Forensic and Fraud Examination

This article provides an overview of fraud and forensic accounting, including definitions, types of fraud, and the roles of fraud examiners and forensic accountants. It also discusses the differences between fraud examination and forensic accounting and provides examples of famous fraud cases.

Forensic and Fraud
Examination

Every business is susceptible to fraud and every day many businesses are affected by
fraudulent activities. Fraud could be understood as a criminal offence, which means use of
techniques, such as cunning, conniving, tricking or unfair behaviour of an individual leading to
cheat somebody (Bodnar and Hopwood, 2012.). An individual resorts to such kind of behaviour
to get an advantage over another by use of false means. According to Singleton & Singleton
(2010) corporate fraud is committing fraud by or for or against a corporation, for instance,
employee fraud or occupational fraud, etc. Forensic Accounting is a process for recording,
dividing and analysing financial data with the help of applying financial principles and theories,
which helps the management in reaching on to informed decisions.
What is Fraud?
Fraud, in general terms means any act which is committed with the intent to deceive
someone, which results in economic loss to someone or gaining advantage over someone. Fraud
can also be called as 'theft by deception'. In legal terms fraud is a criminal offence committed by
an individual with an intention to cause deception to any other person. Fraud could be
categorised as asset misappropriation, corruption or financial statement fraud. Asset
misappropriation is misusing or stealing the assets of an organisation, for instance, stealing
inventory etc. Corruption means unlawful or wrongful use of power or influence in a commercial
transaction to gain advantage or personal benefit while in an employment (Kossovsky, 2014).
And, financial statement fraud means misrepresenting the financial information intentionally to
misguide the persons who rely on such information to take economic decisions.
Fraud Examiner
Fraud examination is used in resolving fraud related disputes by a fraud examiner, who
inspects and analyses financial transactions. A fraud examiner should have knowledge of
properly and legally obtaining evidence for resolving a fraud related issue. An examiner should
also have specific skills to write a clear, accurate and unambiguous report after examination of
data collected pertaining to fraud. A fraud examiner has to testify his findings in a court
proceeding before the judicial authorities, as an expert evidence.
What is Forensic Accounting?
Accounting in general terms means collecting, classifying and calculating any financial
data to reach on to a specific results. Forensic accounting is application of financial principles
and theories to the facts of a circumstance or situation, involving a legal dispute. Primarily,
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forensic accounting is for providing – litigation advisory services and conducting investigations.
The professionals working for Forensic and Litigation Advisory Services (FLAS) are consulted
for providing technical, functional and industry related services, which are applied to resolve the
issues pertaining to occupational fraud, employee frauds, corruption or financial statement fraud
cases. These professionals help and provide assistance to the attorneys in collection of financial
information which could be useful to the party approaching the court. The FLAS professionals
are responsible for providing support in technical sphere such as, data mining etc.
Forensic Accountant
Forensic litigation professionals help with preparing a strategy for litigation, arguments
and preparing an inventory of testimony in both civil and criminal matters (Daniels, Ellis and
Gupta, 2013). The forensic accountants are involved in inspecting and analysing the accounts for
resolving legal disputes arising in any organisation. Financial forensic is a combination of two
different spheres – finance and law. Therefore, the forensic accountants are responsible for
application of financial principles such as accounting, auditing, quantitative techniques and
varied aspects of law in resolving the matters arising in any organisation pertaining to fraud.
Secondly, the forensic accountant investigates and collects data to be used as evidence in the
matter. And, thirdly, the accountants are responsible for critically examining the data and
communicating the same as a result of an investigation.
Forensic accounting versus Fraud examination
The two terms might be understood as same but both the terms are different on a variety
of grounds. Firstly, on the basis of timing forensic accounting is conducted after the allegations
of misconduct are made whereas, fraud examination is conducted even if there are predictions.
Secondly, the goals of fraud examiner and forensic accountant are different, as the former is
responsible for determination of fraud and the later analyses whether the allegations are
reasonable or not (Turvey, 2013). Thirdly, the methodology adopted by both the fraud examiner
and forensic accountant is different, as the former conducts document examination, reviews the
outside sources and conducts interviews, whereas, the later gathers financial and non-financial
evidences to critically analyse whether the allegations are correct or not. And, lastly, the
approaches of both the examination are different as one deals with resolution of fraudulent
conduct and the other attempts to gather sufficient evidence to prove or refute the allegations.
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Fraud examination is a method that resolves the signs or declarations of fraud on the
person. This methods forms a uniform, legal process for resolving the issue that can arrive on
timely basis. It frames the path that it should move in a linear order from general to the specific
that focuses on the culprit through analysis of the evidence that are gained while investigating.
This involves the efforts to resolve the allegations the signs of fraud when the facts or the
evidences are not clear and are unknown (Brody, Melendy and Perri, 2012). Therefore this helps
the investigator to identify the party that has committed the wrong and is able to provide the
recommendation where applicable.
When conducting the fraud examination the investigator should assume that litigation would
follow, he should begin with the proposition that the case will conclude in the litigation. If he
assumes that the litigation will occur then he would conduct the examination in accordance with
the proper rules and regulations and will maintain the guidelines established legally. The
examination of the fraud should be according to the law prescribed in the state. They should not
conduct the examination without proper predictions. It is the entireness of the circumstances that
would lead to believe that the fraud has occurred. Prediction is the base through which the
