Get help now

Evolution of Forensic Accounting

  • Pages 12
  • Words 2888
  • Views 374
  • dovnload

    Download

    Cite

  • Pages 12
  • Words 2888
  • Views 374
  • Academic anxiety?

    Get original paper in 3 hours and nail the task

    Get your paper price

    124 experts online

    Evolution of Forensic Accounting

    Abstract

    Forensic accounting is a discipline that is widely misunderstood by both elites and the ignorant. The fundamental difference between financial accounting and forensic accounting is an area that too has received less significance attention. In this paper, the origin of forensic accounting and its chronological development is tackled. The notion of forensic investigation was first done in 1871 in an estate bankruptcy case. In the same vein, the term ‘Forensic Accountant’ was first used in a published article in 1946. The notion behind forensic accounting is the desire to have a blend of personnel with both accounting practice and principles together with investigative mindset to unveil controversies surrounding financial crimes. The accounting scandals of Enron and Healthsouth are among the spectacular events that have catapulted the acceptance and recognition of the discipline in the global business operation environment. White-collar frauds are so intricate for traditional auditing to investigate and uncover the real frameworks. The US and Canada are emerging as the main countries in which the discipline has gained prominence.

    Among the various issues that forensic accounting has been diversified into include litigation consultation, valuation of business, business intelligence and investigations, corporate advisory and restructuring. Other evolutions and utilization of the disciple include cases relating to business interruptions, product liability, intellectual property, breach of warranty and shareholder/partnership disputes. The future of forensic accounting is an area that is challenging given that the dynamism of regulatory and legislation frameworks is an issue that affects the discipline. In addition, with the increasing number of frauds, there is need to have enough forensic accounting firms and specialists to offer the ever increasing demand for the services.

    Introduction

    The traditional accounting role of auditing was the preserve of accounting of firms. The soundness of the accountants was examination of financial health of firms and the consistency of application of GAAP in daily accounting tasks. Despite the good work of accountants in auditing, white-collar crimes that are sophisticated in execution and commission inhibit traditional auditing. This makes it necessary for another discipline that would tackle this problem effectively. This is the point where forensic accounting gets in. A Forensic accountant is an individual who practices application of accounting, auditing and investigating skills to offer assistance in legal matters surrounding issues like fraud, divorces and bankruptcy cases (Langevoort, 2004).

    Financial accounting and forensic accounting

    Some people interchangeably use the two terms to refer to different factors. However, forensic accountants and financial accountants are professionals that perform significantly separate and different tasks in a firm. Each of them utilizes their unique skills to execute their tasks. Financial accountants perform their duties which entail routine and periodic auditing of company books and proof scrutinizing transactions to determine the truthfulness of the reported financial results. Auditing is embedded on trust and presumes that management is significant in the precision about its data. However, audits singly may not uncover or investigate a white-collar wrongdoing.

    Forensic accounting comes to the aid of this gap by offering a multidisciplinary exploratory mindset. The discipline combines accounting skills and principles with criminal exploratory expertise to blend a specialty that is essential at unearthing white-collar frauds (Moritz, 2004). The discipline and its investigative framework begins from a strong position of suspecting the financial data that has unearthed the financial crime and presumes that accounting data is suspect, that facts are deliberately disguised and the underlying records altered or destroyed. Unlike financial accounting, forensic accountants critically look at the particular suspicious transactions and ideally employ all necessary resources to get to the root of the issues in question.

    Although Certified Fraud Examiner credential is the accepted standard that forensic accountants must abide by, conventional investigative experience is vital to successful investigations (Moritz, 2004). Examining financial statements alone may not provide the exact picture of an intricate financial fraud since the dynamic and well researched concealment efforts by white-collar fraudsters is the order of the business operations.

    Traditional focus on Forensic Accounting

    Most people take forensic accountancy for activities relating to only investigations of fraud. This is due to the dominance of the theme in accounting departments. It may not be well known that forensic accounting originated from Canada before spreading its wings across the globe as it has currently. In this case, in 1975, Bob Lindquist, Don Homles (currently deceased) and Tedd Avey then chartered accountants quit Touche Ross (the current Deloitte Touche) to develop careers as financial investigators (Tedd, 2008). It is at this time that they coined the term ‘Forensic Accountants’ as their new job titles.

