertise in accounting, marketing, finance, management, psychology, criminology, and technology. This chapter presents fraud and nonfraud professional services commonly performed by forensic accountants as well as technical, analytical, and soft skill sets required for forensic accountants to effectively conduct their services.

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Forensic Accounting Opportunities and Services Forensic accounting is a field of accounting practice pertaining to fraud and nonfraud services. Forensic accounting is a practice of using accounting, marketing, finance, management, psychology, and criminology along with technology and science in performing fraud and nonfraud forensic accounting services. Exhibit 2.1 presents three general areas of forensic accounting—litigation consulting, expert witnessing, and fraud

Exhibit 2.1 Forensic Accounting Practice Forensic Accounting Fraud Examination (investigative services)

Litigation consulting (legal services and disputes)

Expert Witnessing

Occupational Fraud

Valuations and litigation support

Legal Disputes

Financial Statement Fraud

Shareholders’ and stakeholders’ disputes

Financial Disputes

Asset-Theft Fraud

Bankruptcy and insolvency

Assistance Lawyers

Consumer Fraud

Divorce Disputes

Assistance Other Accountants (Accounting)

Computer Fraud (IT Risk)

Mergers and Acquisitions

Nonfinancial Disputes and Investigations

Risk Assessment

Bribery

Money Laundering

Cyberattacks

Fraud examination: a process of resolving fraud allegations, gathering and examining evidence, writing reports, and testifying to findings so as to detect, prevent, and correct fraud Litigation consulting: using skills in accounting, auditing, financing, law, and others to gather, analyze, and evaluate evidence, as well as interpret and communicate findings Expert witnessing: serving as a witness to educate jurors and interpret complex accounting and financial issues



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investigation.1 Other specific areas of forensic accounting practices are typically classified into general categories of fraud and nonfraud forensic accounting practices and described in detail in this section. Litigation and Expert Consulting Litigation consultants assist lawyers in pretrial activities, disposition, and discovery. Forensic accountants apply their knowledge, skills, and experience in accounting, business and finance, and criminology to educate lawyers in the interpretation and understanding of financial and nonfinancial information. Litigation consulting services are in demand to determine liability and assess damages in business valuations, insurance claims, malpractice, divorce settlements, and embezzlements and thefts in the workplace. Litigation consultants assist attorneys in pretrial and trial activities, disposition and discovery, and legal deliberations. This type of forensic accountant applies skills, accounting, legal, auditing, and financial knowledge, experience, and training to educate lawyers in the interpretation and understanding of financial information and in auditing matters. Litigation consultants are often hired by attorneys to assist them in evaluating cases and developing trial strategies. Litigation consultants achieve their success by conducting mock trials or focus groups. While performing this exercise, mock jurors are presented with evidence that will be seen during the actual trial. The mock jurors are then surveyed to see what items are the most impactful and what verdicts they are leaning toward. This results in knowing how jurors may react to the case and allows attorneys to know the best way to communicate their case in court.2 Litigation consulting services are important and in demand to determine liability and assess damages in business valuations, malpractice, divorce settlements insurance claims, and embezzlements and thefts in the workplace. The AICPA released definitions and standards for consulting services in 2003. The nine-page document has five sections pertaining to relevant practices in consulting. The standards follow a code of ethics format and the scope of practitioners is clearly outlined in the definition section.3 The guidance is summarized is Exhibit 2.2.

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Exhibit 2.2 AICPA Guidelines on Litigation Consulting Guidance

Pertinent Information

Introduction

Services offered have changed because of the advancements in practices and technology. Consulting services generally involve advisory services, particularly to management.

Definitions

1. Practitioner: Any one member carrying out consulting services for a client. 2. Consulting Process: Analytics applied to consulting. 3. Consulting Services: This includes advisory, consultation, implementation, transaction, support, and product services.

Standards

The standards follow the general standards rule. The rules are: professional competence, due professional care, planning and supervision, and sufficient relevant data, client interest, understanding the client, and communication with the client.

Consulting Services for Attest Clients

Consulting services do not impair independence for attest clients.

Effective Date

January 1, 1992.

Expert Testimony and Witnesses Forensic accountants also serve as expert witnesses to educate jurors about the technical aspects of accounting and financial reporting. Although litigation consulting and expert witnessing services are similar in the sense of applying accounting education and practice to assist the characters of the court (lawyers, jurors, judges) to better understand, use, and interpret financial and nonfinancial information, the overriding difference is the way the forensic assignment is conducted. Forensic accountants serving as expert witnesses must keep professional skepticism and remain objective and neutral to establish credibility with the opposing cross-examiner. The primary objective of the cross-examiner throughout the court deliberation process is to deter credibility by proving that the forensic accountant has given contradictory statements. Litigation consultants, on the contrary, often work under the supervision of a lawyer and as such have special privileges in which specific details and evidence presented do not necessarily have to be revealed. Several Supreme Court cases have set precedents regarding expert witnessing. Two of note are Daubert vs. Merrell Dow Pharmaceuticals, Inc.



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and The Kumho Tire Co. vs. Carmichael decision. Daubert vs. Merrell states that courts must determine whether the logic and methods presented by an expert are valid scientifically and if they can be applied to the case in question. The Kumho Tire Co. vs. Carmichael case extended Daubert vs. Merrell to all expert testimony. Testifying CPAs must detail their certification, qualifications, reasoning, and methods. Experts must also qualify their methodology’s reliability.4 Exhibit 2.3 presents two court cases relevant to expert witnessing forensic accounting services.

Exhibit 2.3 Expert Witnessing Court Cases Court Case

Date Decided Description

Daubert vs. Merrell Dow June 28, 1993 Pharmaceuticals, Inc.

The Kumho Tire Co. vs. Carmichael

March 23, 1999

1. Provided that cross-examination, a swath of evidence, and clear burden of proof is better in principle than the general acceptance standard. 1. Applies the principles in Daubert vs. Merrell to other experts who are not scientists. 2. The gatekeeping obligation applies to every facet of expert testimony.

Fraud Investigation Forensic accountants normally serve as fraud investigators to examine allegations of fraud. Fraud investigators examine financial and nonfinancial data and other evidence to discover and report fraudulent activities. Both financial statement auditing and fraud investigation are the process of gathering competent and sufficient evidence to substantiate the quality, reliability, completeness, transparency, and accuracy of financial reports. Financial auditors provide reasonable assurance that financial statements are free from material misstatements whether caused by errors of fraud, whereas fraud investigators examine allegations of fraud by searching for at least one event or transaction that could signal the possibility of fraud. Furthermore, financial auditors focus primarily on audit of financial statements and are more concerned with management fraud in

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manipulating financial statements, while fraud examiners can be hired to examine both fraud and nonfraud issues. Forensic accountants typically deal with the following: fraud prevention and detection (antifraud policies, procedures, and practices), family law (net worth valuation, divorce), fraudulent financial reporting (FSF) and white-collar crimes (larceny, defalcation, illegal acts, bribery, money laundering, corruption), economic damages (civil litigations), risk assessment (bankruptcy risk), asset valuations (bankruptcy, mergers, and acquisitions), and misappropriation of assets (thefts, embezzlements). In performing these services, forensic accountants should have technical skills including the ability to understand accounting, finance, and law and to think critically, analytical skills of using quantitative methods and conducting research and investigations, and soft skills of communicating effectively and conducting interviews. Business Valuation Business valuation is the assessing of the fair value of a business or company. To accomplish this task, valuation services are provided by people in the industry known as appraisers. The business valuation market has grown and will continue to grow because of mergers, acquisitions, employees stock ownership, stock options, preferred stock, debt, and start-up ventures, economic obsolescence and litigation, and better financing opportunities for businesses and individuals alike.5 Forensic accountants serving as appraisers should have the appraisal and industry aptitude to form credible valuation opinions.6 Forensic accountants are employed to perform business valuation when sales, mergers, partner ownership, or divorce rulings occur. Forensic accountants in performing valuation services often use strategic valuation methods that consider asymmetric risks, management flexibility, real options, realistic estimations and related assumptions, and other factors relevant to the valuation services. Forensic accountants as valuation experts use a sophisticated, planned, properly executed, and welldocumented methodology that investigates all relevant factors. Business valuation strategies and procedures go beyond just financial and market analyses that often focus on financial statement and cash flow analyses and take into consideration economic value-added, management, the market



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and economic conditions, and multiple regression analyses. The types of valuation services provided by forensic accountants are, but not limited to, the following: • Value of a private company that is going public through the Initial Public Offering process • Value of an investment opportunity to assess real options or asymmetric risks • Value of an operating business and assessment of expansion or discontinuing products and services • Value of a division or line of productions • Value of assets and liabilities in the case of divorce disputes • Value option decisions for buy or rent properties • Value of investments in information technologies such as block chain risks • Value investment portfolio • Value of a franchise and franchisee • Value of start-up and emerging growth companies Other Nonfraud Forensic Accounting Services Forensic accountants offer nonfraud services in addition to fraud investigations. Examples of these services include divorce litigation, economic damage quantification, and mergers and acquisitions. Divorce litigation is a big market and forensic accountants are on the forefront. During divorce litigation, forensic accountants use investigative skills to identify hidden assets or equity. These include personal assets, collectibles, collections, stock, and property. After the forensic accountant aids in locating these items, assessment of the long-term impact on divorce is also considered. This is often done by thorough review of tax returns, credit card statements, and other records. 7 Another area where forensic accountants work in is economic damage. Economic damage can be defined as the loss of income and earning capacity. To figure out the amount of loss or reduction in capacity, economic damage quantification must be done. This is a process in which lawyers, agents, and forensic accountants corroborate in the areas of fraud, dispute,

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and injury to reach quantitative results. The methods used to find results include the benchmark approach, the contract method, and the profit method. Each revolves around the examination of performance metrics and correlate the results with the degree of harm. This allows forensic accountants to show proof of wrongdoing during litigation. 8 Mergers and acquisitions (M&A) are common in the business world and forensic accountants can be called upon to evaluate M&A transactions. When mergers and acquisitions occur, practitioners often determine the effect of professional skill sets on the process. The professionals involved in the transaction should be skilled in completeness of exhibits and disclosure and accuracy of the entire business deal. To evaluate the aforementioned correctly, forensic accountants are knowledgeable in virtual data storage, visualization software and material, and the Confidential Information Memorandum (CIM), which is a marketing technique used to attract buyers.9 Forensic Risk Assessment and Management Risk has different notions and is defined in different ways and contexts. Global business is constantly changing and becoming more unpredictable, complex, and volatile. In this challenging business environment, forensic accountants can be hired to identify risks, assess their determinants and consequences, and minimize their detrimental effects. Organizations incur different types of risks to attain their mission, including capital structure risk, credit risk, liquidity risk, interest rate risk, strategy risk, and financial and exchange risk. Forensic accountants are well trained to assist organizations in assessing and managing risks and maximize their rewards and minimize their detrimental effects. Forensic accountants can use the Enterprise Risk Management (ERM) in assessing risks and in turning challenges into opportunities. ERM is a continuous process of identifying, assessing, and disclosing risks that challenge the company, their potential losses, and possible rewards. The Committee of Sponsoring Organizations (COSO) in 2004 defined ERM as “. . . a process, effected by an entity’s board of directors, management and other personnel . . . designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite . . .”10



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Dispute Resolution Dispute resolution is the process of ending grievances between parties. In forensic accounting, a range of acceptable methods are used by practitioners to resolve a dispute, conflict or claim. During the dispute resolution process, forensic accountants often investigate commercial damages and valuations by reviewing financial transactions, reporting on interviews, and debating expert reports. Dispute resolutions are generally a tedious process requiring forensic accountants to act as mediators between parties. A mediator is an individual or party who aids opposing parties in reaching an agreement. In addition to the above-mentioned traditional investigation methods, technology has brought upon new ways to examine litigation. New methodology resulting from the advancement of technology includes retrieval of deleted information, review of electronic data transmissions (calls and e-mails), verification of metadata, and examination of the electronic audit trail.11 The Circle of Conflict, developed by Christopher W. Moore, details a process for mediators.12 The process contains four quadrants, each representing primary, secondary, and third parties, respectively. The inner circle of the quadrants represents issues and options that are viable to each quadrant. This diagram is intentioned to depict opportunities that arise from disputes. 13

Skill Sets of Forensic Accountants A survey study sponsored by the Forensic Valuations Services Section of the American Institute of Certified Public Accountants (AICPA) in 2009 reveals characteristics and skills of forensic accountants described in this section.14 Successful forensic accountants need to have three sets of technical, analytical, and soft skills as explained in the following subsections. Technical Skill Sets Forensic accountants need to be familiar with broad accounting knowledge, the law, and investigative techniques within specialized areas of forensic accounting. Forensic accountants performing financial and investigative fraud services should understand accounting standards, policies, and practices, accounting information systems, auditing standards, procedures and

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practices, use of research methodology, computer technology and digital forensics, fair value estimation, business valuation, and economic damages. The various legal tasks a forensic accountant undergoes include testifying as witness in trial, understanding the legal system, whether in a specific area of expertise such as credit card fraud, or its entirety. The FBI has a large presence in investigating white-collar crime and fraud schemes, and forensic accountants are recruited by the FBI for their familiarity with the legal, investigative process. Forensic accountants must go through extensive schooling to understand these processes. An example curriculum for a student aspiring to become such an accountant includes courses such as Forensic Accounting: Litigation Support and Expert Witnessing. Other courses offered by many universities include Fraud Examination and Computer Forensics and IT Auditing.15 All of these courses teach students about investigative techniques, the legal process, accounting knowledge, and criminology that forensic accountants partake in daily. Some of these technical skills are antifraud education and practice, careers in forensic accounting, compliance with applicable laws and regulations, corporate governance, expert testimony and expert witness techniques, FSF, legal elements of fraud, principles of ethics and corporate code of conduct, professional standards pertaining to forensic accounting, and types of fraud (e.g., employees, management). Analytical Skill Sets Analytical skill sets are often referred to as digital forensics, information technology (IT), Big Data, data analytics, and the ability of forensic accountants to effectively perform their services. Forensic accountants should possess analytical skills of using research methodology and data analytics in gathering and evaluating evidence. The 2009 AICPA survey suggests that the majority (more than 60%) of surveyed attorneys, CPAs, and accounting professors rank being analytical, ethical, and detailed-oriented as essential characteristics and traits of forensic accountants.16 The use of IT, Big Data, data analytics, and time series analyses is very important in digital forensics. There has been an increase in the use of data analytics in the twenty-first century. With the rise of Big Data, forensic accountants are having to become increasingly adaptable for future challenges.



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According to the 2014 Survey on International Trends in Forensic and Valuations Services, conducted by the AICPA, the biggest challenge in the field of forensic accounting today is electronic data analytics; 85 percent of survey responses indicated as much. The evolution of Big Data requires forensic accountants to not only accumulate a lot of data but also be able to decipher and understand it.17 IT skill sets including Big Data and data analytics skills, experience, and knowledge have become increasingly important for forensic accountants. IT advances (e.g., block chain, cloud computing, electronic social media, analytics) provide forensic accountants with an unprecedented amount of data and information availability. Big Data is typically viewed as high-volume, high-velocity, and high-variety information that is typically processed electronically to improve decision-making.18 Forensic accountants typically have access to the huge amount of both structured (e.g., financial information general ledger or transaction data) and unstructured data (e.g., financial disputes, ­valuation information, e-mail, voice or free-text fields in a database) and semi-structured data (e.g., nontraditional data sources such as thirdparty watch lists, news media, free-text payment descriptions) to effectively perform their forensic and investigative services. Ernst & Young (EY) reports two factors relating to cyberattacks and digital fraud have increased the use of Big Data and data analytic tools by forensic accountants.19 First, the existence and persistence of cyberattacks in recent years have caused significant disruption of critical operations, transfer of funds, and misappropriation of intellectual property/confidential personal data and other critical digital assets. Second, ever-increasing fraud risks because of insider threats triggered by unauthorized trading, espionage, or IT sabotage cause malicious insiders to manipulate or destroy data and perpetrate fraud. Big Data enables forensic accountants to perform technological, cultural, analysis and use methodology opportunities in capturing and analyzing both structured financial information and unstructured nonfinancial information. The use of Big Data and data analytics enables forensic accountants to integrate nontraditional sources of financial information and nonfinancial information into audit processes. Forensic accountants use Big Data and data analytics to improve the quality of their investigation, reduce the costs, and enhance profitability. For example, forensic accountants can utilize database-to-database

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FORENSIC ACCOUNTING AND FSF, VOLUME I

verification with independent trading partners. Forensic accountants can use automatic data collection and rule-based analysis techniques to identify errors, irregularities, and fraud. Big Data can change forensic accounting in the following areas: First, population-level investigations are possible and feasible over traditional sampling tests because of the digitization of transaction data and reduced costs of data analysis. Second, the role of forensic accountants with the emergence of Big Data will move from statementlevel investigation and opinion to data-level investigation and report. Third, forensic accountants are able to use text analytics to manage unstructured or semi-structured data, such as text in the management discussion and analysis sections of financial reports. Finally, forensic accountants face a less challenging task in asserting the existence of tangible assets where records are complemented with pertinent audio, video, and textual information. Soft Skill Sets Soft skills are very important to forensic accountants to communicate their findings effectively and in interviewing suspected fraudsters and in testifying in court. Soft skill sets include communication, ­psychology, interviewing, testifying, and problem-solving ability of forensic ­ ­accountants to effectively perform their services. Soft skills including ­communication and interview skills are essential for forensic accountants. Forensic accountants serving as expert witnesses often testify before the courts and write their expert reports that are subject to intensive scrutiny by cross-sectional trials and in depositions. Litigation consultants need to write reports that can effectively stand cross-examinations in trials. ­Because of the nature of the job, forensic accountants must be well organized and be able to communicate their findings in an efficient and effective manner. Accountants must develop a way to communicate with other experts outside of the accounting and finance fields of study. Commonly, being too technical with others can lead to a lack of ­understanding and can produce undesired results, especially for technical legal matters. Interviews are a procedure in investigations that requires information to be extracted in an objective and through manner by not accusing the suspect. When suspects feel accused, they may decide not to divulge critical information, and thus, it is important to make sure the suspect is comfortable with talking.20



Forensic Accounting Services and Skills

37

Forensic accounting services often require dealing with nerves of people under pressure. Thus, forensic accountants need to remain calm, relaxed, and approachable to soothe those nerves and foster cooperation. ­During ­investigations and disputes, integrations and interviewees, individuals may feel accused when they have done nothing wrong, and therefore, forensic accountants should have the necessary soft skills to create a cordial and congenial environment of calmness, cooperation, and respect. Forensic accountants can effectively perform their services and accomplish effective interviews by being objective, organized, and being candid and transparent by discussing the investigation process upfront. Forensic accountants should develop effective listening skills to give opportunity to interviewees to talk freely and listen and observe their body language. Creative thinking, problem solving, and critical thinking are important skills for forensic accounting. Forensic accountants should be able to think quickly, recognize the changes, and adapt to the changes during an investigation. Understanding fraudsters and suspects, their ways of thinking, intent, and motivations is important in investigating fraud. Forensic accountants in investigating fraud may need to obtain a confession that requires collecting documentary evidence and conducting interviews. The process of obtaining confession requires the ability to assess deception from honesty and truthfulness and the knowledge and skills to analyze eye movements and body language rooted in psychology. The AICPA 2009 survey regarding essential characteristics and traits of forensic accountants state the following skills as important in the order of raking by surveyed attorneys, academics, and practicing accountants (CPAs): being analytical, detail-oriented, ethical, responsive, insightful, inquisitive, intuitive, persistent, skeptical, evaluative, confident, as well as functioning well under pressure, generating new ideas and scenarios, making people feel at ease, team playing, and being adaptive.21 In summary, the required skill sets for successful forensic accountants are as follows: accounting, auditing, knowledge of the legal system, criminology, investigative techniques, data analytics, detail-oriented, organized, focused, critical thinking, effective commutation, and creative thinking. Relevant to technical, analytical, and soft skill sets, Exhibit 2.4 ­summarizes and contrasts the American Accounting Association operating manual for f­orensic accounting, auditing, and financial reporting sections. I­ nformation p ­ resented in this exhibit contrasts the education knowledge, along with the teaching and research objectives of auditors, financial accountants, and forensic accountants.

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FORENSIC ACCOUNTING AND FSF, VOLUME I

Exhibit 2.4 Contrasting Education Mission and Objectives of Auditors, Forensic Accountants, and Financial Accountants* Auditing

Financial Forensic Accounting Accounting

Mission

To foster intellectual capabilities, resources, and institutional structures to support innovation, critical analysis, and improvement of auditing and assurance services practice and professional standards.

