Forensic accounting, sometimes referred to as fraud examination accounting, is an emerging area of specialization within the accounting discipline. Webster's Dictionary defines forensic as "belonging to, used in, or suitable to courts of judicature or public discussion and debate." Forensic accounting can, therefore, be defined as accounting that is used in a court of law, including, but not limited to, the application of accounting theory, principles, and calculations to actual or to hypothetical issues in legal proceedings. The term is broad enough to include the many procedures that an accountant or auditor applies in a fraud investigation.
Job titles commonly used in this field include forensic accountant, investigative accountant, fraud examiner, and fraud auditor. These terms are essentially interchangeable. Forensic accountants draw their expertise from many areas, including accounting, auditing, cost accounting, taxation, and information technology. Forensic accounting is more than accounting—more than detective work—it is a multifaceted activity that requires the use of knowledge from a number of disciplines.
Detecting fraud or white-collar crime used to be thought of as part of the accounting function. Fraud was assumed to occur infrequently because of the presence of internal and external auditors, who would likely identify the presence of fraud in the financial statements. The problem of fraud, however, has become to be perceived as serious, and at times, occurring more than infrequently. Such awareness is the motivation for this new specialization in the accounting field.
Forensic accounting has been subdivided into two categories, (1) litigation support and (2) investigation and dispute resolution. Some practitioners choose to specialize in one of the categories. Other practitioners provide both types of services.
Litigation support involves the presentation and interpretation of various issues related to assisting existing or pending litigation. In this area of expertise, the forensic accountant may be asked to assign an estimated value for damages sustained by parties involved in legal disputes and to assist in resolving disputes, even before they reach the courtroom.
For example, this area of litigation support provided to the legal profession might include such assignments as assisting in obtaining documentary evidence to support or rebut a claim, reviewing relevant supporting documents to form an initial assessment of the situation and identify possible areas of loss, assisting with suggesting and designing questions to be asked during the gathering of both the financial and nonfinancial evidence, attending the initial disclosure phase (called the discovery phase) of the trial proceedings to review various testimonies and assisting with the understanding of the financial issues, reviewing opposing damage reports and reporting on both the strengths and weaknesses of the positions taken, and assisting with the settlement discussions and negotiations.
INVESTIGATION AND DISPUTE RESOLUTION
The second category of forensic accounting is investigation and dispute resolution. It is part of the process to determine whether criminal matters, such as employee theft, securities fraud (including falsification of financial statements), identity theft, and insurance fraud, have occurred. Some of the work of the forensic accountant may include recommending actions that can be taken to minimize future damages and risk of loss.
Investigation may occur in civil matters, such as the forensic accountant searching for hidden assets in a divorce case. Another typical example would be the forensic accountant being engaged to investigate employee theft. Not only are forensic accountants often engaged to review the facts of a given situation and provide suggestions regarding possible courses of action, but they are also involved with assisting in the many other ways to protect and recover assets.
EXPERT CONSULTANT VERSUS EXPERT WITNESS
Because of the expertise forensic accountants possess, they are often engaged as expert consultants and/or expert witnesses. As expert consultants, the forensic accountants (investigators) are engaged by attorneys to develop evidence used by the attorneys in a variety of ways. Even if litigation is intended, the expert consultants may not be expected to testify; therefore, the various documents the consultants prepare may be protected by the attorney/client privilege or attorney work-product privilege. This means that the documents may not have to be provided to the opposing side in any litigation. If the expert consultants do not testify, their role may end when the fraud has been established, an estimated range of loss established, and a suspect identified. Additionally, expert consultants may be engaged to assist attorneys by identifying and recommending expert witnesses, helping attorneys to prepare for testimony, and reviewing various documents.
Forensic accountants are in high demand to provide expert witness services. An expert witness is a person who can offer opinions about the situation based on insight developed through education, experience, and training. In the process of a court proceeding, the judge rules on whether an expert witness is qualified to provide evidence on the matter before the court. The need for an expert witness who is a forensic accountant generally arises when there is a dispute involving some area of accounting expertise. When investigators (forensic accountants) are engaged as expert witnesses, litigation is intended, and the investigators will often have to provide deposition and courtroom testimony. They can testify about the facts of the case and can also give opinions. Regardless of how educated, experienced, and trained forensic accountants may be, their credibility is weakened if they are unprepared or not familiar with the facts of the case.
CIVIL VERSUS CRIMINAL TRIALS
When an adequate level of evidence is obtained by the forensic accountant, a decision is made whether to pursue the case in court. As noted previously, forensic accountants often play an important role in civil and criminal action. Civil refers to private rights and remedies sought by civil actions, where the individual has been harmed, for which he or she can claim compensation. Civil fraud trials are typically started by the party suffering the loss and may result in a judgment for reimbursement for actual losses and attorneys' fees. Civil trials do not result in imprisonment.
Criminal fraud involves violation of a law (known as a statute) enacted by the state or federal legislation. Criminal fraud is prosecuted by the state and may result in punishment, such as fines, restitution, and/or prison time.
One of the major differences between civil and criminal fraud is the extent, or burden, of proof required for conviction. In a civil case, the burden of proof is to the extent of a "preponderance of the evidence" (which is usually interpreted to mean more than 50 percent), and the verdict may not be unanimous. In a criminal fraud case, the burden of proof is "beyond a reasonable doubt," and the verdict must usually be unanimous. Thus, it is more difficult to obtain a conviction for criminal fraud than one for civil fraud. The forensic accountant is well versed in the quality and type of documented evidence required for each court.
