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Time: Forensic accounting focuses on the past, although it may do so in order to look forward. Purpose: Forensic accounting is performed for a specific legal forum or in anticipation of presentation before a legal forum. Peremptory: Forensic accountants may be employed in a wide variety of risk management engagements within business enterprise as a matter of right, without the necessity of allegations (e.g., proactive).
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Maurice E. Peloubet coined the phrase in print in 1946. Max Lourie wrote an article and also claimed to coin the phrase, seven years after Peloubet. Louries article voiced three important positions: An accountant should not have to attend law school to learn the art of expert testimony. Colleges and universities should deliver forensic accounting training. Forensic accounting reference books and textbooks should be developed for students.
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In the early 1980s, companies began to use computers to perform their record keeping. Intense competition caused auditing fees to fall as much as 50% from the mid-1980s to the mid1990s. Auditors cut costs by reducing the process of reviewing hundreds of corporate accounts. They grew more reliant on internal controls. The Journal of Forensic Accounting was created.
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Top executives were able to circumvent internal controls and manipulate the records. This lead to situations such as Enron, WorldCom, Xerox, Adelphia Communication, and the fall of Arthur Andersen in the early 2000s. Due to the financial disaster of companies such as Enron and WorldCom, there has been an increased use of forensic techniques in audits and an increase in fees.
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Some accounting experts believe that every audit engagement should include much more skepticism and detailed review of transactions. Other accounting experts suggest that only special engagements specifically targeting fraud can adequately and effectively root out the problem. The Big Four and the next two accounting firms believe that every public corporation should have a forensic audit every three years.
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Recent Events
Economic recessions often increase fraud, since executives may engage in more cooking the books techniques to improve financial results, and financially strapped employees will steal business funds or commit other types of fraud and abuse. In April 2009, Audit Analytics predicted that 3,589 companies (nearly 25%) will report that their auditors doubt they will continue as going concerns. In 2001, the percentage was only 19.2 percent.1 The Federal Governments $787 billion economic stimulus and bailout programs will be breeding grounds for fraud, waste, and abuse. Dan Weil estimates that up to $50 billion of the total (or 5 to 10 percent) will be susceptible to fraud. FBI Director Robert Mueller warns of fraud stemming from the stimulus packages.2 There should be much work for forensic accountants.
Sarah Johnson, Auditors: Nearly 25% of Companies May Not Be Going Concerns, CFO, April 22, 2009, www.cfo.com/article.cfm/13525910/c_2984368/?f=archives 2 Dan Weil, Expert: Stimulus Fraud May Hit $50 Billion, Newsmax.com, June 16, 2009, http://mmoneynews.newsmax.com/printTemplate.html
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Big-Six's Position
A forensic audit is akin to a police investigation. All public companies should have a forensic audit on a regular basis. Companies would be required to have such an audit every three or five years or face these audits on a random basis. Forensic auditors scrutinize any records of companies, including emails, and would be able, if not required, to question all company employees, and to require statements under oath. Might be necessary for an audit network or a specialized forensic auditors to complete a forensic audit with the aid of independent attorneys (not those who have represented the audit client in the other engagements).
Source: Serving Global Markets and the Global Economy: A View from the CEOs of the International Audit Networks, November 2006, p. 13.
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More Differences
Two practitioners have suggested these additional procedures may be used in a forensic audit: Extensive use of interviews and leveraging techniques designed to elicit sufficient information to prove or disprove a hypothesis. Document inspection that may extend to authentication procedures and handwriting analysis. Significant public records search to uncover, for example, unexpected title or ownership, other known addresses, and prior records of individuals. Legal knowledge regarding rules of evidence including chain of custody and preservation of evidence integrity.
Source: Annett Stalker and M.G. Ueltzen, An Audit Versus A Fraud Examination, CPA Expert, Winter 2009, p. 4.
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Find out who did it. Do not worry about all the endless details. Be creative, think like the fraudster, and do not be predictable. Lower the auditing threshold without notice. Take into consideration that fraud often involves conspiracy. Internal control lapses often occur during vacations, sick outages, days off, and rest breaks, especially when temporary personnel replace normal employees.
H. R. Davia, Fraud 101, New York: John Wiley & Sons, 2000, pp. 42-45.
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Principles-based; under audit Principles-based rules, it is rule-based Identify perpetrator of fraud Adversarial Fraud risk assessment and strategic services Adversarial and nonadversarial
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Antitrust. Bankruptcy fraud. Corporate/securities fraud. Health care fraud. Insurance fraud. Mass marketing fraud. Money laundering. Mortgage fraud.
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SarbanesOxley Legislation
1. 2. Title 1 establishes the Public Company Accounting Oversight Board (PCAOB) under the SEC to regulate auditing and to discipline auditors. Title 2 contains a series of rules to ensure that auditors are independent from their clients. For example, neither the primary nor reviewing partner may audit the same client for more than five consecutive years, and the auditor must report all material written communication to the audit committee. Title 3 requires publicly traded companies to have an audit committee, the CEO and CFO must certify their companys financial statements, and provides rules for the conduct of officers and their attorneys. Title 4 prohibits personal loans and requires certain financial disclosures. Title 5 mandates rules for financial security analysts (i.e., research analysts) to avoid conflicts of interest. Titles 6, among other provisions, allows federal courts the power to bar individuals who violate security laws from participating in penny stocks.
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9. 10. 11.
Title 7 requires reports and studies on consolidation of accounting firms, credit rating agencies, enforcement actions, and investment banks. Title 8 provides protection for whistleblowers and mandates penalties and fines for certain acts not dischargeable by bankruptcy. For example, failure of an auditor to keep working papers for 5 years is subject to fines and 10 years in prison, and fine or imprisonment of up to 25 years for anyone knowingly defrauding shareholders of publicly traded companies. A person can receive 20 years in prison and fines for altering, destroying, mutilating, concealing, covering up, falsifying or making a false entry in any record, document, or tangible object. Title 9 increases maximum prison sentences for mail and wire fraud from 5 to 20 years. Willfully and knowingly certifying financial reports not in compliance with the Act is now a criminal offense. Title 10 says that it is the Sense of the Senate to require the CEO to sign the corporate tax return. Title 11 provides a possible 20-year prison sentence for anyone altering, destroying, mutilating, or concealing a record, document, or other object (or otherwise impeding) for an official proceeding.
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