    Inception of Forensic Accounting

    The practice of engaging an accountant to investigate and substantiate financial claims in a court of law can be traced back to 1871 in a bankrupt estate case issue (University of New Orleans, 2006). At inception, forensic accounting lacked any prominence. Ideally, police and attorneys utilized their legal mindsets to investigate and determine the crime from a law perspective. However, this was a great source of weakness especially with cases relating to white collar fraud and corruption (Tedd, 2008). The technicalities of the particular cases inhibited police investigation. At this point, there was a need for professionals who could combine accounting techniques and principles in investigating cases that have financial components as part of the crime. The realization by police was that there was a need to have knowledge and personnel that could aid the court to understand, investigate effectively and explain the financial aspects of white-collar crimes. The term ‘Forensic Accountant’ is believed to have been used first in a published article in 1946 (University of New Orleans, 2006). This is how forensic accounting started to gain preference.

    The complexity of the business place and transactions require the existence of professionals who are trained accountants with investigative mindsets. For example, suppose a firm X plans to acquire a segment of Firm Y. The purchase price is tied to an expected sales and profit growth of 25% of a product that is planned to be launched in six months. What is the best way to determine the preciseness of the purchase price especially given that it is pegged on a future expectation that is uncertain? This is where forensic accounting takes prominence.

    Development of forensic accounting

    This can be crafted to between time horizons of 1970s and 1980s through early 2000 where the discipline included investigating, advisory and consulting services into the subject matter of forensic accounting (William, 2005). The discipline forensic accounting is long in development. The accounting scandals that grabbed global attention like the Enron scandal of 2001 and the HealthSouth Scandal engaged the skills of forensic accounting, thus catapulting the demand for its services. Under these scandals, the arrogance of success and the assumption by senior managers of getting away with anything is an issue that Forensic Accounting unveiled. Unlike auditors who cooperated with the corporations to conceal fraud, forensic accounting objectively traces the root cause of fraud.

    During this era, the mandate of forensic accounting swell in offering to include asset loss investigation and recovery, due diligence, employee screening and corporate astuteness among other services. The magnitude of the fraud and the sophistication of the concealment are issues that only forensic accounting ended up revealing effectively. The above scandals dramatically changed the mentality of white-collar frauds. The new corporate governance in practice particularly in US and Canada has been well documented and numerous white-collar defendants sentenced and penalized heavily. The new move is to enhance fraud prevention and corporate accountability, making corporate governance another discipline under forensic auditing. Interviewing skills is a fundamental data gathering tool that is useful in forensic accounting.

    Another development during this period was the move towards establishing forensic accounting units by major accounting firms. For instance, major accounting industry players like KPMG, PriceWaterhouseCoopers, Earnest &Young, Arthur Andersen and Delloite and Touche formed forensic accounting units in the 1990s. Until after recently, forensic accounting has been treated as a renegade idea. As the evolvement continues, business executives and attorneys presently know that relying on credible accounting information in areas of dispute can make the difference in decision making and the value of such accounting information is worth millions of dollars.

    Sometimes back, forensic accounting firms that started as very small business units have grown rapidly to attain national and international standards thanks to the gained recognition of the field (Gladstein, 2009). The professionals engaging in forensic accounting over the years have provided unrivalled assistance in many platforms including expert witness to bankruptcy and divorce proceedings among others. Additionally, the specialists have been involved in complex international investigations (University of New Orleans, 2006).

    Examining intricate financial crime in the late 1990s and today requires an interdisciplinary team of investigators or IT experts, certified Public Accountants and computer forensics practitioners who work together to unveil crime to the greatest extent. During this period, reaching a conclusive result that is credible requires effective background checks, searching offices for leading evidences, manual or digital surveillance and the revival and scrutiny of computer and e-mail files among other evidence gathering schemes (Moritz, 2004). Investigating frauds in a bank setting can result in huge volumes of data gathered. In this era, sophisticated software of analyzing and classifying data has been useful in the investigations.

