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Forensic accounting is an accountancy specialty area which describes engagements usually resulting from litigation or other anticipated disputes. This is where forensic accountants who are commonly known as forensic auditors often have to come up with forensic evidence which is suitable for the use in a court of law. This evidence has to be highly professional since it has to be presented in a court of law during the eventual trial. All large firms and companies, including medium-sized organizations, are obliged to have forensic accounting departments. Some of them departments will specialize in fraud, royalty audits, personal injury claims, or insurance claims.
The main purpose of forensic accounting is to provide an accounting analysis which is suitable in a court of law because of the increase in the fraudulent and fraud activities around the world that point at the need for the availability of forensic accounting. Forensic accountant engagements in criminal matters usually arise as a result of fraud. The main aim of this paper is to explore the role that forensic accounting has on the litigation support and fraud investigations and its importance in the accounting specialty.
According to the rules of the AICPA Code auditors should be independent, both in fact and in appearance. Auditor’s independence is considered to be the strongest cornerstone of the profession of the auditor, as he/she acts in the interests of the Public Trust Foundation. This independence of the auditors is what ensures that the quality audits are performed and that they contribute fully to users of the financial statements. The Code establishes all the auditors’ independence standards, objectivity and integrity, and all their responsibilities to all their clients, in terms of their action towards the accounting specialists (Singleton & Singleton 2010). Auditor’s independence is general independence that ensures that the auditor is safe from all the parties whose main interests might get harmed by the audit report results. Auditors are supposed to be independent in appearance, which is called a perceived independence, and also independent in fact, which is called a real independence (Dunn 1996).
An auditor who is independent in fact is considered to have an ability to be able to make impartial and just decisions. These decisions should be independent even though the perceived independence is absent or may seem compromising in some situations. As for the independence in-fact, it is very difficult to identify in a an auditor since it is very hard to measure personal integrity and mental attitude of the auditor (Dunn 1996). The independence in appearance, which is also known as the Perceived independence, is the situation where the auditor is forced to act in a way other than acting independently. This, in most cases, adds some credibility to the report of the audit. Also, this reduces the possibility that the auditor does not act independently (Singleton & Singleton 2010).
Financial Forensic Engagements
Financial forensic engagements are divided into several categories which include the Economic damages, which are the calculations of the suffering caused by a breach of a contract or a tort, bankruptcy, reorganization and insolvency, Securities fraud, Business valuation, and computer forensics /e-discovery. This is where the forensic accountants assist in the negligence claims by assessing and commenting on other professionals’ work. These engagements which usually relate to all criminal matters in the aftermath of fraud may involve the assessment of the organization’s accounts presentations and accounting systems in order to be able to assess and proof the reality of numbers in the accounting systems of the organization.
The Techniques used in Forensic Accounting Engagements
A forensic analysis can be done with the purpose of reconstructing an aspect of a financial result and it employs the use of methodologies which are similar to those used in auditing by the auditors. For example, these are invoice and bank statements reviewing, as well as the tests which are done on the basis of accounting records of a company. The main difference between the role of an auditor and the role of a forensic accountant is that the role of an auditor is to make sure that all financial statements of the business truly and fairly represent all its operations. On the other hand, forensic analysis is usually designed to substantiate and make investigations into all total and actual amounts represented in the financial statements with the aim of reconstruction all the income which has not been reported yet. There are a number of techniques which can be employed in the performance of a forensic analysis of a company or a business entity. There are two commonly used methods which are the Direct Method and the Indirect Method (Singleton & Singleton 2010).
The Direct method is commonly known as the Transaction Method and is considered to be very similar to traditional auditing procedures where the method includes the examination and the total analysis of all the checks and invoices which have been cancelled, all the agreements and the contracts which are in existence in the business entity, all public notices and records, and staff and management interviews.
The Indirect Method is used when the Direct Method fails to be productive. Most of the commonly used technologies in the Indirect Method include the Cash T Method, Net worth Method, Bank Deposit Method, and the Source and Applications of Funds Method.
- The Cash T Method
The Cash T Method is considered to be the simplest indirect method used to determine the income which has been underestimated. It involves comparing all received cash to all spent cash. In case that the spent cash exceeds the cash which is received from the non-taxable and the taxable sources, the excess may be representative of all income which has not been reported. Itmay require loan proceeds adjustments and the use of the organization’s savings. This methodology is mainly used in the analysis of retail and wholesale including the owners of the business (O'Gara 2004).