“The mission of the Forensic Accounting Section (FAS) of the American Accounting Association is to foster excellence in the teaching, research, practice, continual professional education (CPE) courses and curriculum development of forensic accounting services by creating opportunities.”

The Financial Accounting and Reporting Section mission is to improve the effectiveness and efficiency of education, research, and professional practice.

Teaching and Education Objectives

To foster intellectual capabilities, resources, and institutional structures to support the development, peer evaluation, and sharing of educational materials, curricula, teaching methods, and professional development in auditing and assurance services.

1. Discover new ways to educate forensic accountants 2. Proper means to exchange ideas for educational improvement 3. Aid forensic accountants in proper methodology and skill sets 4. Question forensic accounting practice 5. Cooperation with other practitioners 6. Recruitment for the forensic accounting profession 7. Unification of practice and academic endeavors 8. CPE for members

1. Disseminating and evaluating teaching methods and materials. 2. Creating opportunities for interchange and cooperation between academics and practitioners.



Forensic Accounting Services and Skills

Auditing Research Objectives

To encourage theoretically based, yet practicerelevant, research scholarship in the many aspects of external and internal auditing utilizing the PCAOB’s standardssetting agenda and Standing Advisory Group meetings, and the topics covered therein as substantive motivation for creative and innovative research that seeks to make a practical difference to the regulation and practice of auditing.

39

Financial Forensic Accounting Accounting 1. Strategic direction for forensic accounting research 2. Strengthen forensic accounting academia 3. Share forensic accounting research findings outside academia 4. Create opportunities for individuals to strengthen research skills

1. To encourage, facilitate, and ­publicize research in financial ­accounting and reporting 2. To communicate interests, intentions, and actual work-inprocess in the area 3. To identify areas in need of research 4. To provide ­opportunities for public exposure of research results through American Accounting Association meetings ­(annual, regional, and special meetings devoted solely to financial accounting and reporting) and publications (including working papers and a separate journal for financial ­accounting and reporting, if warranted)22

Sources: American Accounting Association, Financial Accounting, Auditing and Forensic Accounting Sections. http://aaahq.org/

Conclusion Forensic accounting is a rewarding, demanding, and challenging field of accounting. Forensic accountants perform both fraud and nonfraud services presented in this chapter. Fraud services consist of FSF examination, employee fraud, embezzlement, and theft and misappropriation

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FORENSIC ACCOUNTING AND FSF, VOLUME I

of assets investigation. Nonfraud forensic accounting services consist of litigation consulting, expert witnessing, valuation, and dispute resolution. To effectively fulfill their responsibilities and thoroughly conduct their services, forensic accountants should obtain technical, analytical, and soft skill sets discussed in this chapter.

Action Items 1. Forensic accounting is a rewarding and demanding career. 2. Forensic accounting services are fraud investigation, litigation consulting, expert witnessing, valuations, risk assessment, economic damages among others. 3. Forensic accounting is a process of gathering, analyzing, and evaluating evidence, making decisions and conclusions, and effectively communicating the results of forensic accounting services. 4. Forensic accountants should possess technical, analytical, and soft skill sets to effectively perform their professional services.

Endnotes 1. Z. Rezaee, L. Crumbley, and R. Elmore. 2004. “Forensic Accounting Education: A Survey of Academics and Practitioners.” Advances in Accounting Education Teaching and Curriculum Innovations 6, pp. 193–232. 2. American Psychological Association. 2016. How Did You Get that Job? http://www.apa.org/monitor/2016/06/job-studebaker.aspx, (accessed February 8, 2018). 3. The AICPA. 2003. Statement of Standards for Consulting Services. https://www.aicpa.org/interestareas/forensicandvaluation/resources/ standards/downloadabledocuments/sscs.pdf 4. D.L. Crumbley, and K.A. Russell. 2004. “So You Want to Be an Expert Witness,” Journal of Accountancy. https://www.journalofaccountancy .com/issues/2004/oct/soyouwanttobeanexpertwitness.html, (accessed: February 16, 2018). 5. Investopedia. 2018. Business Valuation. https://www.investopedia .com/terms/b/business-valuation.asp, (accessed February 23, 2018).



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6. Z. Rezaee. 2001. Financial Institutions, Valuations, Mergers, and ­Acquisitions (2nd ed., Hoboken, NJ: John Wiley & Sons, Inc.). 7. McKinley Irvin. October 16, 2017. How Might a Forensic Accountant Benefit My Divorce Case? https://www.mckinleyirvin.com/familylaw-blog/2017/october/how-might-a-forensic-accountant-benefitmy-divor/, (accessed October 2, 2018). 8. MMD Forensic Accountants. n.d. What Is Economic Damage Quantification? https://mdd.com/what-is-economic-damage-quantification/, (accessed October 2, 2018). 9. McGovern & Greene LLP. n.d. Mergers & Acquisitions. https://www .mcgoverngreene.com/forensic-accounting/mergers-acquisitions .html, (accessed October 2, 2018). 10. Committee of Sponsoring Organizations of the Treadway Commission (COSO). September, 2004. Enterprise Risk Management—Integrated Framework (New York, NY: COSO). 11. Kroll. June 1, 2013. Dispute Resolution: The Role of Forensic Accountants and Computer Forensics. https://www.kroll.com/media/pdf/ articles/AsianMena_Counsel_v11.pdf, (accessed August 30, 2018). 12. Deloitte. 2017. The Role of the Forensic Accountant in Mediation. https:// www2.deloitte.com/ie/en/pages/finance/articles/role-of-forensicaccountant-in-mediation.html, (accessed September 4, 2018). 13. Ibid. 14. American Institute of Certified Public Accountants (AICPA). 2009. Characteristics and Skills of the forensic accountant. https://www.aicpa .org/InterestAreas/ForensicAndValuation/Resources/PractAids Guidance/DownloadableDocuments/ForensicAccountingResearch WhitePaper.pdf 15. Missouri State University. n.d. Accountancy Courses. https://www .missouristate.edu/registrar/catalog/courses_ac.htm, (accessed November 5, 2017). 16. AICPA. 2009. Characteristics and Skills. 17. AICPA. 2014. The 2014 AICPA Survey on International Trends in Forensic and Valuation Services. Available at https://rodburkert.com/ wp-content/uploads/2015/08/FVS-International-Trends-2014.pdf 18. M. Vasarhelyi, A. Kogan, and B.M. Tuttle. 2015. “Big Data in Accounting: An Overview,” Accounting Horizons 29, no. 2, pp. 381–396.

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19. Ernst and Young (EY). 2016. Global Forensic Data Analytics Survey 2016. Shifting into Higher Gear: Mitigating Risks and Demonstrating Returns. http://www.ey.com/gl/en/services/assurance/fraud-investigation--dispute-services/ey-shifting-into-high-gear-mitigating-risks-anddemonstrating-returns, (accessed January 4, 2017). 20. M.L. Murphy. December 3, 2014. “Top Soft Skills for Forensic Accountants,” AICPA. https://www.aicpastore.com/Content/media/ PRODUCER_CONTENT/Newsletters/Articles_2014/FVSNews/ skillsforforensicaccountants.jsp, (accessed November 7, 2017). 21. AICPA. 2009. Characteristics and Skills. 22. FARS. Financial Accounting and Reporting Section. http://aaahq.org/ fars, (accessed June 25, 2018).

CHAPTER 3

Forensic Accounting Profession Executive Summary Forensic accounting has advanced as a distinct profession with the accounting and business profession. Several professional organizations have developed certifications in forensic-related services, from fraud examination to valuation investigation and determination. These certifications demonstrate educational credentials, expertise, experience, and ethical considerations of forensic accountants. This chapter presents several professional certifications relevant to forensic accounting practices and services.

Introduction The existence and persistence of financial scandals, financial crises, and related FSF reinvigorated interest in education and practice of forensic accounting and FSF examination. Forensic accounting is gaining considerable attention as the American Accounting Association (AAA) has added a new educational and research section on “Forensic Accounting” and the SEC has strengthened its FSF divisions and trained its staff in the area of forensic accounting and FSF, all international public accounting firms have established a forensic accounting department, and forensic accounting and fraud examination is becoming one of the fundamental components of business schoolscurriculum in recent years. Several professional organizations have established certifications in forensic accounting practices. These forensicrelated certifications demonstrate forensic accountants’ commitments and professionalism. These certifications require practicing forensic accountants to obtain education, work experience, and continuing professional education (CPE) as well as complying with codes of professional ethics. This chapter presents certifications and professional ethics relevant to forensic accounting.

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FORENSIC ACCOUNTING AND FSF, VOLUME I

Initiatives to Promote Forensic Accounting Several global initiatives have been taken in recent decades, to promote forensic accounting and thus to combat fraud. When a company is not effective in generating sustainable performance, management is under more pressure to manage earnings. Opportunities to engage in FSF are higher when the company is not doing well financially and unable to invest in effective corporate governance and internal controls. Emerging corporate governance reforms, securities laws, and best practices are intended to identify and minimize potential conflicts of interest, as well as the incentives, and opportunities to engage in FSF. The American Institute of Certified Public Accountants (AICPA) issued Statement of Auditing Standards No. 82 (SAS No. 82)1 and then SAS NO.99, “Consideration of Fraud in a Financial Statement Audit” in 2002.2 Sarbanes-Oxley Act of 2002 was passed by Congress to combat FSF. Exhibit 3.1 presents information about organizations that currently focus on providing education and training for forensic accountants, and some of these professional organizations and their role in promoting forensic accounting are described in the following paragraphs. The Forensic Accounting section of the AAA is dedicated to the continual improvement of forensic accounting research and education, through the encouragement, development, and sharing of (1) the promotion and dissemination of forensic and investigative academic and practitioner research; (2) the relevant and innovative curricula with an emphasis on effective and efficient instruction; (3) the exploration of knowledge-organization issues related to forensic accounting programs; and (4) the creation and presentation of CPE courses to members and professionals. The International Forensic Accounting Association (IFAA) offers membership to individual accountants and accounting firms. The IFAA aids those in need of a forensic accountant with the ability to (1) search for criteria within their location; (2) correspond with those who meet their criteria; (3) participate in the forensic accounting forums to learn about the field and their situation by experts; and (4) find the right accountant to conduct forensic accounting services. National Association of Certified Valuation Analysts’ (NACVA) Financial Forensics Institute (FFI) was established in partnership with some of the nation’s top minds and authorities in forensic accounting, law, economics, valuation theory, expert witnessing, and support fundamentals. It began with the



Forensic Accounting Profession

45

idea of establishing an association for certified public accountants (CPAs) and business professionals that could support their needs in providing intangible asset valuation and financial litigation consulting services. This organization provides training and CPE courses to members and nonmembers. The National Association of Forensic Accountants (NAFA) provides training and certification to CPAs in various fields of forensic accounting and provides availability and access to the services of those who have achieved NAFA CERTIFIED status. NAFA is the oldest association of CPAs specializing in forensic/investigative accounting organization as well as the fastest growing. The International Institute of Certified ­Forensic ­Accountants (formerly the Association of Chartered Certified Forensic ­Accountants), founded in 2015, is a global organization that ­administers the forensic accounting exams and grants certification to candidates who pass the exam. The International Institute of Certified Forensic A ­ ccountants is a member of the International Federation of Forensic A ­ ccountants and Auditors (IFFAA). The American Institute of ­Certified Public ­Accountants (AICPA) released its proposed new professional s­tandards for CPAs who perform forensic accounting services. The new proposed Statement on Standards for Forensic Services No. 1 (SSFS 1) was published in December 2018 and is intended to provide more ­focused and tailored authoritative guidance to CPAs who perform forensic services.3 The proposal would take effect for new engagements accepted on or after May 1, 2019, with early adoption permitted.

Exhibit 3.1 Organizations that Currently Focus on Providing Forensic accounting and Antifraud Education and Training Name

Description

Website

Association of Certified Fraud Examiners (ACFE)

The ACFE is the world’s largest antifraud organization and premier provider of antifraud training and education. Together with nearly 55,000 members, the ACFE is reducing business fraud worldwide and inspiring public confidence in the integrity and objectivity within the profession.

http://www.acfe .com/

(Continued )

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FORENSIC ACCOUNTING AND FSF, VOLUME I

Exhibit 3.1 (Continued) Name American Accounting Association (AAA) Forensic Accounting and Investigation Section

Description

The Forensic and Investigative Accounting Section of the AAA is dedicated to the continual improvement of forensic accounting research and education, through the encouragement, development, and sharing of: 1) The promotion and dissemination of forensic and investigative academic and practitioner research. 2) The relevant and innovative curricula with an emphasis on effective and efficient instruction. 3) The exploration of knowledge-organization issues related to forensic accounting programs. 4) The creation and presentation of continuing professional education (CPE) courses to members and professionals. International The IFAA offers membership to individual Forensic accountants and accounting firms. IFAA Accounting offers assistance to those in need of a forensic Association accountant with the ability to 1) search for (IFAA) particular criteria within their location; 2) correspond with those who meet their criteria; 3) participate in the forensic accounting forums to learn about the field and their situation by experts; and 4) find the right accountant to assist. Institute The IFP is a powerful coalition dedicated to for Fraud multidisciplinary research, education, and Prevention prevention of fraud and corruption. The IFP’s (IFP) primary mission is to improve the ability of business and government to combat these crimes and to educate the general public on effective methods of recognizing and deterring them. National The NACVA supports the users of business Association and intangible asset valuation services and of Certified financial forensic services, including damages, Valuation determinations of all kinds, and fraud detection Analysts and prevention, by training and certifying (NACVA) financial professionals in these disciplines. NACVA training includes CPE credit and is available to both members and nonmembers. The The IACVA was founded in 2000 to provide International worldwide support to professionals who Association of perform either valuations (for businesses, Consultants, securities, and intangible assets of all kinds) Valuators or are engaged in fraud deterrence. IACVA is and Analysts the first and only international association to (IACVA) provide such support.

Website http://aaahq.org/ fia/index.html

http://www.forensic accountingassocia tion.com/

http://www.theifp .org/

http://www.nacva .com/

http://www.iacva .org/



Forensic Accounting Profession

Name

Description

Website

Financial Forensic Institute (FFI)

FFI was established in partnership with http://www.nacva some of the nation’s top minds and .com/certifications/ authorities in forensic accounting, law, C_cffa.asp economics, valuation theory, expert witnessing, and support fundamentals to offer practitioners with tools and techniques to prevent, detect, investigate and prosecute complex financial and commuter-related frauds.

National Association of Forensic Accountants (NAFA)

The NAFA provides training and CERTIFICATION to CPAs in various fields of forensic accounting and provides availability and access to the services of those who have achieved NAFA-CERTIFIED status.

http://www .nafanet.com/index .htm

Forensic Accountants Society of North America (FASNA)

FASNA was chartered as a network of certified public accounting firms in 1997 for the purpose of providing claims adjustment services to the insurance industry. Over the years, litigation support and special investigations were added as they are often interrelated with our insurance services.

http://www.fasna .org/

International Institute of Certified Forensic Accountants (IICFA)

The IICFA, founded in 2015, is a global organization that administers the Chartered Certified Forensic Accountant (CCFA) and the Certified Global Forensic Accountant (CGFA) exams and grants certification to candidates who pass the exam. The IICFA is a member of the IFFAA.

http://iicfaglobal .com/

Information Systems Audit and Control Association (ISACA)

The ISACA provides certifications in the technology and IT governance fields. It currently offers the Certified Information Systems Auditor (CISA), the Certified in Risk and Information Systems Control (CRISC), and Certified Information Security Manager (CISM).

Isaca.org

Forensic Accounting Section of the American Accounting Association

The Forensic Accounting Section of the American Accounting Association’s mission is to foster excellence in the teaching, research, practice, and curriculum development of forensic accounting services and continuing professional education (CPE) courses.

http://aaahq.org/fia

47

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FORENSIC ACCOUNTING AND FSF, VOLUME I

Professional Certifications in Forensic Accounting and Investigative Practices Every profession has its certification of competency, compliance, and ethical conduct. Exhibit 3.2 presents several certifications relevant to practice of forensic accounting and investigative-related services. ­Exhibit 3.2 ­contains a list of many of the premier certifications, and while not all-inclusive, it is extensive. Academics, students, and practitioners often ask about the value of professional certifications in general and their importance to them. The accounting profession worldwide has evolved, adapted over time to many factors, and has been shaped by a variety of internal and external influences. One of the most influential factors contributing to the professionalism and refinement of the accounting profession is the certification program. This section provides evidence of the value of professional certifications in general and forensic-related certifications to encourage practicing forensic accountants and candidates to obtain their certification in different fields of accounting and auditing. Being in forensic ­accounting without being certified does not mean a whole lot. There are several forensic-related certifications in accounting, with the CPA, typically regarded as the mother of all certifications and the highest mark of designation in the global accounting profession. However, many other certifications such as chartered accountants (CA), certified management accountants (CMA), certified internal auditors (CIA), certified fraud examiners (CFE), and Certified Government Financial Managers (CGFM) may be more relevant to the forensic accounting career in different fields of accounting. The discussion of some on the professional accounting certifications and their education, examination, experience, and CPE requirements are discussed in the following paragraphs. Education Education requirements are typically a prerequisite for almost all professional exams and vary across certifications. For example, the AICPA requires 150 semester hours of college education for a candidate to be

49

Education

Determined by the state board of accountancy

Bachelor’s degree or its educational equivalent

Bachelor’s degree or its education equivalent

Certifications

Certified Public Accountant (CPA)

Certified Fraud Examiner

Certified Internal Auditor (CIA)

2 years of internal auditing experience or its equivalent for certification

2 years of professional experience for certification

Determined by the state board of accountancy

Experience

4 parts (125 m/c questions each), 10 hours 4 parts (125 m/c questions each), 14 hours

1. The internal audit activity’s role in governance, risk, and control 2. Conducting the internal audit engagement 3. Business analysis and information technology 4. Business management skills

4 parts, 14 hours

Test Length

Fraudulent transaction Legal elements of fraud Fraud investigation Criminology and ethics

Auditing and attestation Financial accounting and reporting Regulation Business concepts

Exam

Requirements

75%

75%

75%

Passing Score

Institute of Internal Auditors

Association of Certified Fraud Examiners

American Institute of Certified Public Accountants

Name

(Continued )

www.theiia .org

www.cfenet .com

www.aicpa .org

Website

Sponsoring Organization

Professional Certifications Relevant to Forensic Accounting and Investigative-Related Services

Exhibit 3.2

50

Education

Bachelor’s degree with 24 credit hours of courses in financial management or related topics

No specific degree requirement

Complete 450 days of training,

Certifications

Certified Government Financial Manager

Certified Information System Auditor

Chartered Accountant (CA) England— Associate Chartered Accountant

Pass a series of examinations, work experience of 3 to 5 years.

5 years of professional IS auditing, control, or security work experience for certification

2 years of professionallevel experience in government financial management

Experience

1. IS audit process 2. IT governance 3. Systems and infrastructure lifecycle management 4. IT service delivery and support 5. Protection of information assets 6. Business continuity and disaster recovery

1. Governmental environment 2. Governmental accounting, financial reporting, and budgeting 3. Governmental financial management and control

Exam

Requirements

500/700

75%

1 part, (200 m/c questions) 4 hours

Passing Score

3 parts. 115 questions 2 hours and 15 minutes

Test Length

Exhibit 3.2 (Continued)

The Institute of Chartered Accountants in England and Wales (ICAEW)

Information Systems Audit and Control Association

Association of Government Accountants

Name

www.icaew .com

www.isaca .org

www .agacgfm.org

Website

Sponsoring Organization

51

Complete 450 days of training,

Bachelor’s Degree. If you have a CPA, ACCA, or CA and 8+ years of work history, you do not have to take the exam.

CA England— Fellow Chartered Accountant

Certified Forensic Investigation Professional

3 years of work experience.

Pass a series of examinations, work experience of 3 to 5 years. At least 10 years of membership, Complied with continuing professional development. No exam is mandatory; you must take a masterclass in digital forensics or forensic investigation instead.

None

30%–49% gives you partial exemption from requirements. 50% and above out of 310 and complete a masterclass to become accredited.

International Institute of Certified Forensic Investigation Professionals

The ICAEW

(Continued )

http:// www.iicfip .org/index .php/2012-0609-1447-03/thecfip/9uncate gorised/ 235certifiedforensicinvestigationprofes sional-cfip

www.icaew .com

52

Education

Must have a CPA or a CA. If CPA also is a CFF (Certified in Financial Forensics), they are exempt from the exam and automatically become a FCPA after filing paperwork

Must have a degree and take course from a registered education provider

Certifications

Forensic CPA

Certified Investment Management Analyst

Pass qualification and certification exams and have 3 years’ minimum work experience in finance field

20 hours continuing education each year.

Experience

I. Governance II. Fundamentals III. Portfolio Performance and Risk Measurements IV. Traditional and Alternative Investments V. Portfolio Theory and Behavioral Finance VI. Investment Consulting Process

1. Criminal Interrogation and Confessions 2. Corporate Fraud Handbook 3. Financial Investigation and Forensic Accounting 4. Forensic and Investigative Accounting 5. Principles of Fraud Examination

Exam

Requirements

4-hour exam with 100 multiplechoice questions and 10 prochoice questions.

5-part exam, 100 multiplechoice questions per part

Test Length

Exhibit 3.2 (Continued)

100 out of 150

70%

Passing Score

Advanced Education for Investment and Wealth Professionals

Forensic CPA Society

Name

http://www .imca.org/

https://www .fcpas .org/

Website

Sponsoring Organization

53

36 hours

A university degree with specific business course credits

Bachelor’s degree, 3 Professional References, Forensic — background

Master Analyst in Financial Forensics

CPA

Certified Forensic Accountant

Must currently hold the CPA designation with State Board of Accountancy, current CPA

1. 30 hours of preapproved programs 2. Flexible route demonstrating competence and having relevant work experience

Pass one exam, with 20 matters or 2,500 hours of experience

1. Forensic Accounting 2. Fraud 3. Litigation Services 4. Cybersecurity Issues 5. Valuations 6. Open Book

1. Finance 2. Tax 3. Assurance 4. Performance Management

100 multiplechoices and true or false questions

1-part, multiplechoice questions, 5 hours

70%

American Board of Forensic Accounting

Chartered Professional Accountants Canada

National Association of Certified Valuators and Analysts

(Continued )

www.abfa.us

www .cpacanada.ca

http://www .nacva.org/

54

Education

Candidates must hold an Associate’s degree or higher to be approved into one of the IIA’s certification programs.

Must be a regular member of the AICPA.

Certifications

Certified Risk Management Assurance (CRMA), Institute of Internal Auditors

Chartered Global Management Accountant, American Institute of CPAs

A minimum of 3 years of relevant, workbased experience

Work experience depends on the degree obtained. Master’s: 12 months Bachelor’s 24 months Associate’s: 60 months

Experience

The unique format of the case study exam is set to mirror a real business environment. It simulates what management accountants do in the workplace through the use of a fictionalized organization based on a real business or industry.

1. Organizational governance related to risk management 2. Principles of risk management processes 3. Assurance role of the Internal Auditor 4. Consulting role of the Internal Auditor

Exam

Requirements

3 hours, three to six tasks related to a hypothetical business case

2 parts, Part 1 of the CIA exam. Separate CRMA exam of 100 multiplechoice questions.

Test Length

Exhibit 3.2 (Continued)

I t is peerreviewed and scored anonymously by management accounting experts. A specific passing grade has not yet been established.

600+

Passing Score

www.theiia .org

Website

American In- https://www stitute of Cer- .cgma.org/ tified Public Accountants

Institute of Internal Auditors

Name

Sponsoring Organization

55

Core Forensic Accounting Certificate

Need 75 hours of forensic accountingrelated continuing professional development (CPD). All hours must have been obtained within the 5-year period preceding the date of the CFF application.

CFF candidates must have a minimum of 1,000 hours of business experience in forensic accounting within the 5-year period preceding the date of the CFF application. Refer to the CFF Application Kit for examples of business experience.

1. Forensic Engagement Management 1 and 2 2. Evidence Identification and Gathering 3. Discovery 4. Effective Interviewing Techniques 5. Forensic Accountants Role in Deposition and Testimony 6. Forensic Engagement Reporting Requirements and Preparing Sustainable Reports

The Core Forensic Knowledge and Specialized Forensic Knowledge exams are online and proctored remotely via webcam and audio (either laptop or USB external) anytime 7 days a week throughout the year.

American Institute of Certified Public Accountants

(Continued )

https://www .aicpastore .com/Forensic Valuation and Litigation Services/ Engage ments/ coreforensicaccountingcertificate/ PRDOVR~ PC-166500/ PC-166500 .jsp?_ga=2 .64304047 .12580095 63.152070 795

56

 FF candidates must C have a minimum of 1,000 hours of business experience in forensic accounting within the 5-year period preceding the date of the CFF application. Refer to the CFF Application Kit for examples of business experience.

Specialized Forensic Accounting Certificate

1. Bankruptcy 1 and 2 2. Electronic Data Analysis 3. Business Damages Concepts, and Calculations 4. Individual Damages Concepts and Calculations 1 and 2 5. Intellectual Property Damages Concepts, and Calculations 1 and 2 6. Mergers and Acquisitions 7. Family Law and Divorce Engagements 1, 2, and 3 8. FSF, Corruption, and Asset Misappropriation 1 and 2 9. Fraud Provisions and Engagements 1 and 2 10. Valuation Practices in Forensic Engagements 1 and 2

Exam

This list is not all-inclusive; there are other certifications in accounting.

Need 75 hours of forensic accountingrelated CPD. All hours must have been obtained within the 5-year period preceding the date of the CFF application.

Experience

Certifications Education

Requirements

 he Core T Forensic Knowledge and Specialized ­Forensic Knowledge exams are online and proctored remotely via webcam and audio (either laptop or USB external) anytime 7 days a week throughout the year.

Test Passing Length Score

Exhibit 3.2 (Continued)

 merican A Institute of Certified Public Accountants

Name

https://www.aicpastore .com/Forensic Valuation andLitigationServices/ FVSPractice Management/ specialized-forensicaccounting-certificate/ PRDOVR~PC-167000/ PC-167000.jsp?_ga=2.4 5103460 .13541582 44.15207 08364-33 9126305.15 20708364

Website

Sponsoring Organization



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57

eligible to take the CPA exam. This is typically 30 semester hours beyond the bachelor’s degree in accounting. These additional 30 semester hours are generally taken at the graduate level in the areas of accounting, auditing, international business, information technology, communication, critical thinking, and ethics. All professional certifications in accounting require a bachelor’s degree in accounting or business with concentration in accounting as part of their education requirements. Education requirements are normally classified into (1) technical skills such as financial accounting, auditing, management accounting, taxes, and statistical courses and (2) soft skills such as courses in critical thinking, corporate governance, ethics, organization behavior, and communication. Almost all professional accounting certifications presented in Exhibit 3.2 require CPE to maintain the certification. CPE requirements are explained in the following section. Examination All professional accounting certifications require candidates to take an exam to prove understanding of common body of knowledge in the designated certifications. The content, coverage, and length of the test vary across certifications as indicated in Exhibit 3.3. For example, the AICPA Board of Examiners in administrating the CPA exam currently requires a 14-hour computer-based examination covering auditing, financial reporting, regulation, and business concepts. Certification exams typically consist of: objective questions (multiple-choice), simulation problems, and written questions. The 2018 CPA examination has four parts, FAR (Financial Accounting and Reporting), REG (Regulation), Auditing and Attestation (AUD), and Business Environment and Concepts (BEC). Each section takes 4 hours to complete and a differing number of multiple-choice questions and task-based simulations dependent on the section. Exhibit 3.3 breaks down the sections and explains the requirements for the uniform CPA Examination. The CPA exam takes a total of 16 hours to complete all four sections in a strictly monitored testing environment. Each section also requires the test taker to make a 75 percent to pass. If this score is not obtained, the individual must retake that section. Once a section is passed, the remaining three sections must be passed within 18 months. After the 18-month

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Exhibit 3.3 CPA Exam Sections Sections

Requirements

AUD

4 tested areas: Ethics and Must make a 75% principles, risk assessment to pass the section and audit planning, further procedures and gathering evidence, and making conclusions

Exam is 72 choice 4 hours problems and total 8 Task-Based Simulations

FAR

4 tested areas: Standards Must make a 75% and Frameworks, Financial to pass the section accounts, Transactions, and Governmental

Exam is 66 choice 4 hours problems and 8 Task-Based Simulations

REG

5 tested areas: Ethics and Must make a 75% procedures, law, individual to pass the section taxation, partnership and corporation taxation, and property taxation

Exam is 76 choice 4 hours problems and 8 Task-Based Simulations

BEC

5 tested areas: CGOVP, Economics, Finance, IT, and Supply Chain

Exam is 62 choice 4 hours problems. 4 Task-Based Simulations and 3 written essays

Must make a 75% to pass the section

period, if all the remaining sections are not passed, the first passed section expires and must be taken again. AUD and FAR have four tested areas and REG and BEC have five tested areas, for total of 18 areas on the examination.4 The Certified Fraud Examiner (CFE) certification requires a bachelor’s degree or its educational equivalent and 2 years of professional experience for certification. The total time of the exam is 10 hours and it comes in four parts across the following subjects: 1. Fraudulent transaction 2. Legal elements of fraud 3. Fraud investigation 4. Criminology and ethics



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The Certified Internal Auditor (CIA) certification also requires a bachelor’s degree or its educational equivalent. You must have 2 years of internal auditing experience or its equivalent for certification. The total time for the exam is 14 hours. The exam consists of four parts covering the following: 1. Internal auditors’ role in corporate governance, risk management, and internal control assessment 2. Consulting and advisory activities of internal auditors 3. Conducting the internal audit engagement 4. Business analysis and information technology 5. Business management skills Experience Most accounting professional certifications require work experience as either prerequisite for being eligible to take the exam or to become certified. For example, many states that license CPAs to practice accounting require the candidate who has attained the education level and passed the uniform CPA examination to have a certain work experience under supervision of a CPA before obtaining a CPA license to practice accounting. The required work experience is normally between 1 and 2 years. While the AICPA has certain rules, states have varying experience requirements. Texas, for example, requires nonroutine work. This can be considered any work under someone who has a CPA license. Some states, like California, have more strict work experience requirements. It requires candidates to work in audit, tax, or consulting.5 For instance, the Certified Fraud Examiner, Certified Internal Auditor, and Certified Government Financial Manager designations all require 2 years of general professional experience, internal auditing experience, and professional-level experience in government financial management, respectively. Continuing Professional Education CPE programs are intended to ensure that practicing accountants keep abreast with developments in their profession. The effectiveness of CPE

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programs depends on their coverage of emerging issues affecting the accounting profession. The accounting profession has recently been faced with increased scrutiny demanding changes in: business sustainability, corporate governance reforms, possible convergence in both accounting and auditing standards, risk assessment, and electronic accounting and auditing process. To meet these challenges, accountants should keep pace with advances and update their technical and soft skills. One way to obtain, secure, and document the required skills is through the CPE programs. According to the ACFEs, there are various types of credit across the two classifications of unlimited hours and 10-hour maximum. Participant credit (instruction in an online or formal class), college course credit, in-house training, and self-study credit (one must pass a final exam to receive CPE credit) are of the unlimited variety. This means there is no cap as to how many hours of this variety qualify. Instructor credit (teaching a course), meeting credit, and author credit have 10-hour maximums for each. While still a 10-hour credit, the Fraud Magazine CPE Service is different, in that from any five issues of Fraud Magazine (not older than two years) one may take the quiz listed on the back of each issue. If one passes all five quizzes, one will receive 10 hours of CPE credit.6 The effectiveness of CPE programs depends on their coverage of emerging issues affecting the accounting profession. All accounting professional organizations, including the AICPA, Institute of Management Accountants, and Institute of Internal Auditors, require CPE for their practicing members. The mandatory CPE courses are intended to improve the professional competency and enhance members’ knowledge base, but in many cases, they focus more on compliance than real competency. In summary, prior CPE-related literature suggests that 1. management accounting education should address both policy issues regarding ethics and governance, techniques and procedures, and knowledge and skills of management accountants; 2. management accounting education should be practical and should include topics that require extensive training in theory including ethics and corporate governance; and 3. ethics courses in state CPE programs have grown significantly in recent years.



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Professional Ethics To maintain their certification and to stay in good standing, practicing accountants should absorb their code of professional conduct and frequently report ethical continuing education and certify compliance with the code of professional conduct. Accountants need to conduct themselves ethically, serve their organizations to the best of their ability, and act in the best interest of their organizations and the public. The AICPA Code of Professional Conduct is applicable and adoptable for all practicing accountants including forensic accountants performing fraud and nonfraud services and provides guidelines and rules in performing their professional responsibilities.7 The purpose of continuing education is to enable accountants to focus on sound education which includes ethics and corporate governance. In addressing accountants’ judgment, one should realize that (1) accountants do not work in isolation, but rather as team players, where their work ethics and behaviors are influenced by the ethics and conduct of coworkers, superiors, and even subordinates within the company; and (2) like other human beings, they can be pressured and motivated when the opportunity is given and thus be tempted to engage in unethical behavior (e.g., manipulation of financial reports). Forensic Accountants should comply with all codes of professional conduct relevant to their practices, including those of the AICPA; the Securities and Exchange Commission (SEC); the Department of Justice (DOJ); the Department of Labor (DOL); the Public Company Accounting Oversight Board (PCAOB); the federal, state, and local taxing authorities; the Associate of Certified Fraud Examiners (ACFE); the Government Accountability Office (GAO); and international, national, and local valuation authorities among others. Implications for the Accounting Profession and Forensic Accountants The forensic accounting function can be viewed as a value-added function of producing reliable financial reports that are essential in business decision-making. The auditing profession worldwide has traditionally been regarded as a watchdog of corporate financial reporting

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and a gatekeeper of the financial reporting process. The sustainability of the accounting profession and forensic accounting depends on the soundness, effectiveness, integrity, and robustness of its credentials and certifications. Best practices of the global accounting profession including certification requirements of education, examination, experience, professional ethics, and CPE, as discussed in this section, are relevant to the accounting profession and forensic accountants and can ensure sustainability of this traditionally respected accounting profession while encouraging the most talented, bright, and ethical college students to join this most rewarding forensic accounting profession. Any inappropriate grandfathering entrance to the forensic accounting profession without meeting and exceeding certification requirements of education, examination, experience, CPE, and ethics will be detrimental to the effectiveness, competency, integrity, and sustainability of the profession.

Conclusion Several global initiatives have been taken in recent decades to promote forensic accounting. Many professional organizations such as the AICPA, the ACFE among others have developed professional certifications and codes of professional ethics for practicing forensic accountants. These certifications presented in this chapter demonstrate forensic accountants’ commitments and dedications to advance forensic accounting as a distinct profession with demanding and rewarding career. Practicing forensic accountants should obtain certifications relevant to their areas of practice, maintain their CPE, and comply with all applicable rules, regulations, and requirement of certifications as well as related codes of professional ethics presented in this chapter.

Action Items • Obtain certification relevant to your forensic accounting practice. • Observe codes of professional ethics relevant to your forensic accounting practice.



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• Comply with all applicable laws, rules, and regulations relevant to your forensic accounting practice. • Maintain CPE to stay in a good standing with requirements of your certifications.

Endnotes 1. American Institute of Certified Public Accountants (AICPA). Statement on Auditing Standards No. 82, Consideration of Fraud in a Financial Statement Audit (New York, NY: AICPA). 2. AICPA. 2002. Consideration of Fraud in a Financial Statement Audit. Statement on Auditing Standards No. 99 (New York, NY: AICP). 3. American Institute of Certified Public Accountants (AICPA). 2018. Exposure Draft: Statement on Standards for Forensic Services No. 1 (SSFS 1). Available at https://www.aicpa.org/interestareas/­ forensicandvaluation/resources/standards/exposure-draft-statementon-standards-for-forensic-services.html 4. AICPA. September 30, 2016. Uniform CPA Examination BLUEPRINTS. https://www.aicpa.org/content/dam/aicpa/becomeacpa/ cpaexam/examinationcontent/downloadabledocuments/cpa-examblueprints-effective-20180101.pdf, (accessed December 1, 2017.). 5. Crush the CPA Exam. 2019. CPA Requirements by State. https://crush thecpaexam.com/cpa-license-requirements/, (accessed September 4, 2018). 6. ACFE. Association of Certified Fraud Examiners—Earning CPE: Types of CPE Credit. https://www.acfe.com/maintaining-cpe-types.aspx, (accessed April 20, 2018). 7. American Institute of Certified Public Accountants (AICPA). 2018. Code of Professional Conduct. https://www.aicpa.org/research/ standards/codeofconduct.html

CHAPTER 4

Forensic Accounting Guidelines and Standards Executive Summary Forensic accountants in conducting their professional services should comply with a set of applicable laws, rules, regulations, and professional standards. Practicing forensic accountants are subject to several professional responsibility standards and ethical codes of conduct. Responsibilities of forensic accountants are governed by authoritative guidelines of several professional organizations and government agencies. This chapter presents authoritative guidelines for professional responsibilities and codes of conduct for forensic accountants.

Introduction Forensic accountants should perform their professional services in compliance with standards and codes of conduct established by authoritative bodies relevant to their practices. Forensic accountants should observe authoritative guidelines of professional organizations that they belong to and government agencies and other authoritative bodies that license them to practice. Forensic accountants should observe and comply with many laws, rules, regulations, and standards applicable to their professional services and practices. For example, CPAs who perform forensic accounting services should observe the AICPA professional responsibilities and code of conduct. Forensic accountants who perform valuation services should follow the National Association of Certified Valuators and Analysts (NACVA) professional standards. Many public and private organizations’ professional standards are applicable to forensic accountants and this chapter discusses their relevance and importance to forensic accounting

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practices. This chapter presents professional standards and codes of conduct of these organizations that influence forensic accounting practices as well as forensic accounting best practices, education, and research.

Standards and Authoritative Guidance for Forensic Accountants Authoritative guidance issued by several public and private professional organizations influence forensic accounting practices. Court Systems Forensic accountants investigate forensic cases including alleged fraud incidents, perform forensic analyses, gather sufficient, competent, and persuasive evidence, reach conclusions, and testify to their findings in compliance with applicable laws, rules, regulations, and guidelines including court deliberations. Thus, forensic accounting practices are influenced by court guidelines. Forensic accounting services of expert witnessing, fraud investigation, and litigation consulting among others require application of specialized knowledge and investigative skills in gathering, analyzing, and evaluating evidential matters, ascertaining their compliance with a set of guidelines, and interpreting and communicating findings in the courtroom, boardroom, or other legal or administrative venues that are suitable for use in a court of law.1 There are many court systems in the United States, including the federal court system and 50 state court systems with their own structures and procedures.2 Legal cases and forensic accountants’ investigation of these cases often start at a lower court and may advance to a higher court and possibly the federal court system. Thus, forensic accountants in performing fraud, litigation, valuation, and expert witnessing services among others should be familiar with all state and federal court systems. In general, there are two types of court systems, state courts and federal courts. Many of investigative and legal issues are initiated and resolved in state trial courts that could be city or municipal courts, county or circuit courts, or regional trial courts. These state trial courts can address different types of cases with limited jurisdiction or specific jurisdiction. Lower



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court decisions can be appealed and be retailed by a higher-level court of appellate courts and/or further be heard by the state Supreme Court. The state Supreme Court decisions are final with a state court system and can be appealed to the U.S. Supreme Court. Court systems in the United States based on their structure and hierarchy are Supreme Court, District Courts of Appeal, Circuit Courts, and County Courts. Federal courts are typically divided into districts and circuits with at least one federal district court in every state, whereas federal circuit courts include more than one district. The U.S Supreme Court is the highest level of federal courts and its legal interpretations are the ultimate court decisions. The nine justices of the U.S Supreme Court are nominated by the president, approved by the U.S. Senate, and tenured until they resign or die. Forensic accountants should understand and follow the judicial processes and decisions of the legal system in the United States, which is based on the adversarial process. This adversarial process dictates that all parties in a legal dispute have an equal opportunity to present their case to a neutral jury or judge, with an equal chance to win subject to the same set of rules to ensure the fairness of the process. Professional Standards Forensic accountants are required to follow the Professional Code of Conduct set out by many professional organizations. The following subsections describe many of these guidelines. For example, the AICPA’s code of conduct consists of the following areas: Objectivity and Independence, Due Care, Scope and Nature of work, Integrity, and Responsibility to the Public. First, all actions taken must be in the public’s best interest. This is called the public interest principle. The public contains groups such as creditors, investor clients, and governmental agencies. Second, the due care principle is required in observance of ethical and professional standards. It also requires the member of the AICPA’s ability to adhere to quality control and responsibility for actions taken. Third, the Scope and Nature of work principle pertains to a member of the AICPA using the Code of Professional conduct to determine the level of service for clients. Fourth, the Integrity principle is designed to enhance the public’s trust in the member providing professional service. Finally, the Objectivity and Independence principle

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demand that members strictly avoid conflicts of interest and relationships that may subject the member to objective impairment.3 Outside of the AICPA Code of Professional conduct, several other organizations have written its code of conduct for Forensic Accountants. These organizations are the ACFEs, the American Accounting Association (AAA), the International Forensic Accounting Association (IFAA), the International Institute of Certified Forensic Accountants (IICFA) and the American Board of Forensic Accounting. Each organization’s code of conduct resembles the AICPA’s guidance, as it is the main board in the United States. The IFAA and IICFA are international organizations for forensic accountants and their codes of professional conduct are very much similar to their counterparts in the United States (e.g., AICPA, ACFE). AICPA, AU-C Section 240 is a set of rules concerning the auditor’s duties when encountering fraud in an audit. The AICPA states that the primary purpose of AICPA is to expand upon existing Sections 315 and 330 that deal with risk of material misstatement and audit procedures, respectively. The document also states that in fraud investigations, the main requirement for the auditor is to be professionally skeptical; an auditor is skeptical when observing data regarding material misstatement. Valuation standards are set by the AICPA and cover the scope and engagement of practitioners performing valuations. VS 100 pertains to business ownership and intangible assets, while VS 9100 are interpretations of VS 100. The AICPA is used heavily during litigation, which is of importance to forensic accountants. The areas that fall under litigation are disputes, dissolution, and bankruptcy.4 Nonauthoritative Guidelines The AICPA offers nonauthoritative guidelines through its website. The guidance is very thorough; however, and covers most relevant areas of forensic accounting. The AICPA is the only organization that offers nonauthoritative guidance to practitioners in America. In Canada, The Chartered Professional Accountants (CFA) must follow the 2006 Standard Practices while conducting investigations and engagements. Similar to public accounting, the standards must be applied to ensure integrity and disclosure of accurate information to the public. The CFA website contains seven sections—planning and accepting and engagement,



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information analysis, documentation and reporting, testimony, and applying the standards to the practice. These practices are authoritative, as opposed to most standards in the United States, which are nonauthoritative. The CFA standards are set by the Investigative and Forensic Accounting (IFA) committee. The standards provide guidance in seven major areas—standard practices, engagement acceptance, planning and scope of work, information collection and analysis, file documentation, reporting, and expert testimony.5 Forensic Accountant Code of Ethics Ethics in general is defined as an honorable behavior and “ethics includes: action, foreseeable consequences and people, with their virtues or lack of virtues, involved in any human activity.”6 The principles of accounting theory and practice were founded upon the basis of moral principles and ethical values; therefore, upholding a high standard of ethics is expected of forensic accountants engaged in professional activities. The concept of ethics in business as related to forensic accountants can be hard to define because individuals have their own moral compass and they often think differently, and every business has its own set of standards. Business ethics consist of a set of codes of: business conduct, laws, rules, regulations, and best practices. Business ethics focuses on upholding ethical values in business, including values like honesty, integrity, trust, fairness, and objectivity, whereas noncompliance with these standards can lead to cases of unethical behavior and sometimes even illegal behavior. Forensic accountants should investigate for the truth and report the truth on the basis of their investigation. They should avoid any conflicts of interests and advocacies, should not compromise their objectivity and professional responsibilities, hold the highest standards of integrity and ethics, share their skills, knowledge, and experience with other forensic accountants in a professional manner, express their opinions on the basis of the evidence gathered, and keep abreast of the latest developments in their profession through continuing education, seminars, workshops, and other studies. The above-mentioned rules are also addressed by several organizations such as the American Accounting Association (AAA), American Institute

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of Certified Public Accountants (AICPA), Association of Certified Fraud Examiners (ACFE), and the National Association of Certified Valuators and Analysts (NACVA). Exhibit 4.1 presents these organizations and their codes of ethics relevant to forensic accounting practices. The most common codes of ethics and professional standards are as follows: 1. Integrity/Objectivity/Impartiality 2. Competency/Training/Proper skills 3. Confidentiality/Public trust 4. Independence/Duty to the Public 5. Conflicts of Interest/self-dealings 6. Transparency/Fair presentation 7. Good faith/Due diligence 8. Authority/Proper conduct 9. Professional Judgment/ Skepticism 10. Fairness/Mutual respect

Exhibit 4.1 Codes of Conduct for Forensic Accountants Association Ethics

Code of Conduct

Website

Association of Certified Fraud Examiners (ACFE)

• Integrity and Objectivity • Professional Competence • Due Professional Care • Understanding with Client or Employer • Communication with Client or Employer • Confidentiality

http://www .acfe.com/ code-ofethics.aspx

The ACFE demands that its members follow the highest moral code and ethical procedures when conducting business. Examples of some rules include • Committing to professional conduct and being mindful of professional duties and responsibilities • Act without bias in court procedures and testimony • Keep private information secure • Continually improve skills and effectiveness to offer the best possible service.



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Association Ethics

Code of Conduct

Website

American Institute of Certified Public Accountants (AICPA) Audit Quality Center

• Integrity • Objectivity • Independence

http://pub .aicpa.org/ codeofcon duct/ethicsresources/ et-cod.pdf

• Due Diligence • Honesty • Integrity • Good Faith • Competence • Authority • Judgment • Confidentiality • Higher Education

http://aaahq .org/Portals/ 0/documents/ about/Policies &Procedures Manual/FIN %201.1%20 Code%20of %20Ethics %20Policy .pdf https:// iicfaglobal .com/ membership/ code-ofethics/

American Accounting Association (AAA) Forensic Accounting and Investigation Section

International Institute of Certified Forensic Accountants

National Association of Certified Valuation Analysts (NACVA)

• The AICPA has set forth many principles that practicing individuals must follow. Examples include • Duty to the public • Impartiality and fairness when examining and using evidence • A defined scope of the work being done A waiver is required to be signed by all AAA members. The code includes • Due Diligence • Honesty • Integrity • Good Faith • Competence • Authority • Judgment • Confidentiality The code of ethics has five sections. These are • Integrity • Objectivity • Competence and Due Care • Confidentiality • Proper Conduct NACVA has very similar rules to those of the AICPA. Some rules include • Adequate preparation for the job Measured in education, experience, skill, and so on • Keeping client information confidential and secure • Planning all actions taken and ensuring best practices are established

• Integrity • Objectivity • Competence and Due Care • Confidentiality • Proper Conduct • Integrity and Objectivity • Professional Competence • Due Professional Care • Understanding and Communications • Planning and Supervision • Sufficient Relevant Data • Confidentiality • Acts Discreditable • Client Interest • Documentation • Financial Interest

http://web .nacva .com/TLWebsite/ PDF/ NACVA_ Standards_ FINAL.pdf

(Continued )

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Exhibit 4.1 (Continued) Association Ethics

Code of Conduct

Website

National Association of Certified Valuation Analysts (NACVA)

NACVA has very similar rules to those of the AICPA. Some rules include • Adequate preparation for the job Measured in education, experience, skill, and so on • Keeping client information confidential and secure • Planning all actions taken and ensuring best practices are established

• Integrity and Objectivity • Professional Competence • Due Professional Care • Understanding and Communications • Planning and Supervision • Sufficient Relevant Data • Confidentiality • Acts Discreditable • Client Interest • Documentation • Financial Interest

http://web .nacva .com/TLWebsite/ PDF/ NACVA_ Standards_ FINAL.pdf

American Board of Forensic Accounting

• I shall investigate for the truth. • I shall report only the truth. • I shall avoid conflicts of advocacies. • I shall conduct myself ethically. • I shall seek to preserve the highest standard of my profession. • As a forensic accountant, I shall not have a monetary interest in any matter in which I am retained. • I shall share my knowledge and experience with other forensic accountants in a professional manner. • I shall avoid conflicts of interest and will continue my professional development throughout my career through continuing education, seminars, and other studies.

• Objectivity • Neutrality • Accurate Representation of Experience • Ethical Conduct

http://abfa .us/forensicaccountantcode-ofethics/



Forensic Accounting Guidelines and Standards

Association Ethics

Code of Conduct

73

Website

• As a forensic accountant, I will express my expert opinion only on the basis of my knowledge, skill, education, training, and experience. • The light of knowledge shall guide me to the truth, and with justice the truth shall prevail.

Regulations Relevant to Forensic Accounting The question that has currently and repetitively being asked is that whether forensic accounting should be regulated.7 With many certifications relevant to forensic accountants including certified fraud examiners, certified forensic specialists, certified financial crime specialists, certified forensic accountants, certified forensic financial analysts among others discussed in the previous chapter, it is perhaps time to regulate forensic accounting practices. The regulation of forensic accounting is expected to improve the quality of fraud and nonfraud services performed by forensic accountants. Thus, the following subsections present laws, rules, regulations, and standards relevant for forensic accountants. Foreign Corrupt Practices Act of 1977 (FCPA) The Foreign Corrupt Practices Act (FCPA) was released in 1977 in response to several high-profile fraudulent schemes in the mid-1970s.8 The FCPA itself pertains to disallowing upper management from engaging in business activities with foreign agents that would aid in acquiring and disposing of business through payment of illegal monies. To make the FCPA as effective as possible, the Department of Justice (DoJ) requires all U.S. upper management to abide by the rules contained within the act. In 1998, another amendment was added to the FCPA that required foreign companies that conducted business within the United States to be subject to the same rules and regulations that U.S. firms had to follow. As part of keeping track of all business processes, the DoJ also mandates that

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firms disclose and document all accounting activities in accordance with ­accounting provisions stated within United States Code 78m.9 Code 78m deals with the periodical reports issued by securities firms during a normal business year.10 Despite the FCPA being put into practice in 1977, there are concerns about its effectiveness. On November 9, 2017, Steven R. Peiken of the SEC shared his thoughts in a speech at the School of Law at the University of New York. In the speech, there was a highlight regarding Halliburton’s vice president violating FCPA guidelines.11 A counter to these concerns has been presented by the Big 4 (Deloitte, PricewaterhouseCoopers, Ernst & Young, and KPMG) accounting firms through forensic services. For example, PricewaterhouseCoopers has 3,000 specialists that focus on the Foreign Corrupt Practices Act (FCPA). The firm claims that forensic services help implement strategies that mitigate the risk of FCPA violations.12 A framework was introduced by the DoJ in 2016 that listed rules that companies must follow. These rules are13 • Firms must voluntarily report FCPA violations • Firms that committed an FCPA violation must cooperate with the DoJ • Firms should act swiftly to repair the damage caused by the violation and must work to enact barriers to prevent another such event from happening in the future14 The Sarbanes-Oxley Act of 2002 (SOX) The wave of financial scandals of Enron, Global Crossing, WorldCom, Tyco among others in the early 2000s eroded public trust and investor confidence in public financial information and the financial markets.15 The turn of the twenty-first century was a challenging and rather difficult year for corporate America as evidenced by the stock market’s swift decline, a significant number of earnings management and financial restatements, a rash of corporate and accounting scandals, and a resulting loss of confidence in public financial information and financial markets. The SarbanesOxley Act (SOX) of 2002 was passed in July 2002 to improve investors’ confidence that had been eroded because of the reported financial scandals



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of high-profile companies (e.g., Enron, WorldCom, Global Crossing, Qwest).16 The act was intended to rebuild investor confidence and protect investors by improving the reliability, completeness, accuracy, and transparency of corporate disclosures, including financial reports.17 Many provisions of SOX pertain to financial reporting, including Sections 302 and 404, which require public companies’ management to certify financial statements and report on the effectiveness of the company’s internal control over financial reporting (ICFR) and require auditors to attest to and report on both financial statements and ICFR. Section 301 requires that the audit committee oversee the work of management and the independent auditor as related to ICFR. The audit committee’s oversight of Section 404 is essential as mandatory ICFR is becoming an integral part of financial reporting. SOX provisions directed the SEC to issue rules and Interpretive Guidance and the PCAOB to issue Auditing Standards No. 2 and 5 in requiring the use of the Integrated Financial and Internal Control Reportingconcept.18 The provisions of SOX that were not previously practiced by public companies and that are intended to benefit all companies include the following: • Creating the PCAOB to regulate and oversee the audit of public companies and to improve the ineffective self-regulatory environment of the auditing profession; • Improving corporate governance through more independent and vigilant boards of directors, particularly effective and mandatory audit committees for public companies; • Enhancing responsibilities of executives of public companies by requiring certification of financial statements by both CEO and CFO; • Improving internal control reporting for public companies by requiring certification of ICFR by both CEO and CFO. • Enhancing the quality, reliability, transparency, and timeliness of financial disclosures through executive certifications of both financial statements and internal controls; • Prohibiting nine types of nonaudit services considered to have an adverse effect on auditor independence and objectivity; • Regulating the conduct of auditors, legal counsel, and financial analysts, and their potential conflicts of interest;

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• Increasing civil and criminal penalties for violations of security laws; and • Rebuilding public trust and investor confidence in public financial reports and financial markets. The primary focus of SOX is to improve the quality, reliability, and transparency of public financial reports, quality of the audit process, and the effectiveness of corporate governance. These provisions of SOX have implications for forensic accounting practices. High-quality financial information can contribute significantly to the integrity and efficiency of the capital markets. Financial reporting provisions of SOX and SEC-related rules include the following: • Certification of financial statements and internal controls by CEOs and CFOs; • Disclosure of off–balance sheet transactions; • Disclosure pertaining to the use of non-GAAP (generally accepted accounting principles) financial measures; • Disclosure of material current events affecting companies; • Mandatory internal control reporting by management; • A study of principles-based accounting standards; • Convergence of accounting standards; • Recognition of adequate funding for the FASB as an accounting standard-setting body; and • The oversight function of the FASB by the SEC. A fundamental objective of SOX was to enhance the reliability and integrity of audit functions and the audit process as well as the credibility of audit reports provided in financial statements and to improve investor confidence in the auditing profession. Provisions of SOX and SEC-related rules addressing audit functions include the following: • • • •

Creation of the PCAOB to oversee the accounting profession; Adoption of new rules related to auditor independence; Issuance of new rules related to improper influence on auditors; Issuance of new rules pertaining to retention of records and audit evidence relevant to review and audit of financial statements;



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• The oversight function of the PCAOB by the SEC; and • Attestation of and report on Internal Control over Financial Reporting (ICFR). The following are some important provisions of the SOX that have relevance to forensic accounting practices: The SOX (Sec. 301) explicitly requires that every public company establish procedures for the confidential, anonymous reporting by employees of concerns regarding questionable accounting, internal control, or auditing matters. Yet, the act leaves great flexibility to companies in their implementation of this requirement. Under the SOX (Sec. 301), audit committees of public companies are responsible for establishing and overseeing procedures for employees to confidentially and anonymously report concerns regarding questionable accounting, internal control, or auditing matters. This regulatory requirement is consistent with the belief that the availability of an anonymous channel to report questionable accounting matters can enhance an organization’s internal control by fostering communication and bringing FSF to light as early as possible. Anonymous reporting channels may be particularly useful in encouraging the reporting of wrongdoing by organizational members because anonymity should minimize personal “costs” of reporting, such as retaliation and other potential penalties. A benefit of such channels is that employees often discover FSF before other monitors (e.g., internal auditors, external auditors, and/or regulators) and, consequently, often have the ability to inform the organization earlier than others. In this regard, the 2018 Report to the Nations issued by the Association of Certified Fraud Examiners (ACFE) reports the results of a survey of their members indicating that “tips” including unanimous information obtained from employees and nonemployees were more effective in identifying and discovering fraud than any other methods and mechanisms (40 percent).19 The other two main methods were internal audit and management review, at 15 percent and 13 percent, respectively. As a result of detection, corruption is the most prevalent scheme in every area of the globe. In total, fraudulent behavior inflicted approximately $7 billion in losses, with 22 percent of cases causing losses of more than $1 million.20 Many provisions of SOX pertaining to financial reporting, the audit process, and corporate governance are relevant to forensic accounting practices as discussed earlier and summarized in Exhibit 4.2.

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Exhibit 4.2 Important Provisions of the Sarbanes-Oxley Act (SOX) 2002 Provisions

Summary

Public Company Accounting Standards Board (PCAOB)

An independent Not-for-Profit that sets rules regarding audit, quality control, independence, and ethical conduct. The PCAOB is subservient to Security and Exchange Commission rulings and oversight.

Auditor Independence

Cannot perform nonattest services with audit services with partners required to do a 5-year rotation.

Corporate Responsibility

Members of audit committee are on the board, engage in counsel, and bear responsibility for oversight of public accounting firms.

Enhanced Financial Disclosure

Executives, particularly CEOs and CFOs, must adhere to strict financial reporting guidelines and disclosure.

Trading, Disclosure, and Conflicts of Interest

Prohibits insider trading, requires disclosure of all transactions, and prevents conflicts of interest.

Corporate Misconduct and Crime

Securities fraud is a crime with a 25-year, federally appointed, sentence.

Financial Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) The existence and persistence of financial crisis in the United States and the resulting global economic meltdown is commonly viewed as serious since the Great Depression. The global competitiveness of U.S. capital markets to a significant extent depends on the reliability of financial information in assisting investors to make sound investment decisions, cost-effective regulation in protecting investors, and efficiency in attracting global investors and companies. The U.S. free enterprise system has transformed from a system in which public companies including banks and other financial institutions were traditionally owned and controlled by small groups of investors to a system in which businesses are owned by global investors. The United States has achieved this widespread participation by adopting sound regulations, maintaining high-quality disclosure standards and enforcement procedures that protect the interests of global investors. Recent financial regulatory reforms including the SOX and the Dodd-Frank Wall Street Reform and Consumer



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Protection Act of 2010 (DFA) are intended to protect global investors and consumers.21 Dodd-Frank Act is named after Senate Banking Committee Chairman Christopher Dodd (D-CT) and House Financial Services Committee Chairman Barney Frank (D-MA) and its provisions pertain to banks, hedge funds, credit rating agencies, and the derivatives market. Investor confidence in public financial information and the financial markets is the key driver of global competition, financial stability, and economic growth. Investors are confident when stock prices are on an upward trend and the news about future stock performance is optimistic. The Dodd Frank Act (DFA) is intended to restore investor confidence in corporate America and its financial system and financial services provided through the banking system. Reliable and transparent financial information contributes to the efficient functioning of the capital markets and the economy. In recent years, investment banks and the major brokerage firms have grown rapidly and generated record revenue. Failures of the five major financial institutions of Goldman Sachs Group Inc., Bear Stearns Co., Morgan Stanley, Lehman Brothers Holdings Inc., and Merrill Lynch & Co and subsequent government costly bailout of these firms raise serious concerns about the value-adding activities of financial services firms, their ethics and governance as well as the professional accountability of their board of directors, senior management, internal and external auditors, and other corporate governance participants. The lack of public trust and investor confidence in corporate America, the Wall Street and its financial dealings and reports, has continued to adversely affect the vibrancy of the capital market as bailout banks and subsequent continuous excessive executive compensation have left us with a legacy of mistrust. This challenged policy makers and regulators to establish and enforce more effective and efficient regulatory reforms as well as business leaders to change their culture, behavior, and attitudes to restore confidence and trust in the Wall Street. Provisions of the Dodd Frank Act (DFA) that are relevant to forensic accounting practices are summarized as follows: 1. Broadening the supervisory and oversight role of the Federal Reserve Board to regulate all entities that own an insured depository institution and other large and nonbank financial services firms that could threaten the nation’s financial system.

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2. Establishing a new Financial Services Oversight Council to identify and address existing and emerging systemic risks threatening the health of financial services firms. 3. Developing new processes to liquidate failed financial services firms. 4. Establishing an independent Consumer Financial Protection Bureau to oversee consumer and investor financial regulations and their enforcement. 5. Creating rules to regulate over-the-counter derivatives. 6. Coordinating and harmonizing the supervision, standard-setting and regulatory authorities of the SEC and the Commodities Futures Trading Commission. 7. Mandating registration of advisers of private funds and disclosures of certain information of those funds. 8. Empowering shareholders with a say on pay of nonbonding votes on executive compensation. 9. Increasing accountability and transparency for credit rating agencies. 10. Creating a Federal Insurance Office within the Treasury Department. 11. Restricting and limiting some activities of financial firms, including limiting bank proprietary investing and trading in hedge funds and private equity funds, as well as limiting bank swaps activities. 12. Maintaining consistency in adhering to international financial and banking standards. SEC Enforcement Actions The SEC was created by Congress to ensure proper disclosure of financial information by public companies. The SEC has taken enforcement actions against firms that are identified as having violated the financial reporting requirements of the Securities Exchange Act of 1934.22 The SEC Enforcement Manual (SEC 2010b) provides guidance to ­employees about the handling of complaints, tips, and referrals (leads) r­ eceived concerning violations of SEC requirements. The SEC obtains leads for investigation from several sources: (1) public complaints and tips from short sellers and others; (2) the reporting requirements of federal, state, and local law enforcement agencies under the Bank Secrecy Act; (3) the enforcement staff of the PCAOB; (4) the enforcement of “blue sky laws” by state securities regulators; (5) complaints and other information from members of Congress on behalf



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of constituents whom they represent; and (6) trading-related referrals from domestic self-regulatory organizations (SEC 2010b). SEC staff members from the Division of Corporation Finance examine financial statements and other filings for routine screening criteria violations and for suspicious subjective factors. When the initial investigation exposes factors that warrant further investigation, an informal investigation is conducted, and persons with relevant information are invited to provide pertinent documents and testimony. The SEC need not formally notify the target firm during this investigation, thus protecting firms that are cleared by the informal investigation. If strong evidence of a securities law violation is uncovered during the informal investigation, then the SEC may pursue a formal investigation. If the SEC informs the target of the formal investigation, the 1934 Act Release No. 5092 requires disclosure to shareholders by the firm, and the investigation may become public. The SEC policy is to make its enforcement activities public only when it files a formal complaint alleging securities law violations and seeks settlement with the enforcement target. The formal investigation grants subpoena power to compel testimony and the production of documents. The issuance of an Accounting and Auditing Enforcement Release (AAER) by the SEC signifies that a failure has occurred in the systems that are put in place by companies to prevent opportunistic behavior by company management. AAERs result when companies and/or their auditors accept an administrative action, such as a fine or other reprimand, and agree not to engage in the behavior that brought about the SEC investigation rather than formally plead guilty to a misdeed. Even though these AAERs are not legally considered an audit failure, they can be interpreted as evidence of an audit failure as well as evidence of a corporate governance failure. The discovery of firm-specific corporate governance and audit weaknesses would help auditors, investors, forensic accountants, and regulators assess the likelihood that management will engage in self-serving activities that would lead to the issuance of an AAER. The SEC has issued AAERs during or at the end of an investigation against a company, an auditor, or an officer for alleged accounting and/or auditing misconduct since 1982.23 These releases provide varying degrees of detail on the nature of the misconduct, the individuals and entities involved, and their effect on the financial statements that could be of much interest to forensic accountants. The AAERs dataset as of September 2018 consists of

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3,052 SEC AAERs (1,214 firm misstatement events) issued ­between May 17, 1982 and September 1, 2018. It contains 3941 firm misstatement events that affect at least one of the firms’ quarterly or annual financial statements. The dataset consists of three data files: The ­Details, Annual, and Quarterly files. The Detail file contains • Firm name and its identifiers • AAER numbers (e.g., 1 to 3,180) pertaining to each firm • A description of the reason the AAER was issued • The balance sheet and/or income statement accounts affected by the violation • One observation per firm misstatement event. The Annual and Quarterly files are compiled from the Detail file and are formatted by reporting period when the misstatement occurred. The Annual and Quarterly files contain • AAERs with alleged financial misstatements • Firm name and identifiers • The year and/or quarter-end when the misstatements occurred • Information on whether earnings or revenues are understated • One observation for each year or quarter affected by the violation Exhibit 4.3 presents the timeline of SEC investigation as ­reflected in AAERs. This timeline starts with Model Imperial Inc. on ­January 5, 2000 and ends with RSM LLC. 3943, on June 14, 2018.

Exhibit 4.3 Sample of the selected SEC Accounting and Auditing Enforcement Releases (AAERs) 2000–2018 Date

Event ID

June 14, 2018

RSM LLC, AAER 3943

June 6, 2016

Michael Mona, Jr., AAER 3942



Forensic Accounting Guidelines and Standards

Date

Event ID

May 4, 2018

David Leboe, CPA AAER 3941

May 4, 2018

Kevin McAller, CPA AAER 3940

May 4, 2018

Winter, Kloman, Moter & Repp. AAER 3939

April 30, 2018

Panasonic Corporation AAER 3938

April 24, 2018

Altaba Inc. AAER 3937

April 23, 2018

The Dun & Bradstreet Corporation AAER 3936

March 13, 2018

KPMG AAER 3927

March 13, 2018

Deloitte & Touche AAER 3928

March 13, 2018

BDO LLP AAER 3926

July 27, 2017

Halliburton Company and Jeannot Lorenz AAER 3884

January 19, 2017

Homestreet Inc and Darrell Van Amen AAER 3852

January 18, 2017

General Motors Company AAER 3850

December 6, 2016

KPMG LLP AAER 3834

November 17, 2016

JP Morgan Chase & Co. AAER 3824

October 20, 2016

FMC Technologies, Jeffrey Favret, and Steven Croft AAER 3816

October 18, 2016

Ernst & Young LLP, Crag Fronckiewicz, and Sarah Adams AAER 3814

September 30, 2016

GlaxoSmithKline plc AAER 3810

September 28, 2016

Anheuser-Busch AAER 3808

September 19, 2016

Ernst & Young AAER 3803 and 3802

March 1, 2016

Qualcomm Inc. AAER 3751

February 9, 2016

Monsanto AAER 3741

December 2, 2015

Grant Thornton AAER 3718

January 28, 2015

First National Community Bancorp Inc AAER 3622

December 8, 2014

BKD, LLP AAER 3603

September 29, 2014

Bank of America Corporation AAER 3588

September 25, 2014

Mayer Hoffman McCann P.C. AAER 3587

April 8, 2014

CVS Caremark Corp. AAER 3549

September 19, 2013

JP Morgan Chase AAER 3490

April 24. 2013

Capital One Financial Corporation, Peter Schnall, and David LaGassa AAER 3456

August 8, 2012

Pfizer AAER 3399

February 6, 2012

Smith & Nephew PLC AAER 3363

April 8, 2011

Johnson & Johnson AAER 3261

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(Continued )

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Exhibit 4.3 (Continued) Date

Event ID

February 28, 2011

KPMG Australia AAER 3248

November 4, 2010

Tidewater AAER 3207

October 21, 2010

Office Depot AAER 3199 and 3198

July 27, 2010

General Electric, Ionics, and Amersham AAER 3159

July 22, 2010

Dell, Michael Dell, Kevin Rollins, James Schneider, Leslie Jackson, Nicholas Dunning AAER 3156

January 21, 2010

Assurant Inc. AAER 3109

August 12, 2009

Terex Corporation AAER 3035

April 1, 2009

Take-Two Interactive Software AAER 2957

March 4, 2009

Krispy Kreme Doughnuts AAER 2941

August 8, 2008

Prudential Financial AAER 2860

June 17, 2008

NEC Corporation AAER 2839

June 6, 2008

Citigroup AAER 2838

October 15, 2007

Nortel Networks Corporation AAER 2740

September 27, 2007

Federal Home Loan Mortgage Corporation AAER 2728

August 7, 2007

First BanCorp AAER 2664

May 8, 2007

Motorola AAER 2607

January 12, 2007

Lattice Semiconductor Corp.

September 27, 2006

Lantronix AAER 2485

June 30, 2006

Greentech USA and Roland Breton AAER 2455

April 27, 2006

Ingles Market Incorporated AAER 2422

April 12, 2006

Dollar General AAER 2411

February 7, 2006

Cummins AAER 2370

January 4, 2006

McAffe AAER 2360

September 22, 2005

Bio One Corporation AAER 2317

June 23, 2005

Healthsouth Corporation AAER 2263

April 18, 2005

The Coca-Cola Company AAER 2232

February 5, 2005

Elan Corporation AAER 2181

January 19, 2005

PricewaterhouseCoopers LLP AAER 2169

November 19, 2004

Robotic Vision Systems AAER 2137

November 4, 2004

Morgan Stanley AAER 2132

August 25, 2004

Aurora Foods AAER 2089

August 4, 2004

Bristol-Myers Squibb Company AAER 2075



Forensic Accounting Guidelines and Standards

Date

Event ID

May 5, 2004

Moore Stephens Chartered Accountants (United Kingdom) and Peter D. Stewart, A Partner, Sanctioned by Institute of Chartered Accountants in England and Wales for Failures in Connection with Audits of Financial Statements Filed with the SEC; AAER 2002

January 16, 2004

Corrpro Companies, Inc. AAER 1944

November 10, 2003

WorldCom Inc. AAER 1909

July 16, 2003

Xaibe, Inc. and Lowell Nicholas AAER 1814

April 1, 2003

Thomas & Betts Corporation, et al. AAER 1747

January 13, 2003

Anika Therapeutics, Inc., J. Melville Engle and Sean F. Moran AAER 1699

September 19, 2002

Motorcar Parts and Accessories, Inc. and Peter Bromberg AAER 1629

July 17, 2002

Avon Products, Inc. AAER 1595

June 21, 2002

Rite Aid Corporation AAER 1579

June 3, 2002

Microsoft Corporation AAER 1563

March 27, 2002

Kimberly-Clark Corporation and John W. Donehower AAER 1533

January 15, 2002

BellSouth Corporation AAER 1495 and 1494

December 6, 2001

Pinnacle Holdings, Inc. AAER 1476

October 2, 2001

Millionaire.com and Robert L. White AAER 1462

June 19, 2001

Arthur Andersen LLP AAER 1405

February 5, 2001

Secure Sign, Inc. (formerly YourBankOnline.com) AAER 1366

December 21, 2000

International Business Machines Corporation AAER 1356

September 19, 2000

Pier 1 Imports, Inc. AAER 1303

June 30. 2000

Allegheny Health, Education and Research Foundation AAER 1283

January 5, 2000

Model Imperial, Inc. AAER 1214

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Exhibit 4.4 shows that two events are associated with disclosure of alleged FSF. The first event is when the allegation of FSF was initially publicly disclosed (public disclosure) and the second event is when the SEC or the DoJ officially and publicly disclose their enforcement against public companies for the allegation of FSF (enforcement disclosure).

86

Beginning of FSF

Time

Occurrence Period

Occurrence of FSF

Stage 1

First Public Disclosure of alleged FSF

End of FSF

Stage 3

Discovery and Enforcement Period

Disclosure and Enforcement of FSF

Revelation Period

Discovery Period

Discovery of FSF

Stage 2

Public Disclosure of SEC Investigation

The Timeline for Financial Statement Fraud (FSF) and the SEC Actions

Exhibit 4.4



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87

Conclusion Forensic accountants in practicing forensic accounting services must comply with their professional standards and codes of conduct of several authoritative bodies and governmental agencies. This chapter presented authoritative guidelines applicable to forensic accountants. Many professional standards applicable to forensic accountants are integrity and objectivity, skepticism, confidential information, competency, and due professional care. Professional responsibility standards and codes of conduct were discussed in this chapter. The demand for and interest in forensic accounting education and research are expected to continue to increase as more scholars conduct research in fraud and nonfraud-related issues and universities offer courses and programs in forensic accounting.

Action Items 1. Comply with applicable professional responsibility standards. 2. Observe applicable codes of conduct and professional ethics. 3. Understand all rules and regulations relevant to practice of forensic accounting. 4. Comply with all applicable laws, rules, regulations, standards, and best practices.

Endnotes 1. AICPA. 2017. Forensic Accounting.https://www.aicpa.org/interestareas/ forensicandvaluation/resources/litigation.html 2. The United States Courts. 2018. http://www.uscourts.gov/ 3. AICPA. August 31, 2017. AICPA Code of Professional Conduct. http:// pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf, (accessed December 5, 2017). 4. AICPA. 2007. Statements of Standards for Valuation Services. https:// www.aicpa.org/interestareas/forensicandvaluation/resources/standards/ downloadabledocuments/ssvs_full_version.pdf 5. Chartered Professional Accountants of Canada. n.d. Standard Practices. https://www.cpastore.ca/Catalogue/ShowSampleToc.aspx?productID =1&spID=8&expID=345608949~1

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6. J. Fotrodona, D. Mele, J.M. Rosanas. 2017. “Ethics in Finance and Accounting: Editorial Introduction,” Journal of Business Ethics 140, no. 4, pp. 609–613. 7. D. Huber, and E. Charrier. 2015. Is It Time to Regulate Forensic Accounting? https://hal.archives-ouvertes.fr/hal-01277534/document 8. The Foreign Corrupt Practices Act (FCPA). 1977. Anti-Bribery and Books & Records Provisions of the FCPA. https://www.justice.gov/sites/ default/files/criminal-fraud/legacy/2012/11/14/fcpa-english.pdf 9. Department of Justice. 2017. Foreign Corrupt Practices Act. https:// www.justice.gov/criminal-fraud/foreign-corrupt-practices-act 10. Legal Information Institute. 2017. 15 U.S. Code 78m- Periodical and Other Reports. https://www.law.cornell.edu/uscode/text/15/78m 11. S. Peiken. November 9, 2017. Reflections on the Past, Present, and Future of the SEC’s Enforcement of the Foreign Corrupt Practices Act. https://www.sec.gov/news/speech/speech-peikin-2017-11-09 12. PricewaterhouseCoopers. 2017. FCPA, Anticorruption & Compliance: PwC Forensic Services. https://www.pwc.com/us/en/services/forensics/ anti-bribery-corruption-program-integrity.html 13. Ibid. 14. Department of Justice. April 5, 2016. The Fraud Section’s Foreign Corrupt Practices Act Enforcement Plan and Guidance. https://www .justice.gov/archives/opa/blog-entry/file/838386/download 15. Much of the discussion about rules and regulations, particularly the SOX of 2002 and DOF of 2010 comes from Z. Rezaee. 2018. Corporate Governance in the Aftermath of the 2007–2009 Global Financial Crisis, Vol. 1–4, Business Expert Press. 16. Z. Rezaee. 2007. Corporate Governance Post-Sarbanes–Oxley (­Hoboken, NJ: John Wiley & Sons). 17. Sarbanes–Oxley Act of 2002 (SOX). The Public Company Accounting Reform and Investor Protection Act. www.sec.gov/about/laws/soa2002. pdf. 18. Ibid. 19. Association of Certified Fraud Examiner (ACFE). 2018. Report to the Nations. https://www.acfe.com/report-to-the-nations/2018/ 20. Ibid.



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21. Dodd–Frank Wall Street Reform and Consumer Protection Act (DOF). H.R.4173. Available at https://www.congress.gov/bill/111th-congress/ house-bill/4173/text 22. Securities and Exchange Commissions (SEC). Accounting and Auditing Enforcement Releases (AAAERs). http://www.sec.gov/divisions/ enforce/friactions.shtml 23. Ibid.

CHAPTER 5

Forensic Accounting Practices, and Education and Research Executive Summary Forensic accounting has advanced from a narrow focus on fraud investigation to a profession with certification, education, and research in performing a variety of fraud and nonfraud services. Forensic accountants should possess education, knowledge, experience, and expertise in accounting, auditing, business, finance, law, psychology, and criminology. This chapter presents the structure of the legal system relevant to forensic accounting practice as well as forensic accounting education and research.

Introduction Forensic accounting is considered as an important and rewarding field of accounting to investigate fraud and nonfraud incidents. In such an increasingly unstable economic and litigious environment, there has been significant growth in the demand for and interest in forensic accounting and investigative fraud and nonfraud services. To effectively perform litigation consulting, expert witnessing, valuation, and fraud investigation services, forensic accountants should understand the structure of the legal system as well as forensic accounting best practices and education and research presented in this chapter.

Structure of the Legal System This section provides an overview of the legal, judicial, and regulatory environment in which a forensic accountant may practice. It introduces

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the basics of civil and criminal laws, dispute resolution, and federal and state rules of evidence and procedure applicable to forensic accounting practices. It also provides a description of the federal and state courts and an introduction to other applicable laws, rules, regulations, guidance, and agencies relevant to forensic accounting practices. Civil Litigation Processes The process for civil litigation and related lawsuits generally starts with disagreements and disputes among parties including individuals, businesses, or government and nongovernment entities. Civil lawsuits typically proceed through systematic steps: pleadings, discovery, trial, and appeal in the absence of voluntarily settling at any time before reaching trial or the use of arbitration.1 Civil litigation statistics show, on the federal level, that 409 civil filings occurred with a median case time of 10.1 months (measure of filing to conclusion) during the first 3 months of 2018. The total number of civil cases in 2018 amounted to 277,010. The most common type was prisoner petitions, which contained 53,965 cases. The remaining top five were personal injury/product liability, civil rights, other civil, and contracts with 44,563, 40,371, 34,153, and 24,802 total cases, respectively.2 Pleadings The civil litigation process begins here with the filing of papers by each party involved in a lawsuit. In this portion, each side gets to explain its side of the dispute. Pleadings are composed of two core components: the complaint and the answer. The complaint describes what the defendant did or failed to do that was the direct cause of harm and injury to the plaintiff and the legal basis for holding the defendant responsible for that harm.3 The answer is a phase in which the defendant is given a specific amount of time to file an answer to the complaint. During this period, the defendant may reply by filing a counterclaim, which is when a defendant claims that the plaintiff caused injury and must pay damages. In some cases, a request for clarification, amendments to factual allegations or legal theories, or dismissal can be achieved. After any replies are stated, the court now has the parameters for which issues can be resolved.4

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Discovery Discovery begins after a lawsuit is filed and stops shortly before the trial. During this period, parties seek information, about facts and issues, from one another as well as third parties. These requests are formally issued and may be questions, document requests, admission (admitting or denying facts) requests. Because of discovery being an important part of legal proceedings, there are various methodologies that can be applied. First, a deposition is a statement made from court under oath. The purpose of depositions is to give the opposing party and idea of the content of the upcoming trial. It can be given orally, via tape, or in writing. Along with the depositions, interrogatories may be conducted, which are written questions for the other party to answer.5 Trial Forensic accountants take part in civil trials. In a civil trial, there are many phases, including pretrial, jury duties, examination of evidence, and motions. In the pretrial phase, the complainant files for the case to be heard in court and the defendant is the firm being charged with the offense. The defendant can admit guilt or deny the accusation. In the court, the jury is selected before the proceedings begin by the judge. This process is called voir dire, meaning to speak truthfully. This is done so that bias is not brought into the court proceedings. If the juror does not meet this criterion, another juror is selected. After selection of the jury, the trial commences. During the trial, evidence is examined both directly and in parallel. Before the examination, evidence must be determined to be either direct or circumstantial in nature. Direct evidence is clear and usually involves the obvious including weapons, admittance of guilt, and eyewitness accounts. Circumstantial evidence is much more difficult to facilitate as it involves an inference of fact. This type of evidence includes the crime scene and expert testimony. The court uses various methods to question and verify evidence in court proceedings. Direct examination involves both types of evidence mentioned in the previous paragraph. The witnesses must keep opinions out of the statements made to avoid a biased testimony. Cross-examination is a by-product of direct examination and involves the defendant’s lawyer

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pondering evidence to test its credibility. At the end of the trial, a motion is given. This motion determines whether the trial is over, and the jury can examine all the evidence and make the verdict.6 Appeal To begin the appeal process, a notice of appeal must be filed with the court if it is allowed. Because of forensic accountants being involved in civil cases, the appeal can be done by either party (defendant or plaintiff). An appeal is usually done before trial proceedings commence, but it can be done after the trial is over. The party appealing must write a brief, which is a documented statement discussing why the party believes the decision was factually incorrect. An oral rebuttal to the decision is acceptable in some cases. After the case is appealed, judges may form a dissenting opinion, which is a disagreement with the majority, or a concurring opinion, which agrees with the majority. If the appeal is unsuccessful, it can be appealed to a higher court. If it is not, the verdict stands. If the appeal is successful, it will return to the lower courts to be retried. This is allowed because the US Constitution protects against double jeopardy, which means being tried repeatedly for the same crime.7 Alternatives to Litigation Businesses may want to avoid normal court proceedings but still find a resolution to the problem. The process to address this issue is called Alternative Dispute Resolution (ADRs). There are many types of ADRs, including mediation and arbitration. Mediation is peaceful and designed to arrive at an agreement, as opposed to general litigation proceedings. This bypasses a jury and other forms of legal proceedings and lawyers are not required. An arbitration always involves lawyers with subpoena power; each side can present a case.8 Alternatives to litigation are usually used when pursing a case through normal court proceedings would be more costly than beneficial (cost–benefit analysis). It is important to note that sometimes courts may require ADRs, which is less common than individuals deciding to pursue this form of legal reprieve. According to the United States Department of Justice, in 2017,

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there was a 75 percent success rate for individual-instigated ADRs and a 55 percent success rate for court-ordered ADRs. The year 2017 had a combined 77 percent achieved benefit from resolved cases, which tied with the year 2014 for the highest in a 5-year period.9 Criminal Proceedings The above-mentioned processes for civil trials are identical for criminal proceedings except for the pretrial. In a criminal pretrial, the process changes on the basis of how serious the offense is. For example, felonies are more punishable by federal law, as opposed to misdemeanors, which are generally locality-based offenses. Every other crime lower than the preceding two, is usually punishable by fines.10According to the Department of Justice, in 2016, there were 66,961 criminal cases at year end. Of those cases resolved, 50,973 defendants were found guilty, 148 were found not guilty, and 2,582 were dismissed. Broken down by crime type, the top three crimes were drug offenses, violent crime, and white-collar crime, each totaling at 11,731, 11,688, and 4,791, respectively. The Department of Justice releases criminal court statistics every fiscal year.11