    In the early 2000s, many medium sized independent firms have emerged to offer exploratory and adjudicative services that are affordable to individuals and Small & Medium Enterprises (SMEs). Under this, the firms developed to offer customized investigative services like video surveillance, audio surveillance and asset tracing. Forensic accounting firms have developed into professional service firms that blend their personnel to include accountants, attorneys, police officers, computer analysts and private investigators that are out to resolve suspected complex modern age financial crimes (Williams, 2005).

    Contemporary forensic accounting

    Globalization is a challenge that has captured the business operating place. Though the emergence of the globe as a global village through ICT is a development to celebrate, with it has come the sophistication of white-collar crimes. Money laundering and internet hacking are some of the crimes that are making the discipline of forensic accounting to re-examine its fundamentals (Mbama, 2008). Since global crimes are committed internationally, forensic accounting too ought to extend globally. Fraudsters presently can commit internet crimes that traditional auditing focus of accounting are inhibited to investigate. The audit mindset is fundamentally different from forensic mentality. This has led to the diversification of the discipline. Within forensic accounting as a discipline, the evolvement has led to sub-genres that fall within it including litigation consultation, valuation of business, business intelligence and investigations, corporate advisory and restructuring (Williams, 2005). Other evolutions and utilization of the discipline include cases relating to business interruptions, product liability and intellectual property, breach of warranty and shareholder/partnership disputes (Stanbury, 2006).

    The future of the discipline is very wide. In fact, presently the demand for professionals who have pursued the discipline is on the rise. The US for instance is currently in search of personnel with these skills to feed the industry appetite. Notably, forensic accounting in US and Canada are more developed. For instance, business valuation is done by tax authorities and academic research in some countries. The US and Canada are actively drawing the necessary frameworks to make the discipline a practice and as an industry (Mbama, 2008). In this case, the American Society of Appraisers and the Canadian Institute of Chartered Business Valuers have emerged to label business valuation as an impartial industry, with certified education and practice values as the yardstick.

    Investigative technology is the new entrant in this sector. Traditional forensic accounting tools were limited to spreadsheets. In this case, the maximum number of records a spreadsheet can hold is slightly above 65,500 (Stanbury, 2006). This makes it necessary for a machine that can handle many records. Forensic accountants have presently developed the ability to gather massive manual and digital data to solve even the most intricate financial scandals. White-collar fraud is on the rise and this has led to an upsurge in the demand for forensic accounting services (Goder, 2004).

    Forensic accounting as a career

    Unlike before, forensic accounting has emerged as a career by itself. The growing number of practicing forensic accountants is an indicator of this trend. Industry guiding standards have been mooted to steer this profession against abuse (Stanbury, 2006). If the trend of increasing specialists is anything to go by, then a formal forensic accounting education and qualification is inevitable. Few organizations have internal impartial personnel and resources to investigate extremely complex financial crimes. In this case, when an organization finds itself struggling with a white collar crime like financial statement fraud, insider trading, embezzlement, kickback schemes and other acts where employees abuse professional ethics, it is vital to call in a professional frauds examiner specialist if effective investigations are to be obtained.

    Presently, higher education institutions are offering academic programs at undergraduate and postgraduate level. Forensic accountants have learned how to net cyber criminals, fraudsters and terrorists due to the gained experience of tracing even the smallest evidence that can be traced. Forensic accountants as a career have gathered schematic and discovery tools of attempting to resolve even the most complicated financial fraud (Gober, 2004).

    Future of forensic accounting

    The future of forensic accounting is well above definition. The ideal forensic accounting firms will combine all the professional services of business intelligence and investigations, business valuation, litigation consultation, corporate advisory and restructuring all under the same roof. On the other hand, the future can allow the individual areas in forensic accounting listed above to develop as practice and industry by them.. For instance, the Association of Certified Fraud Examiners, formed in 1988, is the largest and most recognized organization to offer certification. The future of forensic accounting exploration specialty definitely will emerge from financial auditing and criminology to its standalone specialty with goals and values that are distinct (Golden et al, 2006).The future of forensic accounting can be looked in a number of perspectives. First, the changing regulatory and legislative environments is a fundamental issue that affects the future of forensic accounting. Future legislative laws and regulatory environments is an area that the discipline is tied on. Secondly, the dynamic corporate environment where the decisions of investigation face real-world benefits and costs is a significant issue that forensic accounting is in one way or another tethered around in future.