- Net Worth Method
This methodology uses the balance sheet approach so as to be able to estimate the income where the net worth is calculated at the beginning and at the end of the financial period when the difference in the net worth is compared to the overall income. All non-taxable income and reconciling items are included where the un-reconciled differences could represent income which has been underreported.
- Bank Deposit Method
This methodology analyses all the funds which have been deposited in bank in the financial year through the reconstructing of the gross taxable receipts and it is a method when the income of the organization is paid in the banks and almost all the organization’s expenses are paid off in cash terms.
- The Source and Applications of Funds Method
This methodology is employed when there are large sums which are spent on lifestyle other than asset purchase or even investment and is considered to be very similar to the Cash T Method. It is commonly used because it is very simple in use since judges and the Jury can easily understand the meaning of coming in and coming out cash.
Financial Crime Financial Dispute Resolution
Financial crime is made up of activities which range from fraud to stock market manipulation or even to the laundering of crime proceeds. These financial crimes often attract serious propositions for organized and serious crime. Organized and serious crime is usually vulnerable to exploitation, fraud, and the active manipulation of the markets which often provide businesses with attractive opportunities. Also, the organized crime o requires an access to a financial system just like any business entity which is legitimate through the laundering of illegal funds and the facilitation of criminal activities (O'Gara 2004).
Forensic accounting can assist a business in handling all financial crime and fraud within a business through the investigation and analysis. The latter will expectedly lead to the resolution of all disputes and issues in the financial system of any business. As a reaction to a fraud or a financial crime in a business, forensic accounting helps in organization of tackling all reputational and financial risks associated with economic and financial crime in the business. This is because forensic accountants are able to identify the irregularities in the financial statements, recover all the organization’s assets which have been stolen, and come up with ways of introducing controls with the aim of mitigating the future fraud risks in the business. Through the use of new technology, forensic accountants are able to capture, manage and analyze data in supporting all the investigations that they carry out into the financial crimes in the business and also in the dispute resolution in the financial crimes committed in the business (Singleton & Singleton 2010).
Forensic accounting is mainly made up of the litigation support practice where they are supposed to display certain accounting and investigation skills which can help an organization to resolve all the financial disputes which normally arise from the following practices: corporate transaction, licensing contracts, intellectual property contracts, insurance claims, and other construction projects.
A forensic accounting team includes ex-regulators, accountants, and other law enforcement officers like the chartered surveyors, insurance professionals, and economists. Forensic services which are offered by the forensic accounting include financial investigations, securities litigation, shareholders’ disputes and investigation, intellectual property, international arbitration, forensic technology solution, commercial disputes, licensing management services, capital project services, and anti-money laundering (Singleton & Singleton 2010).
The forensic accounting is made up of forensic accountants who have skills and experience in a number of disciplines. They are usually ready to assist businesses and organizations in the investigation, detection, prevention, and giving of remedies to the risk of fraud, financial crime and other financial irregularities which may be encountered by any business. The latter may threaten the core existence of the business in the competitive environment, which means further bankruptcy/ failure of the business.
Forensic accounting can assist all the businesses which might be suffering from the misappropriation of assets. The latter may have any form including asset and cash theft, procurement theft, loan fraud, trade secrets theft, revenue diversion, and the payroll or the expenses fraud. It can also be helpful when there is the suspicion of the manipulation of funds in the business or an accounting fraud, as well as in cases where the business is suspecting that there is a breach of the business ethics, interest conflicts, and other employee impropriety because of a number of fraud cases committed by the employees of a company. This is because employees and, especially, top executives have all the information that they need to know about the financial status of the business and when they tamper with the financial statements of the company, they end up being corrupt and liaising with the internal auditors so as to cover their mistakes. They actually hide the truth from the stakeholders of the company which can lead to the bankruptcy of the company.
The forensic accounting can help a business with thorough investigation of the nature and the extent of the irregularity of the fraud. It also identifies all the losses which can arise as a result of the latter and reveal all accounting misstatements. Additionally, it is about giving proper advice on possible accounting changes required. In order to be successful in the accounting irregularity investigation, forensic accountants have to use all the resources which are publicly available in order to be able to determine the presence and viability of a third party as a main target for the action recovery. Forensic accountants work closely with lawyers so as to frame the freezing and disclosure of orders. In addition, they need to have an ability to analyze any further evidence like bank statement records and information obtained from the disclosure orders. Plus, they provide expert or factual reports and other forms of analysis which can be used to support recovery actions. They assist very much in the design and implementation of all remedial steps in order to improve the processes and controls. This appears helpful in the mitigation of the reoccurrence of the fraud risk.
Investigation services offered by forensic accounting to ensure effective dispute resolution include the use of skilled forensic interview techniques, the use of electronic gathering of evidence (which includes the disk imaging use), the analysis of accounting, documentation and all transaction details of a company, production of reports ( including reports of the witnesses), and all the graphical and numerical analyses which are supposed to be used in criminal proceedings. Finally, the liaison with the regulatory authorities and the law enforcement is provided.
Fraud is one of the major risks that a company or an organization faces. It is very difficult to deliberate its nature and detect it (Ramage 2006). The term fraud is mainly used to describe many forms of dishonest behaviour which are found in both men and women, for example, bribery, forgery, concealment of important facts found in the financial statements. Three major internal fraud categories which can affect a business are asset misappropriation, which includes the cash and the non-cash transactions, fraudulent statements, which include the financial and the non-financial transactions, and corruption which include interest conflicts, extortion, and bribery (Luijernik 2008).
A number of men and women are inherently dishonest and many are plain evil. Evil is considered to be a vice since a person that considered to be evil makes life very difficult, unpleasant, and painful to people around him or her. Men and women can be evil in one way or another other. Money is considered the source of evil since it can make a person greedy and evoke a desire to have what does not belong to him or her. This greed can cause suffering on other people..
It is known that in the cases when some companies go bankrupt, the employees have acted in a dishonest way since they liaised with the auditing company in order to fraud the company without informing their top executives. This is because auditors are the only professional people who are supposed to save a company from going bankrupt and collapsing (Ramage 2006). The company’s internal auditor is the only person who can save the company from going bankrupt. At the same time, dishonesty is an act which qualifies him as evil since such an auditor can make the stakeholders of his company suffer because they lose huge amounts of money in the process (O'Gara 2004). By the way, the stakeholders are people who are involved in the company’s activities and are most likely to be affected by its actions. The stakeholders of any company include the government, employees, customers, suppliers, creditors, the trade union, the business owner, and the community.
Personal interest can lead people to acting dishonestly. So they end up doing evil things, which maycause problems in the future. Specifically, one acts in a dishonest manner because he hopes to get some profit in a return for a dishonest act without being aware of the consequences of this act. Dishonesty is morally wrong and it is indicative of the fact the individual has no conscience. Such people are known to find happiness in their destructive actions at the expense of innocent people’s pain (Luijernik 2008).
Interestingly, it is not uncommon for the top executives of big and medium companies to obstruct justice through collaboration with the internal auditors of the company. They hope to get personal gains from the company at the expense of the company’s profitability. As a matter of fact, the majority of them know what evil they are doing, yet they keep on encouraging other employees of the company to invest in the company. They conceal the fact that they were selling and manipulating all the shares of the company to earn a lot of money, in particular billions of dollars. The innocent employees and stakeholders have no idea about this. Since such situations may lead to the fall of the share price, the independent rating agencies start to consider the company to be worthless (Ramage 2006).
A Company can be affected by unethical issues among the board of directors of the company. This involves a conflict of interests as well asa lack of ethical leadership. From the company employee information source, the company authority team has the idea of acquiring financial excellence through any kind of price and by any means. This leads them to a vice since they start lying and cheating or amending their rules to ensure that the company transacts a lot of money which is not accounted for in the financial statements.
The linking of the internal auditors with the top executives of a company could lead to a breach of the independent rules of auditing since the auditor will have to give false financial reports, which may have a negative impact on the auditing practice. Usually the audit firm is accountable for this sinceit encouraged frauds in the financial documents. This may lead to a loss of trust in the audit profession since people may start thinking there is no one to trust if audits are dishonest If a company employs the services of an auditor, it means that the company has full trust in the auditing firm with its financial documents and they are not expected to obstruct justice. They are supposed to abide by the accounting and auditing standards and the auditing firm should also yield results since the company expects to get all the irregularities in the financial statement and reports.
