Forensic Accounting: Fraudulent Reporting and Concealed Assets

Chapter 0

Overview

Course Objectives

During this course, you will

• Learn the difference between the role of a forensic accountant and a traditional accountant.
• Examine the unique characteristics necessary for a forensic accountant to be successful in the courtroom.
• Learn the importance of chain of custody in handling critical documents reviewed in the process.
• Learn how to improve your success and credibility on the witness stand.

Introduction

This country's court system has evolved over the years as the venue where most business disputes, claims, or conflicts can be settled - but not always to the satisfaction of all parties involved. The disputed facts at issue, while clear and concise to one party, may be viewed in a different manner by the opposing party. Each side faces the difficulty of presenting one's view with witnesses who may be unwilling or unable to provide unbiased evidence to support the position.

The expert witness has also evolved as the individual who possesses the education, experience, and objectivity to present a technical issue in a persuasive manner. The typical expert witness must possess the technical skills necessary to document a position, and the personal traits to present and defend successfully that position from a potentially hostile environment: the witness stand. While the expert witness attempts to interpret a set of facts in a manner that is beneficial to his/her client, honesty, objectivity, and fairness must be paramount in his/her thought process.

The events of the past few years, such as Enron, WorldCom and others, have heightened the significance of the forensic accounting segment of the accounting profession. While the forensic accounting concept has always been an important part of both civil and criminal litigation, these recent events have increased an interest in the process as it applies to the detection of deceptive activity in major businesses and corporations.

The practice of forensic accounting is not suited for all members of the accounting profession - it calls for individuals with a combination of specific training and experience in addition to possessing personality traits that will lend themselves to the rigors of confrontation typically seen in matters of litigation.

Students will see that the process can cover a wide range of expertise, from business valuations issues to allegations of fraud or embezzlement. It involves the willful participation of a forensic accountant who will carefully and diligently analyze the data (evidence) and then prepare an informed opinion based upon the evidence at hand and the experience of the forensic accountant examiner.

Those participants interested in this segment of the profession should avail themselves of the new dedicated portion of the AICPA Website (www.aicpa.org/BVFLS) for information and guidance.

The manual is designed to be a tool to assist the accounting professional, if or when they are faced with an issue involving fraud or deception in business. Use the following “Action Page” to mark or identify specific portions of the manual that may be of assistance now or in the future to aid in matters of litigation or business deception.

Chapter 1

The Unique Role of a Forensic Accountant

Learning Objectives

After studying this chapter you should be able to

• Understand what role a forensic accountant can accomplish or not accomplish
• Identify new fields for the marketing of forensic accounting practice
• Understand the technical qualifications of a forensic accountant
• Prepare a curriculum vitae

Introduction

During the past few years, the task of providing technically proficient experts on accounting matters has become a critical element in matters of litigation. The role of stepping onto the witness stand to provide expert testimony is hazardous for the poorly prepared CPA and stressful for even the most experienced.

The forensic accountant must be prepared for a scrutiny of credentials, education and background seemingly bordering on an invasion of privacy. Being unprepared for this close analysis can prove to be professionally damaging to the unsuspecting accountant or client.

Definition of Forensic Accountant

The definition of forensic accountant results from the breakdown of the two distinctly different fields within the term - Forensic and Accountant.

The word forensic is generally defined as "belonging to the courts of justice." An accountant is generally defined as an "expert in the field of accounting." Accounting is described as a method for preparing a financial record of business transactions and the preparation of statements concerning the assets, liabilities, and operating results of a business.

By combining these two concepts, a forensic accountant becomes an expert in accounting theories and application in relation to legal principles and cases. The forensic accountant applies generally accepted accounting, auditing, or tax standards to an issue being litigated in the court system of a particular governmental jurisdiction.

The approach of a forensic accountant generally differs from that of a typical CPA in methodology and scope of work. The financial accountant's approach to a project is to review all available data and documents as they relate to a particular time frame (year end, fiscal year). The goal is to provide an overall financial picture of the entity as it relates to accepted accounting principles.

The forensic accountant, however, typically makes an intense analysis of one particular incident or series of events in an effort to dissect completely the transactions. The forensic accountant attempts to gain a full and complete understanding of the activity, to determine if it can be supported by generally accepted accounting principles, and to defend or refute this procedure in an advocate arena such as the courtroom.

Although a forensic accountant may be a necessary tool in many varied arenas of business, much of the work appears to be concentrated in certain fields. Forensic accounting engagements often result in the accountant being involved in highly controversial and adversarial situations.

• Business Valuations - The issue may arise as a result of a sale, purchase, or liquidation of a business. The controversy may surround the method of valuing certain unique assets, factors that may affect the viability of the entity, or the intentional concealing of assets.
• Property Valuation in Divorce Issues - This issue sustains conflicts similar to those in business valuation concerns. Many times one of the parties may attempt to intentionally inflate or devalue assets or liabilities.
• Personal Injury - Wrongful death or serious injury damage calculations may be worth significant dollars earned or saved for the client.
• Fraud, Deception, or Intentional Manipulation of Records - The confirming of clandestine activity within a business environment is one of the most difficult assignments for a forensic accountant.