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Forensic Accounting in Practice

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Assignment #3
Forensic Accounting in Practice
Professor Demetrius Carolina, Sr.
Bus 508-Contemporary Business
February 16, 2013

The purpose of my paper is to explore Forensic Accounting and the many aspects surrounding the field. I will determine the skills necessary to be a forensic accountant and its application to business operations. I will also describe the role the forensic accountant plays in a courtroom environment and the role played by the forensic accountant in the litigation process. I will also provide case examples where forensic accountants are used and have provided vital evidence in the case. Today, forensic accounting is a rapidly growing segment of the accounting practice, and the current demand for forensic accountants far outstrips the current supply.

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.
Have you ever been cheated, robbed or financially hurt by actions of others? Well, out of those feelings civil lawsuits arise based on the desire to reclaim what one perceives he/she has lost unjustly. Financial loss isn’t always easy to define or measure. So, the important task of investigating and quantifying the financial loss normally requires the expertise of a forensic accountant. A forensic accountant is a professional who uses a unique blend of education and experience to apply accounting, financial analysis and investigative skills to uncover truth, assist in financial investigations and ultimately provide a credible analysis that may be relied upon in court or mediation. Forensic means identifying, preserving, analyzing and presenting evidence (whether physical, accounting or digital) in a manner that is legally acceptable in a court of law. An experienced forensic accountant should possess certain skills and characteristics to be successful. They should absolutely have a strong knowledge of accounting and financial analysis. They should have curiosity, discretion and sound professional judgment and the ability to listen effectively and communicate clearly. A wide range of skills are necessary because forensic accounting cases can span a wide range of business problems and disputes so a varied range of skills are required. I believe investigative skills are important because auditing and accounting skills provide the forensic accountant with core investigative competencies. These core skills are supplemented with experience in financial matters such as corporate financial planning and working capital management.
Computer skills are also critical to the forensic accountant’s investigative arsenal. The required skills often go beyond the need to use word-processing and spreadsheet software. Some forensic assignments require the use of financial modeling software. Estimating lost profits is accomplished by making assumptions about what would have been. Based on these assumptions, Pro forma financial statements are prepared. Pro Forma financial statements are the complete set of financial statements issued by an entity, incorporating assumptions or hypothetical conditions about events that may have occurred in the past or which may occur in the future. A budget may also be considered a variation on pro forma financial statements, since it presents the projected results of an organization during a future period, based on certain assumptions.
Interviewing skills come into play when gathering evidence. Knowledge of effective interviewing techniques is essential for most types of forensic investigations. The forensic accountant can’t just rely on paper trails, computer databases, and documents to provide evidence. A lot of times, the accountant must acquire the information from people possessing critical information. Through interviews the forensic accountant can obtain information that identifies key issues of a case. Leads can be developed to other sources of evidence. Information about the personal backgrounds of those involved can be obtained in interviews. Interpersonal relationships can be uncovered. Possible motives can be explored. Interviews can be used to obtain the cooperation of victims and witnesses.
Planning carefully is a key to a successful interview. A second chance to interview someone is often impractical. A field visit to a distant place is expensive, and a second visit isn’t practical in most cases. In the field visit, the forensic accountant may have only one opportunity for an entrance interview and an exit interview. Therefore, planning should encompass what information is needed and the interview techniques designed to obtain it. Interviews should be planned so that there is enough time to accomplish the accountant’s objectives. Time shouldn’t be spent on unimportant matters.
Active listening techniques which basically involve rephrasing what the other person has said should be used. They convey sympathy and can be used to move on to the next issue. Interviews are often most productive when the accountant is sympathetic. The victim never should be made to feel that the loss had anything to do with being dumb, untrained, or not using common sense. Interviews should be finished with a statement of appreciation for cooperating. The interviewee should be given one last opportunity to provide information or an opinion with an open-ended question such as “Is there anything else you can think of?”

Describe the role of a forensic accountant within a courtroom environment.
The type of case and the parties involved will determine the forensic accountant’s role. A forensic accountant is most likely to be used when damages are difficult to determine or prove.
There is a noncorporate and corporate role of a forensic accountant. In a noncorporate role the forensic accountants can provide valuable services to individuals and small businesses. Circumstances such as divorce, bankruptcy, and death may necessitate a financial investigation. In a corporate role corporate accountants with forensic accounting expertise can help make a case economically viable. They can team up with the outside expert and provide assistance in many roles. The corporate forensic accountant has the advantage of understanding the firm’s accounting and management information systems. Within a courtroom the forensic accountant can provide services as an expert witness during various stages of the litigation process. The forensic accountant can give pre-trial support. They may be engaged as an expert very early in the case development process. The attorney may choose to engage an expert at an early stage because the expert can advise the attorney on what information to seek during discovery. At the pre-trial stage, the forensic accountant may be asked by the attorney to write a report on any finding, to establish causation between the defendant’s actions and the plaintiff’s losses, to gather facts to support the case, to translate accounting jargon into understandable English, to organize the data supporting the case, or to assist in the formulation of a strategy.
The forensic accountant’s work as an expert typically results in writing reports. The attorney and the expert will agree on the basic scope of the report. Frequently, the defendant’s expert will prepare a report on damages for the court that shows a much lower computation of the loss.
Establishing Causation, this is where the attorney for the plaintiff sometimes will engage a forensic accountant to assist in establishing that the plaintiff’s losses were caused by the defendant’s actions. This is relatively common when accounting concepts, techniques, and records are important in establishing the cause of the plaintiff’s damage.
The forensic accountant gathers facts by proving or disproving issues at trial which involves submitting and identifying documents as evidence. In the discovery phase of the case, the forensic accountant can review many business records for their relevance to the issues.
Forensic accountants translate jargon by assisting attorneys in preparing for depositions of any financial experts employed by the defendant or plaintiff, who may use technical terms and jargon in responding to questions. The forensic accountant can help the attorney understand the responses and formulate additional questions directed at getting to the heart of the issue.
Organizing data and managing the database of documents pertinent to the case is another opportunity for the forensic accountant. A forensic accountant with knowledge of information systems and database management computer programs can be a valuable aid to the attorney in collecting, organizing, and summarizing the large volume of facts and related documents.
Another role is formulating strategy. When the forensic accountant becomes involved in the case at an early stage, insights can be gained that will provide the opportunity to assist attorneys in formulating case strategy.
The experts on both sides can aid an attorney during the trial process by giving trial support. As the trial nears the forensic accountant’s activities become more intense. The forensic accountant’s expertise in business matters can be very helpful to the attorney in analyzing the situation as it develops in court.
The vast majority of civil cases are settled before trial. Generally, parties want to avoid the uncertainties of trial and prefer private settlement procedures. Therefore, opportunities are abound for forensic accountants to provide assistance to attorneys in the settlement negotiation process. The forensic accountant’s role in settlement procedures can be to develop alternative settlements and place a value on them. Statistical techniques can be used to place valuation on these alternatives.
Analyze the legal responsibility a forensic accountant has while providing service to a business.
The forensic accountant has a legal responsibility to provide legal counsel. The forensic accountant must understand the legal process because an investigation can lead to court action, requiring the forensic accountant or an outside expert to give testimony as an expert witness. Many forensic accountants work closely with law enforcement personnel and lawyers during investigations and often appear as expert witnesses during trials. A forensic accountant is an experienced auditor, who acts as a watch-dog of accounts of a company, in order to keep a check on frauds. These experts are responsible for using technology and implementing investigative techniques to disclose fraudulence and illegal practices in fields of accounting, banking, financial laundering, etc. They carry out elaborated audits, verify records, gather proof of financial malpractice, and question people related to misconduct.

Research two (2) cases where forensic accountants have provided vital evidence in a case. Summarize the cases and the importance of the forensic accountants’ role during each case.
In 2008 there was the public divorce proceeding between the famous Paul McCartney and Heather Mills. She had to employ a team of forensic accountants to prove that Paul McCartney was indeed a billionaire and not a millionaire as stated for the purposes of her divorce settlement. The forensic accountant team can uncover hidden income and assets and help with reaching a settlement. What was at stake for Heather Mills was more money for her and the fact that she felt there were hidden assets to be discovered and revealed. Her forensic accountant team had to reconstruct McCartney’s financial statements and transactions. They can check overseas account, laundered funds through a business, safety deposit boxes and unregistered bearer bonds because there anonymous and they can be hidden in the safety deposit box. Concealing wealth can pose legal repercussions because each spouse is supposed to sign an affidavit declaring all of their assets. Withholding account information is fraud and violators are subject to criminal penalties. Also, in the U.S. falsifying a financial affidavit in divorce proceedings is considered perjury. In the end she wasn’t awarded what she asked for but, her settlement was very generous for a 4-year marriage. In the end both parties agreed it was time to move on.
The next case I can think about was a known corporate fraud case where forensic accountants had to dig deep and trace digital and paper trails were the famous Enron Corporation collapse. Enron began life as an energy producer in 1985 following the coming together of two companies - Internorth and Houston Natural Gas. It moved to become an energy trader, and ended up an energy "bank" providing guaranteed quantities at set prices over the long term. Enron owned power plants, water companies, gas distributors and other units involved in the delivery of services to consumers and businesses. But it was the first to realize energy and water could be bought, sold, and hedged just like shares and bonds. Enron became a huge "market-maker" in the US, acting as the main broker in energy products, also taking financial gambles far bigger than its actual core business. As a result, in just 15 years it grew from nowhere to become America's seventh largest company, employing 21,000 staff in more than 40 countries. Its trading operations relied heavily on complicated transactions, many relating to deals many years in the future. Many of these gambles on the future energy prices were losing money, and to disguise this network of dubious "partnerships" were created - Enron devices for keeping debts off the balance sheet and thus keeping profits high and shareholders happy. It is alleged that these partnerships bought losing businesses from Enron to boost its balance sheet. Some of the partnerships were set up by the company's executives, benefiting them, their families and friends to the tune of millions of dollars. In addition, many of the company's executives allegedly raked in massive profits by selling their shares before the company's problems went public and its stock price collapsed. After a while the losses were being shuttled around corners of the empire to keep them hidden, eventually coming to light in 2001. And when that happened, Enron left behind $31 billion dollars of debts, its shares become worthless, and 21,000 workers around the world lost their jobs. Financial accountants uncovered that creative accounting allowed Enron to be more powerful on paper than it really was. They also discovered that many of Enron’s recorded assets and profits were inflated, and in some cases completely fraudulent and non-existent. Also, some of the company's debts and losses were recorded in offshore entities, remaining absent from Enron's financial statements. This all led to the great demise and Enron filing for bankruptcy protection in 2001. The company had more than $38 billion in outstanding debts. In the following months, the U.S. Justice Department initiated a criminal investigation into Enron's bankruptcy. Several Enron executives and Enron's auditor firm, Arthur Andersen, have since been indicted for a variety of charges including obstruction of justice for shredding documents and conspiracy to commit wire and securities fraud, and some have been sentenced to prison.
So, in conclusion we can see that a forensic accountant plays a very important role whether it is in a corporate setting or noncorporate setting. I’ve explained the role a forensic accountant takes in a courtroom setting in addition to bringing a clear understanding that there are certain skills and responsibilities a forensic accountant must have to be successful. I believe the most important information revealed in this research is that the forensic accountant must clearly know how to communicate and have excellent investigative skills.

References

Heitger, L. E., & Heitger, D. L. (2008). Incorporating Forensic Accounting and Litigation Advisory Services into the Classroom. Issues In Accounting Education, 23(4), 561-572.
Topping, M. (2008). Litigation and the Role of the Forensic Accountant. (cover story). Credit Control, 29(2), 8.
Hanson, Richard. "Forensic Accounting." Encyclopedia of Business and Finance, 2nd ed.. 2007. Retrieved February 16, 2013 from Encyclopedia.com: http://www.encyclopedia.com/doc/1G2-1552100143.html Stevens, J. B. (n.d.). How Forensic Accountants Can Help in Divorce Proceedings | South Carolina Family Law Blog. Spartanburg Divorce Lawyer Ben Stevens | South Carolina Family Law Blog | The Stevens Firm. Retrieved February 16, 2013, from http://www.scfamilylaw.com/2012/09/07/how-forensic-accountants-can-help-in-divorce-proceedings/
Tucker, A. S. (2011, June). The Numbers Tell a Story. California Lawyer - Groundbreaking Cases, Controversies, Personalities & Legal News. Retrieved February16, 2013, from http://www.callawyer.com/Clstory.cfm?eid=916111
Ruth, B. A., & Gillen, M. A. (n.d.). The Role of Forensic Accountants in Divorce Engagements Newsletter Article. Lorman Education Services - Continuing Education Seminars. Retrieved February 16, 2013, from http://www.lorman.com/newsletter/article.php?article_id=1478&newsletter_id=313&category_id=6

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