Forensic Accounting Fraud Standards and Practices Several auditing standards provide guidelines for forensic accountants and external auditors to assess risk of financial reporting fraud and discover Financial Statement Fraud(FSF). These standards are the Statement on Auditing Standards (SAS) No. 99 entitled “Consideration of Fraud in a Financial Statement Audit” and the International Standard on Auditing (ISA) No. 240 entitled “The Auditor’s Responsibility Relating to Fraud in an Audit of Financial Statements.” These auditing standards emphasize the importance of evaluating fraud risk from the view of fraud-triangle factors and the use of brainstorming sessions to assess fraud risks and evaluate how fraud could be perpetrated. However, SAS 99 (AICPA 2002) does not provide detailed instructions on how auditors should consider fraud schemes in risk assessment and how auditors adjust audit programs to respond to the assessed fraud risk. SAS 99 (AICPA 2002, p. 31) states, “The auditor may identify

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events or conditions that indicate incentives/pressures to perpetrate fraud, opportunities to carry out the fraud, or attitudes/rationalizations to justify a fraudulent action.”12 The existence of these conditions, or events, are commonly referred to as “fraud risk factors” that provide signals, symptoms, and possible red flags that fraud could exist.13 SAS 99 (AICPA 2002) states that when management has incentives or pressures to perpetrate fraud, opportunities to carry out the fraud, and attitudes or rationalizations to justify a fraudulent action, it might intend to commit fraud. Therefore, the first phase of fraud is normally the assessment of the presence of risk factors in the fraud triangle. When these factors are present in the business environment of a company, there is a higher likelihood that management will commit fraud. Given the intention to commit fraud, management must then decide how to perpetrate it. Since the management attempts to falsify financial statements, the first step in perpetrating fraud could be to decide which accounts and how they should be manipulated. For example, when management notices that the company cannot meet the projected net income for the period, it might decide to overstate sales revenue to increase the net income. ISA 240 pertains to the auditor’s looking for fraud in financial statements. ISA 240 was developed from a need to prevent and detect fraud in 2004 through the risk of material misstatement (RMM). The RMM is the likelihood that material misstatements enter into the accounting information process, were undetected by the system of internal controls, and are not discovered by auditors. As a result, when there is likelihood for fraud, the risk is higher. The auditor must use professional judgment and skills to use the RMM for ISA 240 standards. The requirements for professional judgment include skepticism, processes designed to manage, assess, and mitigate risk, and auditors discussing the audit with each other on a consistent basis.14 ISA 240 is a set of standards; however, when it comes to forensic accounting, the standards vary by case according to the laws, the requirements of the investigation, and the evidence compiled. For these reasons, a forensic accountant needs to know ISA 240 from the perspective of the external audit team and management. This will allow the accountant to identify areas of possible manipulation of the standards that may lead to fraudulent activities.15

Forensic Accounting Practices, and Education and Research 97

Normally, if management has not used any evidence to conceal ­account schemes, the fraud might be detected by an auditor through regular audit procedures. Therefore, the assertion that fraud occurred without the use of evidence schemes is linked to evidence gathered by regular audit procedures. However, if there is a risk that management has used ­evidence schemes to conceal fraud, auditors should assess what specific evidence schemes could have been used. Therefore, the last level of ­assertions is the occurrence of specific evidence schemes. Auditors should perform special procedures to assess the risk of specific evidence schemes being used. As mentioned previously, it should be noted that the special audit procedures do not have to be new procedures, but those that are designed and performed for the special purpose of examining whether the audit evidence has been manipulated by management. In recent years, the PCAOB has encouraged the Auditing Section of the AAA to sponsor a series of literature syntheses on Financial Reporting Fraud (FRF). These syntheses were aimed at compiling findings of academic studies on FRF and providing insights into their policy, practical and educational implications for regulators, practitioners, and academics. The first FRF synthesis was conducted by Hogan et al. (2008) and concluded that the rationalization element of the fraud triangle has received the least amount of attention in academic literature.16 The second synthesis was conducted by Trompeter et al. (2013), which further advanced the fraud triangle in the areas of antifraud measures and legal elements of fraud, such as fraud schemes, concealment, and conversion.17 These syntheses address all components of FRF by focusing on the capability and compliance elements of the FRF model in further occurrences and deterrence of fraud.

Forensic Accounting Fraud-related Cases Throughout the twenty-first century, forensic accounting grew as an industry, mostly because of the development of new technologies that make committing fraud easier. There have been several prevalent cases that have occurred during 2017 that were reported by the IRS, Big 4, and the FBI. One example, provided by the Internal Revenue Service (IRS), involves a man named Masud Sarshar, who stored millions of US dollars

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in Israeli bank accounts. He had an account in Bank Lumei and two other banks, which he connected to his business, Apparel Limited, Inc. He hid 23.5 million in these banks to avoid paying tax to the IRS by not disclosing his income on his 2006 to 2012 tax returns.18 The FBI, situated in the United States, places high value on investigating and solving white-collar crime. In the 2016 Fiscal Year, the FBI, in its report on Health Care Fraud and Abuse Control Program, highlighted several cases that it solved using its Strike Force team. The first case, Regent Management Services L.P., a nursing company, was receiving kickbacks from several companies regarding ambulatory transportation services. These kickbacks were given in trade for very prominent Medicare and Medicaid transportation referrals. The Strike Force (SF) found out about this and charged Regent Management Services a fine totaling $2.7  million in 2015. As a resolution to this case, Regent had to enter into a Corporate Integrity Agreement, a contract established by the HHS-OIG, for 5 years. This is the first case in U.S. history in which any medical company was held responsible for the kickbacks. Another case took place in June 2016, in which the FBI SF team found that Irving Holdings, one of the biggest taxicab firms in the United States, gave the State of Texas government a false affidavit pertaining to 10 North Texas business’ and individuals. The total payout was $1.1 million.19 Exhibit 5.1 summarizes many high-profile and profound fraud cases that have happened in the past 20 years. The most notable is the Enron scandal, which is the largest accounting scandal to date, amounting to $74 billion over 4 years. As a result, Congress established the PCAOB which resulted from the SOX. Now the SEC has established new regulations regarding securities and FSF. There were several cases that happened in 2007, including Qwest, UBS, and Mc’Afee. Collectively, the companies were fined $69 million and many CEOs were let go. Most of the cases in Exhibit 5.1 pertain to financial statement or securities fraud, and as a result, disclosure of the cases to the public is mandated by law. The effectiveness of SOX can be questioned as a result of several of these high-profile crimes. The passed legislation, which promised to reduce fraud, has not held true. The overall fraud rate has not had a significant change since 2002. This is made evident by Exhibit 5.1, which displays many damaging cases after the SOX era.

Forensic Accounting Practices, and Education and Research 99

Exhibit 5.1 The Most Profound Fraud Cases Fraud

Description

Qwest communications international

• Insider Trading • Year committed 2007 • Sold more than $100 million in Qwest stock while in possession of material nonpublic information regarding Qwest financial health • Ordered to pay fine $19 million, CEO was ordered to serve 6 years in prison

Adelphia Communications Corporation

• Accounting Financial Fraud • One of the most extensive frauds ever to take place in public • Defrauded company’s shareholders and creditors out of millions of dollars • CEO and CFO were sentenced to 15 and 20 years in prison. • Family of founder was forfeited in excess of $1.5 billion.

Enron

• Largest accounting scandal in history. • Many executives were charged with felonies and went to prison. • Counts included securities fraud, money laundering, making false statements to banks, securities fraud, money laundering, and so on. • Shareholders lost $74 billion in the 4 years before the company’s bankruptcy. • Enron filed for bankruptcy on December 2, 2001 under Chapter 11, with assets of $63.4 billion; it was the largest corporate bankruptcy in U.S. history until WorldCom’s 2002 bankruptcy.

Reebok

• Insider Trading • Year committed 2006 • Massive insider trading scheme that resulted in more than $6.7 million in illicit gains • An associate at Goldman Sachs, an investment banking analyst at Merrill Lynch and several other defendants were convicted and pled guilty.

UBS

• Insider Trading • Year Committed 2007 • An executive director at UBS, a former in-house attorney at Morgan Stanley devised and participated in a scheme that provided them with $8 million of illegal profits. • 8 of the 13 defendants have pled guilty. (Continued )

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Exhibit 5.1 (Continued) Fraud

Description

Mc’Afee Inc.

• Securities Fraud • Year committed 2007 • Company overstated its revenue and earnings. • Company was ordered to pay $50 million in penalties.

TYCO • Undervaluing acquired assets, over acquired liabilities international Ltd. • Year fraud was committed 2000–2004 • The proposed final judgment ordered TYCO to pay $11 in disgorgement and a $50 million in civil penalty. The French Bank Société Générale

• Société Générale is the 3rd largest Corporate and Investment bank in the Eurozone by net banking income and the 6th largest French company by market capitalization • On January 24, 2008, the bank announced that a single futures trader at the bank had fraudulently lost the bank 4.9 billion euros (an equivalent of $7.2 billion), the largest such loss in history. • Junior Trader caused bank $7 billion in losses.

MADDOFF

• Bernard L. Madoff conducted the largest Ponzi Scheme in the history of Wall Street (Madoff Investment Securities LLC) • Securities fraud, wire fraud, mail fraud, money laundering, perjury, making false statements • The amounts missing from clients’ accounts including fabricated gains were $65 billion. • He was sentenced to the maximum allowed 150 years in prison, and was ordered to pay $18 billion in restitutions; his family and he were fined $170 billion.

Hedge—Fund Fraud

• Two hedge-fund managers, Paul Greenswood and Stephen Walsh, misappropriated at least $553 million of investors’ money and used it to finance personal expenses. • Alleged victims included famous names as Carnegie Mellon that invested $49 million, and University of Pittsburg $65 million. • Iowa public employees’ retirement invested about 2% of its portfolio or $339 million in the fund. • Executive faced criminal charges including securities charge.

HealthSouth Corporation

• Former chairman and executive of the company Richard Scrushy artificially inflated company’s earning for at least 6 years through an accounting scam. • He was ordered to pay a staggering $2.88 billion in civil charges. • It is the largest financial penalty ever levered against a single executive.

Forensic Accounting Practices, and Education and Research 101

Fraud

Description

Parmalat

• Falsified accounting documents to show a bank account with €3.95 billion to cover up losses and debts • A fraud investigation was launched, and the company went bankrupt. • The CEO was charged with financial fraud and money laundering and was sentenced to 10 years in prison.

Satyam

• Made fake customer records in order to inflate revenue and obtain fraudulent loans and advances • Share prices plummeted, the chairman resigned, and the company restated its financial records for the 2002–2008 period. • The former chairman was charged with several offenses. The SEC fined Satyam and its former auditor Price Waterhouse Coopers’ Indian affiliates a total of $16 million after probing the scandal.

Olympus

• Inappropriately covered losses on its investment dating to the 1990s by using value-inflated acquisitions. • Olympus’ share price fell by about 75% and investigations were made into the company in the United States, Britain, and Japan. • The company’s chairman and two former executives were arrested in Tokyo and could serve jail term. Eight executives will also take pay cuts of between 30% and 50%.

Iran’s largest case of bank fraud

• This case resulted in the arrest of more than 50 suspects, including some government officials. • At least 39 defendants were charged with fraudulent criminal activities, and four of them were sentenced to death.

Forensic Accounting Best Practices Forensic accountants are typically well trained and educated to perform risk and vulnerability assessment associated with global corruption, fraud, allegations of financial misstatements and mismanagement, and antifraud investigation and prevention. Best practices of forensic accounting suggest that forensic accountants conduct full and extensive fact-finding and investigations in performing litigation consulting, expert witnessing, and anticorruption and fraud examination services. Forensic accountants’ hands-on training, on-the-job experience, and application of best practices enable them to assist their clients with forensic accounting services including • Antifraud and anticorruption examination • Corporate consulting and investigations

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• Examination of allegations of corporate fraud or financial misstatement and mismanagement • Foreign Corrupt Practices Act investigation and consulting • Investigation of whistle-blower allegations • Cybersecurity assessment • Responding to regulators’ inquiries and requests • Troubleshooting and prevention and detection of problems before they occur In performing the above-mentioned services among others, forensic accountants should sharpen their skills in the following: • Identification of the elements of fraud, both civil and criminal • Assessment of an organization environment and culture, including governance, ethics, risk management, and antifraud policies and procedures • Identification of fraud schemes, their red flags, symptoms, and detection techniques • Application of a comprehensive and robust fraud risk assessment methodology • Evaluation of fraud risk and ways to mitigate this risk • Assessment of the need for internal controls and fraud risk management • Classification of the types of persons most likely to commit fraud and their motivations and rationalization • Assessment of the importance of managing fraud risk from in and outside the business • Definition of the roles and responsibilities of corporate gatekeepers for detecting, deterring, and investigating fraud • Identification of rules, regulations, and professional standards governing prevention and detection of Financial Reporting Fraud. • Discussion of elements of Financial Reporting Fraud. • Description of fraud triangle of incentives/pressure, opportunities and rationalization • Application of antifraud policies and best practices • Identification of fraud schemes and scenarios relevant to numerous industries, including banking, insurance, stock exchanges, and government

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• Discussion of professional standards pertaining to prevention and detection of both employees’ and management fraud • Performance of forensic accounting and investigative audit procedures • Encouragement of effectual “brainstorming sessions” discussing fraud possibilities • Identification of risk exposures and designing of remediation responses to fraud risk • Performance of a fraud risk assessment • Discussion of securities fraud and money laundering Antifraud policies and programs should address corporate culture, control structure, and fraud procedures. 1. Corporate culture—corporate culture should create an environment that sets an appropriate tone at the top that promotes ethical behavior and reinforces antifraud conduct, demanding “doing the right thing always.” The corporate culture provides incentives for everyone in the company, from directors to officers and employees, to act competently and ethically. 2. Control environment—an effective control environment could reduce opportunities for individuals to engage in fraudulent activities. Authoritative guidelines including Section 404 of SOX, SEC-related implementation rules, and PCAOB auditing standards Nos. 2 and 5 emphasize the importance of effective internal controls in the prevention and detection of FSF. 3. Antifraud procedures—adequate fraud-related procedures should be developed and performed to ensure prevention and detection of potential fraud.

Forensic Accounting Research Forensic accounting research conducted by academic scholars and practitioners are intended to promote and advance forensic accounting research in all areas of forensic accounting services, including fraud examination, valuations, litigation consulting, and expert witnessing. Exhibit 5.2 presents a synopsis of forensic accounting published articles in the past two decades.

104

Data Source(s)

International Journal of Business and Social Science

Journal of Forensic Accounting

Contemporary Accounting Research

Behavioral & Experimental Accounting

Fordham Business Research Papers

Author(s)

Aksoy Tamer Kahyaoglu Sezer

Albrecht, Steve Albrecht, Conan Albrecht, Chad

Asare, Wright

Brazel, Joseph Jones, Keith Prawitt, Douglas

Chidambaram NK Kedia Simi Prabhala Nagpurnanand

2010

2012

2004

2004

2012

Time Period

To determine, through SEC enforcement actions, the causes of corporate fraud

Analysis of financial and nonfinancial measures in an audit

Risk assessments’ effect on planning for fraud

Research connection between management theories and FSF

Using upper management feedback to determine issues and causes of fraud

Purpose

Corporate fraud

Fraud detection

Fraud Planning

Fraud

Fraud in Turkey

CEO and Director connections

Auditor’s reaction, analytical procedures, nonfinancial measures

Risk assessment, program planning tools

Corporate executives, agency theory, stewardship theory

Executive manager perspective

Dependent Explanatory Variables Variables

Forensic Accounting Research

Exhibit 5.2

Connections affect fraud.

Auditors do not consider nonfinancial measures.

Fraud risk assessment was not associated with program effectiveness.

Stewardship theory leads to higher fraud in comparison with agency theory.

Fraud is a significant issue in Turkey

Findings

105

Journal of Forensic & Investigative Accounting

Journal of Advanced Management Science

American Accounting Association, Auditing: A journal of practice and theory, August 2017

Journal of Forensic and Investigative Accounting

Contemporary Accounting Research

Journal of Forensic & Investigative Accounting

Clements, Shawver

Dalnail, Kamaluddin, Sanusi, Kahiruddin

Donelson, Ege, McInnis

Fairweather William

Fung Michael

Gonzalez, Kopp

2017

2015

2017

1999–2016

2014

2017

Examining personality traits impact on fraud

Use the Cumulative Prospect Theory to evaluate, detect, and determine incentives for financial reporting fraud

Using Benford’s law to detect and collect data related to fraud

Discover how much internal control affects fraud risk

Link between statement analysis and reporting fraud

Fraud

Fraudulent Financial Reporting

Potential Fraud

Financial Reporting Fraud

Fraudulent Financial Reporting

Use the Rest model to Fraudulent determine where accountants Behavior will blow the whistle on Detection fraudulent behavior

Traits, dark triad

Incentives, prospect theory

Benford’s law, Receiver Operating Characteristic curve (ROC) Curve

Internal control

FSF, financial ratios

Morals, Ethics, Whistle-blowing

(Continued )

Greed is the highest predictor of fraud.

Fraud is higher among high-risk losses and low-risk gains.

No cost difference in investigating fraudulent behavior vs. not doing so

Weak internal control increases the risk for financial fraud.

Debt to equity ratio is the highest predictor of fraud.

Whistle-blowing is affected by pressures.

106

Data Source(s)

Stanford Law and Economics

Journal of Forensic & Investigative Accounting

Journal of Accounting Research

Research in Accounting Regulation

Procedia and Elsevier

Journal of Finance

Author(s)

Griffin, Grundfest

Grove, Hugh Clouse, Mac

Ham, Lang, Seybert, Wang

Huber, Dennis

Kanapickiene, Rasa Grundiene, Zivilie

Karpoff, Lou

2010

2015

2013

1986–2015

2014

2002

Time Period

Short seller’s ability to detect firm fraud

Using financial ratios to detect fraudulent behavior

To determine whether regulation of the forensic accounting profession is necessary

Analyze CFO narcissism’s effect on financial reporting

Use fraud models to improve forensic analysis across continents

Insider trading’s effect on fraud

Purpose

Short selling fraud

Fraudulent behavior

Forensic accounting profession

Financial Reporting Quality

Forensic Analysis

Insider Fraud

Data misrepresentation, short interest

Ratios, financial statements

Regulations

CEO narcissism

Fraud models, ratios, warning signs of fraud

Insider selling

Dependent Explanatory Variables Variables

Exhibit 5.2 (Continued)

Short sellers can identify fraud quickly.

Profitability, liquidity, activity, and structural ratios are the best ratios used to detect fraud.

State-level legislation is best for regulation of forensic accounting.

Through lab analysis, narcissism is directly related to financial misreporting.

Models were effective

Insider trading, once known, has a significant effect on investors.

Findings

107

Contemporary Accounting Research

Journal of Forensic & Investigative Accounting

Critical Perspectives on Accounting

Descriptive Journal of Accounting Literature, 2016

American Accounting Association, Auditing: A journal of practice and theory, November 2008

Markelevich Ariel Rosner Rebecca

Mulig, Liz Prachyl, Cheryl

Rezaee Zabihollah

Rezaee

Rezaee, Hogan, Riley Jr., Velury

Using the term “crime” to identify FSF

Using internal controls to detect red flags

To examine if the fees auditors charge are linked to financial reporting fraud

2008

Academic Research’s effect on FSF

2002– 2016 Present a synthesis of research in business sustainability in the past decade

2005

2017

2013

FSF

Business sustainability

Financial

Fraud

Fraudulent firms

Academic research, incentives, pressures

Economic, governance, social, ethical, and environmental

CRIME (Cookies, Recipes, Incentives, Monitoring, End results)

Red flags

Audit fees, audit engagements

(Continued )

SAS 99 is warranted, use of fraud detection tools are mixed, and further exploration of fraud indicators is needed.

The goal of firm value creation can be achieved when management creates a shared value for all stakeholders.

Fraudulent behavior damages investor confidence and decreases investments.

Internal controls are needed to detect red flags.

Higher non-audit(NA) fees indicate higher degrees of fraudulent behavior.

108

Data Source(s)

SSRN

Journal of Accounting and Public Policy

Corporate Law: Law & Finance e-journal

Author(s)

Skousen, Smith, Wright

Wang, Chen, Chin, Zheng

Wuerges, Artur Borba, Jose

2011

2017

1997–2008

Time Period

Using logit models to estimate the detection of fraud

Investigate connection between political, business, and social drivers and financial reporting fraud

Show how the fraud triangle and SAS no.99 impact FSF

Purpose

Accounting fraud

Fraudulent reporting

FSF

Pressure, opportunity, rationalization (fraud triangle)

Managerial ability, politics

Fraud Triangle and SAS 99

Dependent Explanatory Variables Variables

Exhibit 5.2 (Continued)

SEC not fit to handle fraud on broad scale, increasing assets leads to less fraud.

Better management leads to less reporting fraud.

The fraud triangle has a direct correlation with FSF.

Findings

Forensic Accounting Practices, and Education and Research 109

These published research studies cover theoretical, practical, and empirical aspects of forensic accounting. Many of these published articles provide policy, practical, educational, and research implications and further our understanding of forensic accounting. Forensic accounting research summarized in Exhibit 5.2 presents the journals, purposes, and research methods, most commonly used variables constructed, and findings of these studies. This is a synthesis and synopsis of high-profile studies in forensic accounting. Summarized articles suggest that fraud and quantitative methods make up the higher portion of topics and research methods published in forensic accounting journals. In total, 25 articles from various journals were selected. Most of the journals centered around business sustainability, financial reporting fraud, and financial reporting quality. The consensus from the articles selected is that internal control systems are needed to minimize financial fraud and maximize business sustainability. It is important to select a few articles from the exhibit to explain this reasoning. The American Accounting Association’s Journal of Auditing published an article in August 2017 that discussed the impact of internal control on the fraud risk equation. The conclusion from the study was that weak internal controls led to an increase in financial reporting fraud. To reduce financial reporting fraud, the authors state that a high-quality internal control system is needed. This would allow the company to detect, prevent, and correct any potential or committed fraudulent behavior. Another document, released by the Journal of Accounting Research, investigated a CEO’s relative narcissism and its impact on financial reporting. The authors found that narcissism affects financial reporting. Two Earnest Young surveys (2014, 2016) report the trends toward the use of information technology (IT) in general and Big Data/analytics in particular in forensic accounting practices. First, there is an increasing use of forensic data analytics. Second, cyber breaches (illicit transferring of funds, disrupting critical operations, or stealing intellectual property/confidential personal data and other critical digital assets) and insider threats (malicious insiders stealing, manipulating, or destroying data, fraud, IP theft, unauthorized trading, espionage or IT sabotage) are emerging as the fastest growing fraud risks faced by forensic accountants. Forensic accountants increasingly use Big Data (analytics) in their

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practices to deal with the datasets exceeding the typical constrains of a traditional spreadsheet.20 As traditional rules-based relational database techniques, such as matching, sorting, filtering, and query design, often result in false positives or missed fraud detection opportunities, forensic accountants nowadays incorporate data visualization, predictive analytics, behavior analytics, content analytics, social network analysis, geospatial analytics, and numerous advanced antifraud techniques.21 Forensic accounting education and practice have gained attention from research scholars. One survey examined both academics and practitioners in the United States and provided evidence of the importance of forensic accounting education and practice and its integration into the business curriculum.22 Another survey examined the update availability of forensic accounting education in the United States and other English-speaking countries and found that in the United States, there are 422 universities and colleges offering forensic accounting courses, with 97 of them providing forensic accounting programs; while in Canada and other English-speaking countries, there are 25 universities and colleges offering forensic accounting courses, with 23 forensic accounting programs among 186 Canadian and other English-speaking universities and colleges.23 Several academic studies promote integration of forensic accounting into the business curriculum. For example, a recent research examined availability of forensic accounting education in the Western countries including the United States and found that in the United States, there are 422 universities and colleges offering forensic accounting courses, with 97 of them providing forensic accounting programs.24 There are 25 universities and colleges offering forensic accounting courses, with 23 forensic accounting programs in Canada and other English-speaking countries.25 There is a lack of diversity in forensic accounting research topics and methods, with the keen focus on fraud and FSF and fraud investigation, with less emphasis on other topics of forensic accounting such as expert witnessing and litigation consulting. Many of the published articles identify gaps between practice and research in forensic accounting and encourage research in emerging topics using diverse methods that contribute to the literature and are valuable to forensic accountants. The emerging research topics in forensic accounting are, but not

Forensic Accounting Practices, and Education and Research 111

limited to, cybersecurity attacks and threats, financial misstatement and mismanagement, bankruptcy and insolvency, valuations and fair value estimation, economic damage calculations, digital forensic and computer forensic techniques, financial reporting fraud and securities fraud, the role of gatekeepers in preventing and detecting FSF, antibribery and anti-money laundering, government inquiries and foreign corrupt practices, insurance and personal injury claims, and the use of Big Data and Data Analytics in forensic accounting.

Forensic Accounting Education Forensic accounting is an exciting field that started in the business world. Playing catch-up, educational institutions are trying to implement classes to fill the demand for educated professionals. Although it is becoming increasingly more popular in the field of education, there is still a lack of standardized forms of education and skillset taught across the board. The greatest obstacle in offering a more comprehensive forensic curriculum is the perception of a lack of room for it. Electives within accounting degrees are becoming fewer and fewer, so offering more forensic classes would take away from other required courses. However, fraud is discovered mostly from internal sources, so students need to be aware of the red flags of various fraud schemes if they are going to be working for a company. This shows a need for all students to take forensic accounting classes, not just future auditors. Forensic accountants are regarded as experts in deterring, preventing, and detecting FRF by researching for at least one irregular transaction or event that may lead to a big financial scandal and fraud. Skills required for being effective and successful forensic accountants are enormous, including being team-oriented, having the ability to analyze problems and complex situations, having adequate computer skills, possessing interpersonal and communication skills, being creative and skeptical, and finally having a keen curiosity and being persistent. A keen curiosity is needed to keep forensic accountants on their toes and forcing them to look for red flags, irregularities, and symptoms of fraud. Persistency is needed to conduct thorough investigation of connecting the dots. Forensic accountants should possess a working knowledge of accounting, the legal system,

112

Acquire a broad overview of the nature and magnitude of the problem of economic fraud.

1. Education on pervasiveness of and the causes of fraud and whitecollar crime.

Accounting concern with detection and prevention of fraud and white-collar crime.

Advance preparation (reading and assignments) completed

N/A

3. Academic research journal readings

2. Internet readings, Practitioner journal readings

1. Group assignment and individual assignment

Assignments

1. First principles 1. IRS Financial 1. Written of accounting Investigations: assignment courses A Financial Approach to Detecting and Resolving Crimes

ACCT 5112, ACCT 5122, ISYS 3333

Course Course Course Objective Requirements Prerequisites Text Book

An examination of various aspects of fraud prevention and detection, including the sociology of fraud, elements of fraud, types of fraud involving accounting information, costs of fraud, use of controls to prevent fraud, and methods of fraud detection

Course Description

Forensic Accounting Education

Exhibit 5.3

North Dakota State

U of Arkansas

University

113

Include both litigation support and fraud issues.

2. Student will learn why fraud is committed, how it will be deterred, and how it will be investigated.

1. Cover all of the major methods employees use to commit occupational fraud

Provide students an opportunity to gain experience in investigative (forensic) accounting.

2. Explore methods of fraud detection, investigation, and prevention.

1. Active participation and discussion 2. Good communication skills 3. Testify in court 4. Role-playing

3. Chapter 6 of IRS book

2. Basic computer proficiency

Handouts

Wells, Joseph T., Occupational Fraud and Abuse (Obsidian Publishing Company, Inc. 1997).

2. Albrecht, et al. Fraud: Bringing Light to the Dark Side of Business (Irwin Professional Publishing 1995) 3. Project

2. Interview paper

(Continued )

Indiana U

U of Texas at Austin

114

General survey reviewing both the nature and scope of white-collar criminal activity in the United States

Course Description

Robertson, J.C., 1. Reading of Fraud Examination textbook for Managers and 2. Discussion Auditors (FEMA) 3. Paper (Austin: Association of Certified Fraud Examiners)

1. Increase fraud awareness. 2. Learn aspects of fraud detection.

1. Text book reading 2. Research paper

Assignments

Manning, George A. (2000) Financial Investigation and Forensic Accounting. Boca Raton, Florida: CRC Press. ISBN #: 0849304350

Know the following concepts: The Economics of Crime Financial Crime Expenditure Theory Illicit Offshore Activities Net Worth Analysis Expenditure Theory Organized Crime Sources of Information Accounting and Audit Techniques Money Laundering

Course Course Course Objective Requirements Prerequisites Text Book

Exhibit 5.3 (Continued)

DePaul U

Canyon College

University

115

1. Study and application 1. Understand the of the procedures and role of accountant techniques used in the in prevention, prevention, investigation, detection, and and detection of fraud and investigation of white-collar crime. fraud. 2. Study of social, ethical, legal, 2. The motivation and political considerations for perpetrators of that surround fraud fraud 3. The warning signs of fraudulent activity

3. Obtain insight on fraud prevention and identify weaknesses in internal control systems.

ACC 311

Occupational Fraud and Abuse—Wells (1997) Financial Shenanigans— Schilit (2002) Selected Articles Provided by Instructor

Wells, Joseph T., Occupational Fraud and Abuse (OFA) (Austin: Obsidian Publishing Company) 1. Topic paper 2. Project

California State Polytechnic U

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FORENSIC ACCOUNTING AND FSF, VOLUME I

criminology, and investigative techniques; they should also be detail oriented and organized; they should think critically and have excellent communication skills. Effective antifraud policies and programs should be designed to prevent and detect fraud. Antifraud programs should deter, prevent, and detect all variations of fraud, from misrepresenting financial information to misappropriating assets and employee fraud. Effective antifraud programs should also address the antifraud role of corporate governance participants. Entities of all sizes and types are susceptible to both employee fraud (e.g., misappropriate of assets, theft, embezzlement) and management fraud (e.g., earnings management, FSF, manipulation of financial reports). Effective antifraud programs—focusing on fraud awareness and education in the workplace environment, whistle-blowing policies and procedures of encouraging and protecting employees to report suspicious behavior, adequate internal control procedures designed to prevent and detect fraud and conduct surprise audits—can significantly reduce fraud. The demand for and interest in forensic accounting, ethics, and corporate governance and antifraud practice and education has significantly increased in the post-SOX era. Forensic accounting, ethics, and corporate governance have made significant improvements in the past two decades—yet, many have expressed concern over the corporate governance, ethics, and forensic accounting education, as well as the training provided in an effective antifraud program. Forensic accountants are regarded as experts in deterring, preventing, and detecting FRF by researching for at least one irregular transaction or event that may lead to a big financial scandal and fraud. This one transaction or event is typically referred as a “tip of the iceberg,” which encourages forensic accountants to acquire specialized knowledge, skills, education, and experience in identifying and evaluating this entire threatening iceberg (fraud). Exhibit 5.3 presents forensic accounting education in training the most competent and ethical forensic accountants possessing skills. Exhibit 5.3 describes forensic accounting course description, objectives, requirements, prerequisites, and course assignments and universities that offer these courses. Many universities worldwide are now offering forensic accounting education; the courses cover important topics relevant to the three areas

Forensic Accounting Practices, and Education and Research 117

of forensic accounting practice of litigation consulting, expert witnessing, and fraud examination. Colleges and universities must do their part by encouraging business, criminology, and law faculty to carry out much-needed research in this important area and teach courses in fraud and forensic accounting. Behavioral sciences—psychology, sociology, criminology, and anthropology—are needed to support the interdisciplinary field of fraud examination and forensic accounting in theory development and in practice, and in fraud prevention, deterrence, and detection.26 A survey of forensic accounting education finds that the (1) demand for and interest in forensic accounting education continue to increase: (2) more universities are offering forensic accounting courses; (3) forensic accounting education is beneficial and relevant to accounting and business students, the accounting profession, and business communities; and (4) there are many of forensic accounting education topics and universities chose among topics those that best fit their programs.27 Some universities worldwide are now offering forensic accounting courses at either undergraduate or graduate levels to train most competent, ethical, and professional future forensic accountants. Exhibit 5.4 presents forensic accounting course offerings at undergraduate and graduate levels, course title, and universities that offer forensic accounting courses and programs and their URL addresses. Forensic accounting certificate programs typically require several specialized courses in accounting, auditing, business, IT, psychology, law, and criminology. A  few schools, such as Georgia Southern University, Florida ­Atlantic University, the University of West Florida, Carlow University and Edinboro University in Pennsylvania, Franklin University and Tiffin University in Ohio, Rider University in New Jersey, the University of Wollongong in Australia, and Villa Julie College in Maryland, have created separate forensic accounting undergraduate or graduate degree programs. These degree programs offer several fraud and nonfraud specific courses as either minor or major in forensic accounting at the undergraduate or graduate level. An important issue is the methods of integrating forensic accounting into the business and accounting curriculum. Two suggested methods of covering forensic accounting education are (1) integration of forensic accounting through accounting and auditing courses and (2) offering of a stand-alone forensic accounting course.28 The rationale for the first method

118

Title

AC 534 Fraud Risk Management

ACCT 5433 Fraud Prevention and Detection

4950 Financial Fraud: Investigation and Detection (4)

-ACTG 4520 Fraud Accounting -ACTG 3351

- 4235 Fraud Auditing and Forensic Accounting (3). - 7235 Fraud Auditing (3).

ACC 430 Forensic Accounting and Auditing

ACCT 410/ 610 Fraud Examination

ACCT 655 - FRAUD DETECTION: INVESTIGATION AND PREVENTION

ACC 383 K.4 Fraud Examination

Level

Graduate

Graduate

Undergraduate

Undergraduate/ Graduate

Undergraduate/ Graduate

Undergraduate

Undergraduate/ Graduate

Graduate

Undergraduate

U of Texas at Austin

Widener U

http://www.bus.utexas.edu/dept/accounting/syllabi/2003spring/ 383k4-wells.doc

http://muse.widener.edu/SBA/

http://www.ndsu.nodak.edu/ndsu/buckhoff/WebCourse/syllabus .htm

http://www.hilbert.edu/stage2/catalog/course_catalog.asp

Hilbert College North Dakota State U

http://www.bus.lsu.edu/accounting/courses.html

Louisiana State U

http://www.daniels.du.edu/accountancy/graduatecourselisting .asp?offset=0#

http://www.csuhayward.edu/ecat/20012002/u-buad .html#section11

California State U - Hayward U of Denver

http://www.uark.edu/depts/acctinfo/course/5433/F02syll.htm

http://www.cba.ua.edu/accounting/courses.html

URL Address

U of Arkansas

U of Alabama

University

Forensic Accounting Course Offerings

Exhibit 5.4

119

ACC 635 Fraud Audit

ACCT 461. Fraud Examination

A 572

CJ455 - Overview of White Collar Crime

AC603 Fraud Auditing and Forensic Accounting

ACC 499

ACC 798

GSM 653y

ACC 5331

ACCTG 4383 -- Fraud Auditing

Graduate

Undergraduate

Graduate

Undergraduate

Undergraduate

Undergraduate

Graduate

Graduate

Graduate

Undergraduate

http://www.canyoncollege.edu/cc/crim~jus/syllabus/cj455.htm

http://www.iub.edu/~aisdept/busa572/heitger/index.htm

http://www.cwu.edu/~linnellg/catalog/02_pages47-68.html#acct

http://marriottschool.byu.edu/soais/courses/accounting.cfm

U of Central Oklahoma

Baylor U

Willamette U

DePaul U

http://www.registrar.ucok.edu/cats/ACCTG.html

http://business.baylor.edu/acc/default.aspx?pageID=95

http://www.willamette.edu/agsm/prospectus/elec3.html

http://fac.comtech.depaul.edu/accysyllabi/fall02/Clayton%20 ACC%20798%20syllabus%202002.doc

California State Polytechnic U http://www.csupomona.edu/~vspeden/SYL499SP02.doc

Georgian Court College

Canyon College

Indiana University

Central Washington U

Brigham Young U

120

FORENSIC ACCOUNTING AND FSF, VOLUME I

of infusing forensic accounting education into the accounting curriculum throughout existing accounting and auditing courses is that all three fields of forensic accounting (litigation consulting, expert ­witnessing, and fraud examination) can shape all aspects of today’s ­business. Forensic ­accounting topics can be integrated into existing upper-level ­accounting and auditing courses to ensure coverage of all critical ­aspects of forensic accounting. Most of the impediments to this integrated a­ pproach relate to the fact that adding forensic accounting to existing accounting and auditing courses may not be feasible and that faculty and students may not feel comfortable in covering additional forensic accounting t­ opics to their courses. The second approach is to offer a stand-alone course in forensic accounting at either the undergraduate or graduate level. Offering a separate forensic accounting can give the opportunity to accounting and business programs to tailor forensic accounting education to their own interest, specialization, and needs. The major impediments to offering a separate forensic accounting course are lack of administrative support and faculty interest and financial resources. The topical coverage of forensic accounting education is i­ mportant regardless of the method of delivery of forensic accounting (integration, separate course). The convergence of forensic accounting topics in a separate course or the integration of those topics into ­upper-level courses requires the classification of interrelated topics into smaller subsets or modules. These modules can be used individually or in groups to allow instructors to customize their forensic accounting syllabi. Forensic accounting topics can be arranged into several ­modules. The first module can consist of fundamental forensic accounting topics such as forensic accounting principles, standards, services, ­fundamentals of fraud investigation and so on. The second module can cover types of fraud, FSF, fraud prevention and deterrence programs, antifraud auditing standards, effective report writing, and environmental and business red flags. The next module can focus on corporate governance, fraud deference, prevention and detection policies and procedures, financial reporting process and analysis, earnings management, criminology and white-collar and economic

Forensic Accounting Practices, and Education and Research 121

crimes, occupational fraud, security and privacy, cybersecurity, and legal elements of fraud. Another module can present careers in forensic accounting, litigation consulting techniques, shareholder litigation, crime control techniques, expert testimony and expert witness techniques, conflicts of interest investigating techniques, compliance with applicable laws and regulation, business valuations and cost estimates, and rules of evidence, interview skills and legal aspects of interviews, intellectual property fraud, cyberattacks, and cyber fraud. The following modules for forensic accounting education are suggested: (1) forensic accounting theories, principles, tools, and techniques; (2) forensic accounting standards and procedures; (3) financial reporting process; (4) fraud and fraud examination; (5) investigation and law; (6) evidence-gathering procedures and analysis; (7) litigation consulting; and (8) expert witness. Universities based on the available resources, including faculty, database, and facilities, can decide to offer a forensic accounting course at either undergraduate or graduate level or both. R ­ egardless of infusion of forensic accounting education into several businesses and accounting courses, offering of a stand-alone forensic ­accounting course at either graduate or undergraduate level, ­relevant ­forensic accounting topics should be classified into manageable modules. Each module should cover at least 10 topics and can be arranged on the basis of the classifications of forensic accounting services (­expert ­witnessing, litigation consulting, and fraud investigation) or ­ expertise and knowledge requirements (soft skills, technical ­education, analytical skills). The coverage of forensic accounting topics in a ­separate course, or the integration of them into business and accounting courses, requires the classification of related topics into teaching modules. The use of the module approach to forensic ­accounting enables instructors to customize their syllabus by promoting critical thinking, skepticism, and the flexibility to cover all or selected modules in their courses. Exhibit 5.5 presents many forensic accounting topics, which are classified into the three categories of general, fraud-related, and non-fraud-related that can be included in teaching modules.

122

Fraud Related Aggressive financial reporting Audit committees Audit quality, effectiveness, and failures Billing schemes Check tampering Common fraud schemes Cyber fraud Cooking the books Civil and criminal fraud statutes Concealing fraud in accounting Detecting management and employee fraud Earnings management Economic impacts of white-collar crimes The Enron and other related cases Financial reporting process and analysis Financial reporting standards and principles FSF Finding assets and people Fraud auditing methodology Fraud detection and deterrence programs Fraud perpetrators and their motivations

General

Accounting information systems Accounting Lyceum Analytical review and procedures Bribery and corruption investigation Business interruption Civil and criminal procedures Compliance with applicable laws and regulations Concealment investigative methods Conducting internal investigations Corporate abuse Corporate governance Criminology and white-collar and economic crimes Crime control techniques Document collection and analysis Effective report writing Elements of fraud, pressure, opportunity, and rationalization Environmental and business red flags Environmental and personal red flags

Forensic Accounting Topics

Exhibit 5.5

Admissibility of expert opinions Antitrust Bankruptcy Business valuations Cost estimates Concepts and tools of judicial procedures Conflicts of interest investigating techniques Conversion investigative methods Knowledge of the legal system Litigation consulting techniques Loss prevention investigation Loss prevention programs Manipulation of related party transactions Marital Dissolution Modeling and discounting future damages Money laundering Occupational fraud Rules of evidence Security and privacy Resolution of allegations of misconduct Rules of evidence

Nonfraud Related

123

Expert witness and expert testimony techniques Federal Rules of Evidence Forensic accounting practices Interrogation Interview principles and methods to evaluate deception Interview skills and legal aspects of interviews Overview of ethics Phases of forensic accounting Principles of ethics and corporate code of conduct Professional liability Professional standards pertaining to forensic accounting

Fraud prevention and fraud policies Fraud schemes Fraud statistics Fraud symptoms Fraud symptoms and computer-aided fraud auditing techniques Fundamentals of fraud Hidden assets Improper Revenue Recognition Insider information and corporate disclosures Intellectual Property Fraud Internal control evaluation Inventory and asset theft Lapping Legal elements of fraud On-book and off-book accounting and FSF Investigation of financial crimes and legal elements Kiting Overview of fraud auditing and fraud investigation Overview of the legal elements of fraud Payroll and expense reimbursement Red flags Regulations of the accounting profession Resolution of allegations of misconduct Theft and skimming Theory of fraud examination and prevention

Skills required of the forensic accountant Special-purpose Entities Statistical sampling Tax consequences Techniques in locating hidden assets The justice system Trial and cross-examination Valuation Services White-collar crime

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FORENSIC ACCOUNTING AND FSF, VOLUME I

Conclusion Forensic accountants should possess education, knowledge, experience, and expertise in accounting, auditing, business, finance, law, psychology, and criminology. This chapter presents the structure of the legal system relevant to forensic accounting practice as well as forensic accounting education and research. Business colleges and accounting programs should integrate forensic accounting education into the business and accounting curricula for preparing and training future generations of forensic accountants who are competent and ethical in conducting fraud and nonfraud examination. Future research should also explore new methods, technology, and advances in forensic accounting practices.

Action Items 1. Understand the structure of the legal system. 2. Apply forensic accounting research and education in practicing forensic accounting. 3. Participate in forensic accounting courses and programs to meet professional continuing education requirements. 4. Conduct research on fraud and nonfraud forensic accounting issues that provide policy, educational, and practical implications.

Endnotes 1. Stoel Rives LLP. 2012. How Does a Lawsuit Work? Basic Steps in the Civil Litigation Process. https://www.stoel.com/how-does-a-lawsuitwork-basic-steps-in, (accessed December 7, 2017). 2. UScourts. 2018. Federal Court Management Statistics. http://www .uscourts.gov/statistics/table/na/federal-court-managementstatistics/2018/03/31-1 3. Ibid. 4. Ibid. 5. American Bar Association. 2017. Discovery. https://www.americanbar.org/groups/public_education/resources/law_related_education_ network/how_courts_work/discovery.html

Forensic Accounting Practices, and Education and Research 125

6. American Bar Association. 2017. How Courts Work: Steps in a Trial. https://www.americanbar.org/groups/public_education/resources/ law_related_education_network/how_courts_work/steps_in_a_ trial2.html 7. Ibid. 8. D. Radunz. 2017. Alternatives to Litigation. http://www.radunzlaw .com/alternatives-to-litigation/ 9. Department of Justice. 2017. Alternative Dispute Resolution at the ­Department of Justice. https://www.justice.gov/olp/alternative-disputeresolution-department-justice 10. Ibid. 11. Department of Justice. 2016. United States Attorneys’ Annual Statistical Report. https://www.justice.gov/usao/page/file/988896/download 12. American Institute of certified Accountants (AICPA). October, 2002. Statement on Auditing Standards No.  99: Consideration of Fraud in a Financial Statement Audit. Available at https://www.aicpa .org/Research/Standards/AuditAttest/DownloadableDocuments/ AU-00316.pdf 13. Ibid. 14. IFAC. December 15, 2009. International Standard on Auditing 240. http://www.ifac.org/system/files/downloads/a012-2010-iaasbhandbook-isa-240.pdf 15. PCAOB. February 22, 2007. Panel Discussion – Forensic Audit Procedures. https://pcaobus.org/News/Events/Documents/02222007_ SAGMeeting/Forensic_Audit_Procedures.pdf 16. C.E. Hogan, Z. Rezaee, R.A. Riley, and U.K. Velury. 2008. “Financial Statement Fraud: Insights from the Academic Literature,” Auditing: A Journal of Practice & Theory 27, no. 2, pp. 231–252. 17. G.M. Trompeter, T.D. Carpenter, N. Desai, K.L. Jones, and R.A. Riley. 2013. “A Synthesis of Fraud-related Research,” Auditing: A Journal of Practice and Theory 32(sup.1): 287–321. 18. Internal Revenue Service. 2018. Examples of International Investigations—Fiscal Year 2017. https://www.irs.gov/compliance/criminal-­ investigation/examples-of-international-investigations-fiscal-year-2017, (accessed October 31, 2017).

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19. HHS. January, 2016. Health Care Fraud and Abuse Control Program Annual Report for Fiscal Year 2016. https://oig.hhs.gov/publications/ docs/hcfac/FY2016-hcfac.pdf, (accessed November 21, 2017). 20. Ernst and Young (EY). 2014. Global Forensic Data Analytics Survey 2014. http://www.ey.com/GL/en/Services/Assurance/FraudInvestigation---Dispute-Services/EY-Global-Forensic-Data-Analytics-Survey-2014, (accessed March 14, 2018) 21. Ibid. 22. Z. Rezaee, D.L. Crumbley, and R.C. Elmore. 2004. “Forensic Accounting Education: A Survey of Academicians and Practitioners,” Advances in Accounting Education 6, pp. 193–231. 23. M. Seda, and B.K. Peterson Kramer. 2014. “An Examination of the Availability and Composition of Forensic Accounting Education in the United States and Other Countries,” Journal of Forensic & Investigative Accounting 6, no. 1, pp. 1–46. 24. Ibid. 25. Ibid. 26. S. Ramamoorti. 2008. “The Psychology and Sociology of Fraud: Integrating the Behavioral Sciences Component into Fraud and Forensic Accounting Curricula,” Issues in Accounting Education. http:// proquest.umi.com.proxy1.ncu.edu/pqdweb?did=1613190661&sid=6 &Fmt=4&clientId=52110&RQT=309&VName=PQD, (accessed September 22, 2010). 27. Rezaee, Crumbley, and Elmore. 2004. 28. Ibid.

About the Author Dr. Zabihollah (Zabi) Rezaee, PhD, CPA, CMA, CIA, CFE, CGFM, CSOXP, CGOVP, CGRCP, CGMA, and CRMA is the Thompson-Hill Chair of Excellence, PhD coordinator and professor of accountancy at the University of Memphis and has served a two-year term on the Standing Advisory Group (SAG) of the Public Company Accounting Oversight Board (PCAOB). He received his BS degree from the Iranian Institute of Advanced Accounting, his MBA from Tarleton State University in Texas, and his PhD from the University of Mississippi. He holds 10 certifications, including Certified Public Accountant (CPA), Certified Fraud Examiner (CFE), Certified Management Accountant (CMA), Certified Internal Auditor (CIA), Certified Government Financial Manager (CGFM), Certified SarbanesOxley Professional (CSOXP), Certified Corporate Governance Professional (CGOVP), Certified Governance Risk Compliance Professional (CGRCP), Chartered Global Management Accountant (CGMA), and Certified Risk Management Assurance (CRMA). He served as the 2012–2014 secretary of the Forensic Accounting (FIA) Section of the American Accounting Association (AAA) and is currently serving on Auditing Standards Committee of the Auditing Section of the AAA. He was one of the finalists for the position of the Faculty Trustee at the University of Memphis in 2016 and the Ombudsperson position in 2017. He is the incoming editor of the Journal of Forensic Accounting Research of the AAA (2019–2020). He has served as expert witness and testified in federal courts. Rezaee has published over 220 articles, made more than 230 presentations, and has written 11 book chapters. He has also published 12 books: Financial Institutions, Valuations, Mergers, and Acquisitions: The Fair Value Approach; Financial Statement Fraud: Prevention and Detection; U.S. Master Auditing Guide 3rd edition; Audit Committee Oversight Effectiveness

128

ABOUT THE AUTHOR

Post-Sarbanes-Oxley Act; Corporate Governance Post-Sarbanes-Oxley: Regulations, Requirements, and Integrated Processes; Corporate Governance and Business Ethics and Financial Services Firms: Governance, regulations, Valuations, Mergers and Acquisitions, and contributed to several other books. His two recent books on Corporate Sustainability: Integrating Performance and Reporting, published in November 2012, won the 2013 Axiom Gold Award in the category of Business Ethics and Business Sustainability: Performance, Compliance, Accountability, and Integrated Reporting was published in October 2015 by Greenleaf Publishing. The book on Audit Committee Effectiveness was published in three volumes by Business Expert Press in July 2016. His most recent books are on Corporate Governance in the Aftermath of the Global Financial Crisis, in four volumes, published by Business Expert Press in March 2018 and Business Sustainability in Asia, published by John Wiley and Sons in March 2019. Several of these books are translated into other languages including Chinese, Persian, Korean, and Spanish.

Index Accounting and Auditing Enforcement Release (AAER), 81–82 sample of, 82–85 Adelphia Communications Corporation, 99 Alternative Dispute Resolution (ADRs), 94–95 American Accounting Association (AAA), 3, 43, 46, 68 operating manual, 38–39 American Board of Forensic Accounting, 68 American Institute of Certified Public Accountants (AICPA), 33, 44, 45 Board of Examiners, 57 Code of Professional Conduct, 61, 67 nonauthoritative guidelines, 68–69 American Therapeutic Corporation, 16 Analytical skill sets, 34–36 Antifraud procedures, 103 Antifraud programs, 116 Appeal, 94 Association of Certified Fraud Examiners (ACFE), 3, 61 Association of Chartered Certified Forensic Accountants. See International Institute of Certified Forensic Accountants AU-C Section 240, 68 Auditing and Attestation (AUD), 57, 58 Behavioral sciences, 117 Big Data, 35, 109. See also Analytical skill sets Business Environment and Concepts (BEC), 57, 58 Business valuation, 30–31

Certified Fraud Examiner (CFE), 3, 48, 58 Certified Government Financial Managers (CGFM), 48 Certified Internal Auditor (CIA), 48, 59 Certified management accountants (CMA), 48 Certified public accountants (CPAs), 20 Chartered accountants (CA), 48 Chartered Professional Accountants (CFA), 68 Circle of Conflict, 33 Civil litigation processes, 92 alternatives to litigation, 94–95 appeal, 94 discovery, 93 pleadings, 92 trial, 93–94 Code of ethics, for forensic accountant, 69–73 Committee of Sponsoring Organizations (COSO), 5, 32 Confidential Information Memorandum (CIM), 32 Continuing professional education (CPE), 59–60 related literature, 60 Control environment, 103 Conventional accounting, 18 Corporate culture, 103 Corporate Integrity Agreement, 98 Court systems, 66 Criminal proceedings, 95 Criminalistics, 21 Cross-examination, 93–94 Data analytics. See Analytical skill sets Daubert vs. Merrell Dow Pharmaceuticals, Inc., 28–29

130 INDEX

Deloitte, 7 Department of Justice (DoJ), 61, 73 Department of Labor (DOL), 61 Digital forensics. See Analytical skill sets Digital forensics, 21 Direct examination, 93 Discovery, 93 Dispute resolution, 33 Divorce litigation, 31 Dodd-Frank Act (DFA). See also Financial Reform and Consumer Protection Act of 2010 provisions of, 79–80 Drug offenses, 95 Due care principle, 67 Economic damage, 31–32 Enron, 99 Enterprise Risk Management (ERM), 32 Ernst & Young (EY), 7, 35 Ethics, 69 Expert witnesses, 28 court cases, 29 External auditing, 19 FAR (Financial Accounting and Reporting), 57, 58 Federal Bureau of Investigation (FBI), 15 Federal courts, 67 Federal, state, and local taxing authorities, 61 Financial Accounting Standards Board (FASB), 20 Financial Forensics Institute (FFI), 44, 47 Financial Reform and Consumer Protection Act of 2010, 78–80 Financial Reporting Fraud (FRF), 97 Financial Statement Fraud (FSF), 2, 95 timeline for, 86 Foreign Corrupt Practices Act (FCPA), 73

Forensic accounting guidelines and standards action items, 87 conclusion, 87 introduction, 65–66 regulations relevant to, 73–86 standards and authoritative guidance for, 66–73 introduction, 1–2 by accounting firms, 8–14 action items, 22 books, 4–5 careers, 6–7 conclusion, 21–22 with conversional accounting and auditing, 17–21 definition of, 2–5 status of, 5–17 modules for, 121 practices, and education and research action items, 124 best practices, 101–103 conclusion, 124 education, 111–123 fraud-related cases, 97–101 fraud standards and practices, 95–97 introduction, 91 research, 103–111 structure of legal system, 91–95 profession action items, 62–63 conclusion, 62 initiatives to promote, 44–47 introduction, 43 professional certifications in, 48–62 services and skills, 26–27 action items, 40 business valuation, 30–31 conclusion, 39–40 dispute resolution, 33 expert testimony and witnesses, 28–29 forensic risk assessment and management, 32 fraud investigation, 29–30

INDEX 131

introduction, 25 litigation and expert consulting, 27–28 other nonfraud forensic accounting services, 31–32 skill sets of, 33–39 topics, 122–123 Forensic Accounting: Litigation Support and Expert Witnessing, 34 Forensic and investigative accounting, 17 Fraud definition of, 3 forensic accounting, 19 forensic and investigation practices, 19 investigation, 29–30 Magazine CPE Service, 60 risk factors, 96 Fraud Examination and Computer Forensics and IT Auditing, 34 Fraudulent financial reporting (FSF), 31 The French Bank Societe Generale, 100 Global business, 32 Government Accountability Office (GAO), 61 Health Care Fraud and Abuse Control Program, 98 HealthSouth Corporation, 100 Hedge–Fund Fraud, 100 House Financial Services Committee Chairman Barney Frank (D-MA), 79 Information technology (IT). See Analytical skill sets Institute for Fraud Prevention (IFP), 46 Integrity principle, 67 Internal auditing, 19 Internal control over financial reporting (ICFR), 75 Internal Revenue Service (IRS), 97

International Association of Consultants Valuators and Analysis (IACVA), 46 International Forensic Accounting Association (IFAA), 44, 46, 68 International Institute of Certified Forensic Accountants (IICFA), 45, 68 International Standard on Auditing (ISA) No. 240 entitled, 95, 96 International Trends in Forensic and Valuations Services, 35 Investigative and Forensic Accounting (IFA), 69 Journal of Accounting Research, 109 Journal of Auditing, 109 KPMG, 7 The Kumho Tire Co. vs. Carmichael decision. Daubert vs. Merrell, 29 Legal system, structure of, 91–92 civil litigation processes, 92 alternatives to litigation, 94–95 appeal, 94 discovery, 93 pleadings, 92 trial, 93–94 criminal proceedings, 95 Litigation consultants, 27 AICPA guidelines on, 28 MADDOFF, 100 MC’Afee Inc., 100 Mediator, 33 Mergers and acquisitions (M&A), 32 Moore, Christopher W., 33 National Association of Certified Valuation Analysts’ (NACVA), 44, 46, 65 National Association of Forensic Accountants (NAFA), 45, 47

132 INDEX

Nonfraud forensic and investigation practices, 19 Objectivity and Independence principle, 67–68 Olympus, 101 Parmalat, 101 Pleadings, 92 PricewaterhouseCoopers (PwC), 7 Prisoner petitions, 92 Professional certifications continuing professional education, 59–60 education, 48, 57 examination, 57–59 experience, 59 in forensic accounting, 49–57 implications for, 61–62 professional ethics, 61 Professional Code of Conduct, 67 Professional ethics, 61 Public Company Accounting Oversight Board (PCAOB), 20, 61 Public interest principle, 67 QWEST communications international, 99 Raj Rajaratnam, 16 Reebok, 99 REG (Regulation), 57, 58 Risk of material misstatement (RMM), 96

Sarbanes-Oxley Act of 2002 (SOX), 5, 74–78 fundamental objective of, 77–78 primary focus of, 76 provisions of, 78 Satyam, 101 Scope and Nature of work principle, 67 Securities and Exchange Commission (SEC), 3, 61 Securities Exchange Act of 1934, 80–86 Semi-structured data, 35 Senate Banking Committee Chairman Christopher Dodd (D-CT), 79 Soft skill sets, 36–39 State trial courts, 66–67 Statement on Auditing Standards (SAS) No. 99 entitled, 95, 96 Statement on Standards for Forensic Services No. 1 (SSFS 1), 45 Structured data, 35 Technical skill sets, 33–34 Tip of the iceberg, 116 Trial, 93–94 TYCO International Ltd, 100 UBS, 99 Unstructured data, 35 U.S Supreme Court, 67 Violent crime, 95 Voirdire, 93 White-collar crimes, 31, 95

OTHER TITLES IN OUR FINANCIAL ACCOUNTING, AUDITING AND TAXATION COLLECTION Mark S. Bettner, Bucknell University; Michael P. Coyne, Fairfield University; and Roby Sawyers, Editors • • • • • • • • • • • •

Accounting History and the Rise of Civilization, Volume I by Gary Giroux Accounting History and the Rise of Civilization, Volume II by Gary Giroux A Refresher in Financial Accounting by Faisal Sheikh Accounting Fraud, Second Edition: Maneuvering and Manipulation, Past and Present by Gary Giroux Corporate Governance in the Aftermath of the Global Financial Crisis, Volume I: Relevance and Reforms by Zabihollah Rezaee Corporate Governance in the Aftermath of the Global Financial Crisis, Volume II: Functions and Sustainability by Zabihollah Rezaee Corporate Governance in the Aftermath of the Global Financial Crisis, Volume III: Gatekeeper Functions by Zabihollah Rezaee Corporate Governance in the Aftermath of the Global Financial Crisis, Volume IV: Emerging Issues in Corporate Governance by Zabihollah Rezaee Using Accounting & Financial Information, Second Edition: Analyzing, Forecasting, and Decision Making by Mark S. Bettner Pick a Number, Second Edition: The U.S. and International Accounting by Roger Hussey The Story Underlying the Numbers: A Simple Approach to Comprehensive Financial Statements Analysis by S. Veena Iyer Forensic Accounting and Financial Statement Fraud, Volume II: Forensic Accounting Performance by Zabihollah Rezaee

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Fundamentals of Forensic Accounting Zabihollah Rezaee The existence and persistence of high profile alleged financial statement fraud (FSF) have negatively affected the safety and soundness of financial markets and investors confident in public financial information. Forensic accounting has advanced as an important and rewarding field of accounting to prevent, detect and correct FSF. There has been significant demand for and interest in forensic accounting as well substantial growth in both investigation and litigation services. The first volume addresses the relevance and importance of forensic accounting and fraud examination as well as the framework and structure of forensic accounting practices. The author presents an introduction to forensic accounting and financial statement fraud examination and their relevance and importance to businesses, financial markets, economies and society. Also discussed is forensic accounting opportunities, skills, and services; forensic accounting profession; and professional responsibilities and codes of conduct for forensic accountants. Finally, forensic accounting best practices, education, and research are touched on. Dr. Zabihollah (Zabi) Rezaee, PhD, CPA, CMA, CIA, CFE, CGFM, CSOXP, CGOVP, CGRCP, CGMA and CRMA, is the Thompson-Hill Chair of Excellence, PhD coordinator and professor of accountancy at the University of Memphis. He also served a two-year term on the Standing Advisory Group of the Public Company Accounting Oversight Board (PCAOB). He received his BS degree from the Iranian Institute of Advanced Accounting, his MBA from Tarleton State University in Texas, and his PhD from the University of Mississippi. Dr. Rezaee holds ten certifications, including certified public accountant (CPA) and certified fraud examiner (CFE). He served as the 2012–2014 secretary of the Forensic Accounting Section of the American Accounting Association (AAA) and is currently the editor of the Journal of Forensic Accounting Research (JFAR). Professor Rezaee has published over 220 articles and made more than 240 presentations, written 11 books including the two books on Corporate Governance and Audit Committees published by the Business Expert Press. He has testified before the Federal Courts as the expert witness.

Financial Accounting, Auditing and Taxation Collection Mark S. Bettner, Michael P. Coyne, and Roby Sawyers, Editors

Financial Accounting, Auditing and Taxation Collection Mark S. Bettner, Michael P. Coyne, and Roby Sawyers, Editors

FORENSIC ACCOUNTING AND FINANCIAL STATEMENT FRAUD, VOLUME I

Curriculum-oriented, borndigital books for advanced business students, written by academic thought leaders who translate realworld business experience into course readings and reference materials for students expecting to tackle management and leadership challenges during their professional careers.

Forensic Accounting and Financial Statement Fraud, Volume I

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Forensic Accounting and Financial Statement Fraud, Volume I Fundamentals of Forensic Accounting

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