examination should commence (Shaw and Browne, 2013). For example the investigator should
conduct a fraud risk assessment for consulting purpose even if there is no reason to believe that
fraud has occurred or will occur. The examiner should approach the investigation into fraudulent
matter from both the perspectives by seeking to prove that fraud has occurred or to prove that
fraud has not occurred. While assessing the fraud the investigator should commence when the
full fact are unknown or unclear, therefore they should proceed the case from taking the general
prospective to the specific. For example the fraud examiner should start the interview from start
from all the possible witnesses who appears to be involved in the matter. After this the
investigator should create a hypothesis, he should analyse the available data and should create a
preliminary data report. These hypothesis are created for the specific cases such as financial
statement fraud as so on.
After creating the hypothesis the time has arrived where the hypothesis should be tested
through correcting and integrating the known information. Testing hypothesis involves creating
a scenario of what happens if. He should look at the following facts as, if why the vendor is
getting the unusually high amount of large contracts, why they are purchasing the high priced
and ow quality products for a longer period, why the purchasing agent is having the personal
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relation with the vendor and why the purchasing agent is having the liability to counsel the
business towards a favoured vendor.
The investigator should prepare a fraud response plan. When a evidence of misconduct
arises, management should take the decision to develop a fraud response plan in an appropriate
and timely manner. This plan outlines the actions that a member of an organisation will take
when a fraud arises (Smith, 2012). As every fraud is different the response plan should outline
the different ways of conducting the examination. These plans helps the organisation to manage
their responses and create environment to minimise risk and maximize the organisations
potential for the overall success.
A response team should be created for handling the fraud that has happened or will
happen in the organisation. As no single person is effective in addressing the fraud. The response
team should be made according to the facts and the potential severity of the suspected fraud. The
must include the legal counsel, a management representative, a certified fraud examiner, a
financial director and a audit committee.
The fraud that has encompassed in any organisation creates the large area of opportunity
for the forensic accountant. This helps in preventing fraud from occurring, investigating fraud
and assisting owners and the organisations in the implementing better controls and procedures in
response to fraud that has been committed. However once the fraud has been identified, the
forensic accountant can prove the matter while investigating the things. There are many kinds of
frauds and the forensic accountant can apply all of his knowledge while solving the case.
Gathering evidence is one of the key role of the investigator while investigating any case.
All the cases requires the submission of the best evidences. Evidence means that all the evidence
submitted must be prove to be original. There are some exceptions to this rules however it is
wise to see this as being flexible (Dorminey and et. al., 2012). This helps in conducting the
financial crime investigation. If the case is of proving that the CFO has embezzled the money
from the pension fund, and introducing the copies of the bank statement will help the
investigator in giving the best evidence. Therefore proper handling of the document is required
and is a primary concern for any organisation. From the moment documents come in the
possession of the investigator they should keep them in safe hands. The documents that should
be expected are signed documents, transactional papers, intranet sources, emails etc. documents
from the third party and the financial contracts should also be taken into consideration.
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The practical case that has happened and where the application of this forensic
accounting applies is the famous case of the Enron Scandal, the accounting team under the
supervision of Enron hide millions of money in the failed projects and debts. The companies
stock plummeted from over 90 dollars to 1 dollar in the stock exchange within the year. The
financial statement of the company were then checked by the forensic accountants, the
accounting techniques of the Enron that were inflating the stock price and hiding the debt were
exposed (.Özkul and Pamukçu, 2012). Again in the case of Crazy Eddie they adopted the
technique to skim the reported taxable income, they also reduced the skimming to increase the
reported income and profit growth while taking the company public. This fraud costed the
investors and the creditors hundreds of millions of dollars. The company was also involved in
money laundering and fraudulent transactions and they also concealed the liabilities and
expenses. In this case as the accounting professional doesn't analyse auditors error and therefore
learned from it. As the audit programme were general and the auditor have not been to process
oriented. So this enables that the forensic team should analyse the fact and should prepare the
evidence in such a way so that they are able to prove their statements.
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References
Books and authors
Bodnar, G. H. and Hopwood, W.S., 2012. Accounting information systems. Upper Saddle River:
Pearson.
Daniels, B. W., Ellis, Y. and Gupta, R. D., 2013. ACCOUNTING EDUCATORS AND
PRACTITIONERS'PERSPECTIVES ON FRAUD AND FORENSIC TOPICS IN THE
ACCOUNTING CURRICULUM. Journal of Legal, Ethical & Regulatory Issues. 16(2).
Brody, R. G., Melendy, S. R. and Perri, F. S., 2012. Commentary from the American
Accounting Association's 2011 annual meeting panel on emerging issues in fraud
research. Accounting Horizons. 26(3). pp.513-531.
Smith, E. P., 2012. The basics of business valuation, fraud and forensic accounting, and dispute
resolution services. The CPA Journal. 82(6). p.6.
Özkul, F. U. and Pamukçu, A., 2012. Fraud detection and forensic accounting. In Emerging
fraud (pp. 19-41). Springer, Berlin, Heidelberg.
Dorminey, J., and et. al., 2012. The evolution of fraud theory. Issues in Accounting Education.
27(2). pp.555-579.
Shaw, A. and Browne, A., 2013. A practical and robust approach to coping with large volumes
of data submitted for digital forensic examination. Digital Investigation. 10(2). pp.116-
128.
Turvey, B. E., 2013. Forensic fraud: Evaluating law enforcement and forensic science cultures
in the context of examiner misconduct. Academic Press.
Kossovsky, A. E., 2014. Benford's law: theory, the general law of relative quantities, and
forensic fraud detection applications. World Scientific.
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