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Forensic Accounting in Practice

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Forensic Accounting In Practice

Contemporary Business 508

This paper discusses the role of forensic accounting practices. It takes a look at the skills sets of forensic accountants and the role they play out in the court room. It goes also analyzes the legal responsibilities of a forensic accountant form a professional perspective as their role for expert opinion in the court room. A forensic accountant is someone uses their accounting credibility for investigative or other legal applications, such as corporate acquisition, divorce proceedings, insurance settlements, or other legal purposes (Brody, Melendy, & Perri, 2012).

Determine the most important five (5) skills that a forensic accountant needs to possess and evaluate the need for each skill. Be sure to include discussion regarding the relationship between the skill and its application to business operations.

The first identifiable important skill for a forensic accountant to posses is investigative intuitiveness. The forensic accountant should possess creative and analytical thinking (DiGabrielle, 2008). According to DiGabrielle, the ability to solve a financial puzzle with an incomplete set of pieces is an extremely important characteristic for forensic accountants (p. 336). The forensic accountant is providing a service to a client for the purpose of expert information as it pertains to legal matters or for the purpose of finding or preventing financial misrepresentation. Their role is not to merely provide auditing services and problem solving abilities, but to present expert information by employing deductive analysis of financial reporting to determine fraudulent or negligent presence. According to Astutie & Utami a forensic accountant is like a [detective] and should inquire accurately which an indicator of fraud (p.123) is. Being sought for their investigative abilities, a case must be scientifically developed. A sound case would involve identifying the problem or hypothesis, “collecting evidence and data, analyzing the data to test the hypothesis, and drawing a conclusion” (Harris & Brown, 2000).
The next skill commonly important for a forensic accountant is communication skills, orally and written. The forensic accountant will be providing information to various parties when called upon. They have to be able to effectively communicate their findings or conclusions and be able to address each audience according to their levels of understanding and expertise (Harris & Brown, 2000). In a legal environment, such as the court room, the audience would include the judge, lawyers, other expert witnesses, as well as the jury. They must differentiate between fact and opinion on their findings, as wells as effectively communicate their analyses and procedures (Harris & Brown, 2000). It must be clear and concise for those not familiar with the intricacies of the professional aspects of accounting. It must also show credibility as it can make for support in favor or not in favor of the parties involved, depending on the counter of the opposing parties and their expert witnesses. According to a survey facilitated by the AICPA in 2009, indicates strong emphasis on being an effective communicator which encompasses abilities to simplify information, articulate key issues, and potentially present deposition or trial testimony (Davis, Ogilby, & Farrell, 2010). This would focus on the ability to be an expert witness in the court of law (Jones, 2011).
The third skill a forensic accountant should posses is legal knowledge. The forensic accountant will be called upon to determine fraud, to determine negligence, or to help aid in the process of informed decision making based on financial accuracies or inaccuracies. The information compiled and presented may be done in a legal environment. Knowledge of legal aspects concerning civil and criminal cases and how it relates to the justice system influences the value of the litigation support (Astutie & Utami, 2013).
A fourth skill is critical thinking. Critical thinking is important, because the main goal is to solve a complex puzzle. As information is gathered and put into sequence it is important to constantly exploit all possibilities of fraud and motivation to commit fraud. Forensic accountants should think creatively in considering possible tactic used by the fraud doer (Astutie & Utami, 2013).
A fifth skill useful for forensic accountants is the knowledge of Accounting Information Systems, AIS. AIS are software used for accounting purposes for companies. Forensic investigator will utilized spreadsheet software and the use of statistical and database analysis for which the need to understand the AIS system in addition to other analyses, to be able to conduct a detailed analysis of receivables (Bressler, 2012). The goal is to identify links between transactions and be able to present as valid evidence to other parties who may not have an in-depth knowledge of AIS (Bressler, 2012).

Describe the role of a forensic accountant within a courtroom environment.
An expert witness is the primary role of a forensic accountant within a courtroom environment. An expert witness is viewed as a person who possesses the training, skills, education, and expertise dedicated to a profession or technical skill. A forensic accountant background would have formal education in the accounting field. They would possess their CPA. They would have working experience in the field, with specialization that leads to the niche of forensic accounting. In the courtroom the forensic accountant must present factual unbiased material in regards to the investigation of financial reports to maintain credibility of the evidence being presented (DiGabrielle, 2008). Phil Levi, an accountant who specializes in fraud investigation, detection and prevention states, “Or job is not to build a (criminal) case. It’s to prove or disprove the allegations. The proof is in the documents. Everything in my report, and ultimate conclusion, is based on facts. We don’t decide who’s guilty” (Delean, 2007).

Analyze the legal responsibility a forensic accountant has while providing service to a business.

The legal responsibility a forensic accountant has while providing service to a business would be to provide expert opinion associated by their field by utilizing their investigative accounting skills for clarification of financial representation. A forensic accountant may service several types of clients for various scenarios. The influence a credible forensic accountant has can be of value to the client as it relates to its’ litigation support. Most roles a forensic accountant may assume leads to some insight of this notion from a legal perspective. There are forensic accountants that offer mediation and arbitration services to their clients. They are able to offer dispute resolutions that otherwise would be costly and time consuming for individuals businesses involved in commercial disputes with third parties (Idowu, 2011). This aspect would indicate a larger legal capacity when it comes to deciding legalities of the matter. The forensic accountant makes judgment in accordance of the laws that apply injunction with the expert opinion developed off the report of findings. They must be ethical in their practice and be certain the opinion given is factual and omits personal opinion and bias.

Knowledge of how the legal system views evidence, expert testimony, and negligence and should always adheres to their professional responsibilities and ethical standards (Hanson & Rockness, 1995). According to Hanson and Rockness accountants involved in litigation services must become familiar with the rules of evidence that govern court proceedings, hence Federal Rules of Evidence created in 1975. Expert testimony under the Federal Rule of evidence 702, (Hanson & Rockness, 1995) an expert is allowed to testify when specialized knowledge will assist the trier of fact. The article goes on to relay that:
Rule 703 allows expert witnesses to form opinions based on three sources of information: firsthand observations, presentations at trial, and preparation of data outside the court. This allows broad leeway for opinions. Finally, under Rule 705 an expert is allowed to give opinions or inferences without disclosing underlay lying data or facts. Tile expert can; however, be cross-examined by opposing attorneys regarding the underlying data. The liberal admission of expert testimony makes the role of an expert witness crucial to successful lawsuits (p.28).

Forensic accountants can be of great value when in the discovery stage of litigation. Their background lends to determining what type of financial information is important to establishing lost profits as well as evaluating other types of data (Hanson & Rockness, 1995). Knowledge of hearsay rules is something a forensic accountant wants to be acquainted with as well. There are over 20 exceptions to hearsay rule, where witnesses are only expected to testify to the validity of their statements. The business records exception [allows for] litigation support experts to effectively accumulate information as to testify to its relevance of importance (Hanson & Rockness, 1995). This recalls back to previously referenced skill a forensic accountant has, communication skills. The impact of testimony from an expert witness based off the exception of the rule highlights the importance of being aware and knowing when to be required to seek advice from attorney for areas that are grey. Negligence is another area of legal responsibility a forensic accountant must be familiar with. When providing litigation support, a forensic accountant does not want to be countered with a claim of negligence by a client. The client would have to prove four elements of negligence claim: (1) existence of a legal duty of care, (2) reach of the duty to act as a reasonable prudent professional under the circumstances, (3) causal connection between the actions of the defendant and damages suffered by the plaintiff, and (4) damages suffered by the plaintiff (Hanson & Rockness, 1995). The client will have to show that expert was deficient in service thus causing the client to lose the lawsuit (Hanson & Rockness, 1995) Research two (2) cases where forensics accountants have provided vital evidence in a case. Summarize the cases and the importance of the forensic accountants’ role during each case.

The first case is notoriously famous, the Enron scandal. Enron came under scrutiny in 2002 when investigations began about their complex of off-shore network partnerships and accounting practices. Enron’s main core business is transmission and distribution of power. They went into various fields of business not related to the industry of its core, and was extremely successful in, making Fortunes list as “America’s most innovative company” for six years straight (Mclean, Nicholas, Helyar, Revell, & Sung, 2001).
Enron’s utilization of off balance sheet accounting and mark to market accounting practices aided in the years of deceptive and fraudulent practices that led economic damages of great impact. Off balance sheet accounting can make a company appear as if it has less debt than it actually does. (Obringer, August) Debt is moved to a newly created company known as special purpose entities (SPE’s) (Obringer, August). The speculation centered on how Enron made its money. No one could quite answer that question. The CFO, Jeff Skilly was known for arrogant aggressive attitudes and once boasted Enron’s stock valued at eighty dollars should really be trading at $126 dollars. Another flag set when Skilly started aggressively selling stocks.
The importance of the accountant role would be to investigate the financial statements of Enron’s records. They would interview employees, share holders, and follow up with any leads that are produced. They would inquire about the disclosures and piece together if it indeed made sense or not. They would pour over data, and reconstruct missing data. Once the information has been compiled, they would make recommendations based their findings by presenting them in written communication with supporting evidence, such as charts and other visuals. They must communicate the facts, and be able to articulate their findings as it relates to the claim. They would provide an expert opinion based on the evidence at hand.

Sir Paul McCartney and Heather Mills divorce case is an example for the services of a forensic accountant. McCartney, a Beatles Member and Heather Mills, a former model headed for divorce and the stakes were high. Heather claimed Paul was worth over $800 million dollars instead of stated $400 million dollars. Most of Hill’s expert evidence was not admissible. This may haven primarily due to self-representation and the understanding of the legal system within the court room. Originally, Hills requested 125 million dollars, but was awarded almost $50 million dollars. The accountants were retained to research McCartney’s asset, but the research produced no discrepancies in their findings. If additional assets would have been found McCartney’s claim could have increased beyond the awarded amount. In this type of case the role of the accountant would be to research assets and determine the cost of accustomed lifestyle in which the client is trying to prove (Patil, 2011) . It also highlights the ethical aspect of the profession, even hired by a client to provide evidence that would be of advantage, the code of conduct does not allow for misrepresentation of the facts.

In conclusion, forensic accounting in practice shows how certain capabilities of a forensic accountant is imperative to the service they can offer. The skills are more than just number crunching. It requires an analytical approach instead of just systematic. The skills and capabilities referenced in the paper tend to show that they actually build off each other and are interchangeably needed as it pertains to other aspects of their sought after professional expertise. This niche has brought a feel of excitement on a profession often regarded as boring. Big cases such as Enron and Worldcom, exposes the fact that there is need for forensic accounting and it is here to stay. Those that embark on this profession must understand their role and how their expertise is critical when it comes to the justice process when subjecting their credibility and reliability.

References
Astutie, Y., & Utami, Y. (2013). Characteristics and Relevant Sills of the Forensic Accountant. Annual Conference on Accounting & Finance, (pp. 122-129). doi:10.5176/2251-1997_Af13.44
Bressler, L. (2012, March). The Role of Forensic Accountants in Fraud Investigations: Importance of Attorney & Judges's Perceptions. Journal of Finance & Accounting, 9, 1-9.
Brody, R., Melendy, S., & Perri, F. (2012, Septemeber 1). Commentary from the American Accounting Association's 2011 Annual Meeting Panel on Emerging Isses in Fraud Research. Accounting Horizons, 26(3), 513-531. doi:10.2308/acch-50175
Curtis, G. (2008, November 1). Legal and Regulatory Environments and Ethics: Essential Components of a Fraud Forensic Accounting Curriculm. Issues in Accounting Education, 23(4), 535-543.
Davis, C., Ogilby, S., & Farrell, R. (2010, August). Survival of Analytically Fit: The DNA of an Effective Forensic Accountant. Journal of Accountancy, 210(2), 54-56.
Delean, P. (2007, July 11). Montrealer is 'fraud examiner of the year'; To be Honoured by Texas-Bsed Body. Accountant Specializes in Investigation, Detection and Prevention of White-Collar Crime. The Gazette (Montreal), p. B3.
DiGabrielle, J. A. (2008, July 1). An Emperical Investigation of Relevant Skills of Forensic Accountants. Journal of Education for Business, 83(6), 331-338.
Hanson, R. K., & Rockness, J. W. (1995, March). Litigation Support Liability: The Mattco Decision. CPA Journal, 65(3), P.28.
Harris, C. k., & Brown, A. M. (2000). The Qualities of a Forensic Accountant. Pennslyvania CPA Journal, 71(1), 6.
Idowu, S. (2011). So You Want to be a Forensic Accountant? Accountancy Ireland, 43(6), 65-66.
Jones, A. (2011, September 10). Turning Number Crunchers into Forensic Accountants: Going to Court. Weekend Austrailian, p. 4.
Mclean, B., Nicholas, V., Helyar, J., Revell, J., & Sung, J. (2001, December 24). Why Enron Went Bust. Fortune, 144(13), pp. 58-68.
Obringer, L. A. (August, 16 2005). How Cooking The Books Work. Retrieved August 11, 2013, from How Stuff Works: <http://money.howstuffworks.com/cooking-books.htm>
Patil, A. S. (2011, December). Forensic Accounting: A New Concept of Investigation. Golden Research Thoughts, 1(6), 1-3.

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