In the cases of financial crime, it is innocent citizens that suffer greatly since they are stakeholders of the company. Market frauds often lead to the loss of money by the citizens who y may have invested heavily expecting to gain profits because they thought that the company was faring very well in the stock market and financially. The most common financial crime which is money laundering with the full cost of money laundering in a community usually higher when the full scope of all unreported financial activities are accounted for after having been investigated for fraud and financial crime. These financial crimes can include activities like tax evasion, organised theft, cybercrime, embezzlement, securities fraud, identity fraud, insider trading, and bank fraud.
The impact of financial crime is that it leads to the increase in the volatile interest rates and exchange rates due to the illicit funds., It also leads to the damage of the reputation of the business and the individual sector, as well as the damage of the financial reputation of the country, consumer loss and the lack of confidence in the business. It hampers the ability to attract foreign investment, leads to the situation when costs of regulation and security are increased, and affects economic growth negatively. The latter is related to the fact it diverts all resources available for the activities which are less productive (Pickett 2007).
The potential that fraud portrays is normally considered as a type of risk to a business entity which can be managed through the creation of preventive controls and establishment of the corporate culture. These measures can help to reduce the likelihood of the occurrence of fraud in a company with the help of contingency planning. The latter is deemed to be effective. In addition, detective controls may help with the reduction of the losses which may be incurred in the business (Coenen 2008).
A risk-based approach is recognized to be capable of enabling a business or an organization to target its resources in an efficient way. The executive leaders who are main decision-makers of any business act responsible for the design of all the controls helpful in the reduction of the fraud risk. However, in order to be able to come up with good decisions on how they can manage the fraud risk, they have to be aware of and know the extent in which the business is vulnerable to fraud. This can involve activities like the assessment the business’s vulnerability to fraud, identification of the areas in the business which are considered to be the most vulnerable to fraud risk, and the overall evaluation of the fraud risk scale (HM Treasury 2003).
In order to be able to combat fraud risk, an organization should come up with a fraud strategy which will have clear set goals and demonstrate zero tolerance to fraud (Coenen 2008). This strategy should have a set financial investment level which needs to be proportionate to the identified risk. Also, it needs to, make a provision for those who have countered the fraud risk using all its support and authority if necessary. The strategy should ensure that all who are involved in combating fraud receive the training and the necessary accreditation (Singleton & Singleton 2010).
A successful organization should have a well-defined far-sighted stand and, above all, good leadership management, which has to be innovative enough to be able to pursue the objectives of the organization. The outcome of a good strategic plan is the goal setting of a company which is based purely on its vision and mission statement. A goal is an endeavour to achieve something during a specified period of time. It is supposed to be realistic and specific. The goals that the company sets are then translated by its leaders into activities and objectives. The main aim of the executives of any company is to move the organization into attaining a high level of performance through the operational planning. It aims at making a company a global visionary company and, at the same time, combats fraud in the company.
The recommended measures that companies can undertake to minimize these associated downside risks are implementation of a good leadership management strategy and accepting performance management strategies dealing with employee training and selection. The latter is attributed to the fact because the employee and manager expectations are considered to be crucial when making certain progress in the performance management in any company. The main reason for this recommendation is good leadership is essential for a successful company since a company with poor leadership is mostly likely to experience high fraud risks and face a variety of fraud cases. This is due to the fact leaders may have led the company in accordance with their own personal gain desires that contradict to the idea of the welfare of the company and its stakeholders. This may well lead to the downfall of the company and eventually to its bankruptcy. It is the obligation of the operational staff and the managers of any company to be responsible for all operations in a company. They are perceived as leaders of the company who should be able to come up with ways of reducing the fraud risk in a given company. (HM Treasury 2003).
Leadership is a process of effecting and stimulating the execution of the organization’s strategic plan. For a company to be able to survive in the competitive world, it has to have good leadership management strategy since leaders visualize, strategize, implement, evaluate, and review all desired projects and programs, so as to be able to achieve their set goals. This information gathering performed by leaders helps in the decision-making processes of the company and demonstrates the importance of leadership in a business or organization. Good leadership of a company can facilitate the success of its performance through proper strategy planning initiated by the leaders of an organization through the utilization of the available resources. The latter might be limited within a challenging environment, so as to be able to meet all the expectations of the stakeholders.
Leadership in any organization starts with a vision which is directed towards the goals of the company. In this context, a good leader is the one who intends to score big successes for his organization. Leaders help when it comes to strategic planning, which is a systematic continuous process aimed at guiding organizations into making solid decisions about the future. Leaders have to be able to develop all the procedures and operations that are necessary for the organization to achieve its set goals. Also they are bound to develop and determine ways of how the success of the company or organization will be achieved. The strategic plan is usually a long-term plan of action which is designed by an organization in order to achieve its set goals and objectives.
The management responsibilities of the executives in a company include activities like training and management of staff performance, customer interface management, risk reduction in the company, and the engagement of the stakeholders of the company. The executives of a company should act like role models and work towards the achievement of the goals and objectives of the company. In the majority of cases, the company which has been accused of being the largest in consumer fraud cases has been driven to bankruptcy or failure by poor leadership and management skills, which are also below standards. The majority of the fraud cases are mainly associated with the top executives of the company. This builds a bad name for the company. Therefore, calls for good leadership qualities of the executives which include practicing good communication skills, being honest to the stakeholders of the company, being visionary, not being self-centred, be quick in taking actions in the protection of the stakeholders of the company, and motivating need to be taken into account.
Recruitment and selection practices are the most important aspects to be associated with any organisation. With the use of these techniques, the corporate plans can be long-term in the light of contemporary trends in the industry. It illustrates the importance and impact of recruitment practices on the growth rate and success of the company. This can be elaborated further because it is important that the personnel have a particular job profile. On the basis of this job alignment and certain skills of the employees, organisational success can be ensured. Thus, the companies may get a number of benefits associated with the recruitment techniques. So managers and other employees should develop open, honest, clear, and very strong relations marked by mutual respect and trust. All managers are responsible for staff recruitment in organizations that they lead. Hence, being leaders of their organizations, they have to strictly adhere to the recruitment policies of their organizations.
In this case, the screening of staff can enable the organization to reduce the risk of fraud. Managers should not allow any member of the staff who is corrupt to resign so as to avoid being sanctioned or being investigated. This calls for the human resources department in any organization to step in and put in measures and procedures which call for disciplinary actions in cases where there is the involvement of fraud in the organization so that they can serve as warnings to any future frauds in the organizations.
In conclusion, the majority of companies which display unethical business behaviors regarding accounting standards, use the standards which are not acceptable in the accounting practices. Specifically, due to the presence of financial crime in the company related to manipulations in the stock market, the public generally thinks that the company is doing very well in the stock markets and makes huge profits. However, this appears to be false due to concealment of financial transactions which are done by the top executives of the company who fail to be honest with their stakeholders. This may lead to massive loses of the stakeholders’ money invested in the company. This determines the importance of forensic accounting which protects businesses from the exploitation of greedy auditing firms and top executives who are only motivated by the personal gain that they can get from the company at the expense of the stakeholders’ money loss.
Financial crime in organization is as a result of poor leadership management where the leaders of the company end up not being visionary and focused on driving the company into realizing its set goals and objectives. Leaders should act like role models since they are main decision makers of the company. Specifically, main decisions which have to be undertaken by the company need to be authorized by them. This shows that they should not involve themselves in any financial crimes and fraud cases. Instead, they should put in measures to ensure that any member of the staff who acts in a dishonest manner or is involved in committing a financial crime is severely punished. This will help to discourage the fraudulent behaviors in the future (Luijernik 2008).
In order for businesses to be able to manage the fraud risk, they should be capable of identifying all the fraud risks within the organization through the use of forensic accounting skills. Hence, the forensic accountant identifies potential fraud risks, assesses the impact and initiates actions aimed at controlling and reducing the risk (Pickett 2007). An organization should come up with a fraud strategy which is aimed at the reduction of fraud cases. This strategy needs to ensure all the procedures are provided that allow gathering of collation and evidence. In addition, it needs to include the major purpose of the response plan of the fraud, the corporate policy, the definition of the fraud, the response to the fraud, the actual investigation, the objectives of the organization in dealing with the fraud risk, and the follow-up plan and action.