THE NEED FOR FORENSIC ACCOUNTANTS AND FRAUD EXAMINERS
Between 2001 and 2005, a number of top business stories disclosed financial statement fraud and its impact on the accounting profession, businesses, consumers, and investors. In response to several large businesses seeking bankruptcy, the federal government enacted very specific accounting and business laws, including the Sarbanes-Oxley Act of 2002. This act, among other regulations, states that chief executive officers and chief financial officers are directly responsible for the accuracy of financial statements, with significant fines and extensive prison terms for violators. The act also defines prohibited activities that are outside the normal scope of external auditors. Many businesspeople found the act to be the most sweeping legislation to affect the accounting profession since the Securities Act of 1933 and the Securities Exchange Act of 1934.
Many professional organizations, including the American Institute of Certified Public Accountants and the Association of Certified Fraud Examiners (ACFE), emphasize the need for education in the prevention, detection, and prosecution of accounting fraud. As a result, the field of forensic accounting and fraud examination has emerged in the effort to combat financial abuse.
According to the ACFE Report to the Nation in 2005, organizations lose an estimated $670 billion per year (approximately 6 percent of all small businesses' annual gross revenue in 2004) to fraud and abuse. It is no wonder forensic accounting and fraud examination is one of the fastest-growing sectors, not just within the accounting profession, but within all fields of employment.
According to Accounting Today, nearly 40 percent of the top 100 accounting firms in the United States have expanded, or were planning to expand, their forensic-related services. U.S. News & World Report (February 8, 2002) called forensic accounting one of the "20 hot job tracks of the future" and in 2002 designated the forensic accounting profession as one of the eight most secure career tracks in America. SmartMoney Magazine also in 2002 (Accounting Web US May 16, 2002) stated that this profession is one of the "ten hottest jobs" for the next decade with a salary potential of over $100,000. In addition, a national study conducted by Kessler International (August 2, 2001), a forensic accounting firm headquartered in New York City, revealed that two-thirds of the companies that responded to a national study stated that they have either used the services of a forensic accountant already or have considered doing so. The Cincinnati Business Courier in February 2003 stated that the major scandals at the beginning of the twenty-first century had prompted business owners to turn to forensic accountants and fraud examiners for proactive fraud checkups.
Other organizations and companies are also asking forensic accountants to search for wrongdoings. The Federal Bureau of Investigation (FBI), the Internal Revenue Service, and the U.S. Bureau of Alcohol, Tobacco and Firearms have forensic accountants who investigate situations from money laundering and identity-theft-related fraud to arson for profit and tax evasion. Law firms use forensic accountants to help divorcing clients uncover assets hidden by their spouses, and in the first decade of the twenty-first century, forensic accountants have uncovered instances of companies misstating their financial statements to inflate company profits or minimize losses.
Forensic accountants work in most major accounting firms and are needed for investigating mergers and acquisitions; they are also employed in tax investigations, economic crime investigations, all kinds of civil litigation support, specialized audits, and even in terrorist investigations. Forensic accountants work throughout the business world, in public accounting, corporations, and in all branches of government (from the FBI and Central Intelligence Agency to the offices of the local authorities). Forensic accounting firms are everywhere.
A GROWING TREND IN HIGHER EDUCATION
Since 2002 some colleges and universities have developed degree programs in forensic accounting and fraud examination, both at the undergraduate and graduate level. Additionally, many academic institutions have developed and are offering stand-alone courses in this field. Many other academic and professional organizations are developing seminars and training modules to handle the demand for training in this area.
see also Association of Certified Fraud Examiners; Fraudulent Financial Reporting
Albrecht, W., Albrecht, S., and Albrecht, C. C. (2006). Fraud examination (2nd ed.). Mason, OH: Thomson South-Western.
Association of Certified Fraud Examiners (2004). Report to the Nation. Available from http://www.acfe.com/fraud/report.asp.
Forensic Accounting. (2002). Forensic accounting demystified. http://www.forensicaccounting.com/home.html. Retrieved January 3, 2006.
PPC's guide to fraud detection (5th ed.). (2002). (Vols. 1–2). Fort Worth, TX: Thomson-Practitioners.
Wells, J. T. (2005). Principles of fraud examination. Hoboken, NJ: Wiley.
Richard O. Hanson
Forensic accounting, sometimes called investigative accounting, involves the application of accounting concepts and techniques to legal problems. Forensic accountants investigate and document financial fraud and white-collar crimes such as embezzlement. They also provide litigation support to attorneys and law enforcement agencies investigating financial wrongdoing.
Many different organizations consult forensic accountants. Corporations hire forensic accountants to investigate allegations of fraud on the part of their employees, suppliers, or customers. Attorneys consult forensic accountants to obtain estimates of losses, damages, and assets related to specific legal cases in many areas of the law, including product liability, shareholder disputes, and breaches of contract. In criminal investigations, forensic accountants analyze complex financial transactions such as those in stock market manipulations and price fixing schemes. They also help governments achieve compliance with various forms of regulation.
Forensic accountants typically become involved in financial investigations after fraud auditors have discovered evidence of deceptive financial transactions. After conducting an investigation, they write and submit a report of their findings. When a case goes to trial, they are likely to testify as expert witnesses.
Arnoff, Norman B., and Sue C. Jacobs. 2001. "Forensic Accountant's Role as Expert Before and During Trial." New York Law Journal 226 (August 17): 3.
Bologna, G. Jack, and Robert J. Lindquist. 1985. Fraud Auditing and Forensic Accounting. 2d ed. New York: Wiley.