    Additionally, the move towards the use of digital tools in aid of forensic accounting investigation is the future of forensic accounting (Mbama, 2008). The main drivers to the adoption of digital tools in forensic investigations are firstly the increasing clear technology preferences and strategies by firms and regulators while asking for forensic accounting services and secondly, the ever evolving digital tools of forensic investigation (Williams, 2005). The availability of these tools is driving the industry towards technologically powered forensic investigation. For instance, US accounting regulators are presently in the process of standardizing systems which they will require forensic accounting firms to utilize.

    Moreover, with the increasing number of frauds, there is need to have enough forensic accounting firms and specialists to offer the ever increasing demand for the services (Mbama, 2008). The integration of technology, especially the ICT, in practically all functions of a firm is an area that forensic accountants will rely on in future in creation of data back ups to investigate financial scandals whose data may have been maliciously damaged.

    Conclusion

    Forensic accounting is a discipline that has long emerged from a little known discipline to a widely recognized and demanded service. Though little was known about the discipline in the mid 1960s, the 1990s marked the most essential timelines of its development. Firms that started to offer the service in the inception today have gone international and are highly recognized. There is no other time that the services of forensic accounting have been needed like presently and the times to come. This is due to the sophistication and the frequency of white-collar wrongdoings that has been facilitated by technological advancement. This way, fraudsters prefer to perform internet money laundering, an intricate financial crime, to robbing the banks by use of guns. To cope with this, forensic accountants and the discipline is employing the use of digital tools for analysis of data. Finally, to keep up with eliminating the present day financial crime, forensic accountants too need to embrace the emerging technology.

    References

    Gober T.D (2004) The Use of Forensic Accounting to Detect Fraud Retrieved 19 June 2009fromhttp://www.tgfas.com/documents/articles/the%20use%20of%20forensic%20accounting%20to%20detect%20fraud%20-%20bf%20and%20itsec%20report.pdf

    Gladstein (2009) The Evolution of Forensic Accounting Retrieved 19 June 2009 from http://www.gladsteincpa.com/forensic.html

    Golden et al (2006) A guide to forensic accounting investigation, Hoboken: Wiley

    Langevoort, D. (2004) FTI and Forensic Accounting Retrieved 19 June 2009 from http://www.sechistorical.org/collection/programs/transcripts/Transcript_2004_0921_FTI.pdf

    Mbama A.R (2008) Money Laundering: The Role of a Forensic Accountant as an Expert Witness Retrieved 19 June 2009 from http://ican-usa.net/The_Role_of_a_Forensic_Accountant_as_an_Expert_WitnessDraft.doc

    Moritz S (2004) Forensic Accounting Retrieved 19 June 2009 from http://www.ipsaintl.com/pdfs/source_winter_04.pdf

    Stanbury J (2006, Dec 7) Forensic Futurama Accounting Age, London p.17

    Tedd, A. (2008) The Evolution of Forensic Accounting Retrieved 19 June 2009 fromhttp://www.metrocorpcounsel.com/current.php?artType=view&artMonth=October&artYear=2004&EntryNo=1676

    University of New Orleans (2006) Fraud and Law Retrieved 19 June 2009 from http://orgs.uno.edu/bap/als/1.Fraud%20Investigations.pdf

    Williams J. W (2005) Reflections on the Private versus Public Policing of Economic Crime Brit. J. Criminol 45(1) 316-339

    This essay was written by a fellow student. You may use it as a guide or sample for writing your own paper, but remember to cite it correctly. Don’t submit it as your own as it will be considered plagiarism.

    Need a custom essay sample written specially to meet your requirements?

    Choose skilled expert on your subject and get original paper with free plagiarism report

    Order custom paper Without paying upfront

    Evolution of Forensic Accounting. (2017, Feb 13). Retrieved from https://graduateway.com/evolution-of-forensic-accounting/

    Hi, my name is Amy 👋

    In case you can't find a relevant example, our professional writers are ready to help you write a unique paper. Just talk to our smart assistant Amy and she'll connect you with the best match.

    Get help with your paper
    We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy