The Highest Level of Forensic Accounting Assurance - Assignment Example

Forensic Accounting Chris Cho A) According to Crumbley (Crumbly, 2008) forensic accounting is accounting that is suitable for legal review, offering the highest level of assurance and scientific conclusion. Forensic accounting enables the accountant to deliver a professional judgment depending on the findings as to accounts, inventories or the presentation thereof that is of such quality that it would be sustainable in some adversarial legal proceeding or within some judicial or administrative review. Forensic accounting is focused upon both the evidence of economic transactions and reporting as contained within an accounting system and the legal framework which allows such evidence to be suitable for the purpose of establishing accountability and valuation. Michael Kessler of Kessler International states that forensic accountants must have the skills of both private investigator and an accountant which means that analytical abilities and research skills are the key to success. Forensic accountants should possess bachelors’ degree in accounting with additional academic preparation in fields like criminal justice or law enforcement, but more importantly should be a Certified Public Accountant (CPA) (Vogt, 2004). Forensic accountants are hired to aid in the development of computerized financial software for better analysis of financial evidence; assist the legal system by appearing and testifying in open court as expert witnesses and write books and train other accountants who are interested in the investigative study of the industry (Whatley). According to Crumbley (Crumbley, 2008) forensic accountants detect and interpret the evidences of both normal and abnormal phenomena introduced into the books and records of an accounting system and the resultant effect upon the accounts, inventories and the presentation. Forensic accountants are more likely to work for CPA firms offering forensic accounting services (eHow Contributor). Most of forensic accounting service is commonly used by businesses is internal auditing so as to detect fraud to avoid further complications by conducting external audit (Whatley). According to Samociuk, Iyer and Doody (Samociuk, Iyer and Doody, 2010, P46) some of the indicators for detecting fraud include unusual supplier relationships, business partners or intermediaries are in fact companies with no employees, no turnover, and are based in tax havens, non transparent counterparties indicating criminal association, payments of goods and services with vague description and payments to offshore or tax haven based companies or bank accounts. The internal controls of an accounting system protects the business organizations from abuse and fraud and ensures that the information received is accurate and timely in compliance with the regulatory requirements (MoneyInstructor, 2009). It is further mentioned that management has to play an important role in detecting fraud and it is essential that the directors make their views on the unacceptability of fraud and dishonesty explicit (Dunne and Morris, 2008, P390). B. The financial statement frauds of HIH & FAI Insurance Company in Australia was the latest to hit the headlines with regards to fraudulent accounting. The analysis of the case of reveals that the management deliberately manipulated the claims estimates for the purpose of improving reported profit. Management indulged in fraudulent activities to conceal the under – reserving from the Board, the auditors, and APRA among others which shows that board of members were not aware about the internal activities that were taking place. There was deliberate misrepresentation of financial statements just to show profit to the board of directors proving that internal auditing was weak and real facts were hidden from the external actuaries (Potter, 2005, P6). There is a list of Twenty ways to detect fraud. 1. Unusual behaviour – The perpetrator will often display unusual behaviour that, when taken as a whole, is a strong indicator of fraud. 2. Complaints – Frequently tips or complaints will be received which may indicate that a fraudulent action is going on. 3. Stale items in reconciliations – In bank reconciliations, deposits or cheques not included in the reconciliation could be indicative of theft. 4. Excessive voids – Voided sales slips could mean that the sale was rung up, the payment diverted to the use of the perpetrator, and the sales slip subsequently voided to cover the theft. 5. Missing documents – Documents which are unable to be located can be a red flag for fraud. 6. Excessive credit memos – Similar to excessive voids, this technique can be used to cover the theft of cash. 7. Common names and addresses for refunds – Sales employees frequently make bogus refunds to customers for merchandise. 8. Increasing reconciling items – Stolen deposits, or bogus cheques written, are frequently not removed, or covered, from the reconciliation. 9. General ledger out-of-balance – When funds, merchandise, or assets are stolen and not covered by a fictitious entry, the general ledger will be out of balance. 10. Adjustments to receivables or payables – In cases where customer payments are mis-appropriated, adjustments to receivables can be made to cover the shortage. 11. Excess purchases – Excess purchases can be used to cover fraud in two ways: 1. fictitious payees are used to convert funds. 2. Excessive purchases may indicate a possible payoff of purchasing agent. 12. Duplicate payments – Duplicate payments are sometimes converted to the use of an employee. 13. Ghost employees – Ghost employee schemes are frequently uncovered when an auditor, fraud examiner, or other individual distributes pay cheques to employees who do not exist. 14. Employee expense accounts – Employees frequently conceal fraud in their individual expense account reimbursements. 15. Inventory shortages – Normal shrinkage over a period of time can be computed through historical analysis. 16. Increased scrap – In the manufacturing process, an increased amount of scrap could indicate a scheme to steal and resell this material. 17. Large payments to individuals – Excessively large payments to individuals may indicate instances of fraudulent disbursements. 18. Employee overtime – Employees being paid for overtime hours not worked by altering time sheets before or after management approval. 19. Write-off of accounts receivable – Comparing the write-off receivables by customers may lead to information indicating that the employee has absconded with customer payments. 20. Post office boxes as shipping addresses – In instances where merchandise is shipped to a post office box, this may indicate that an employee is shipping to a bogus purchaser. C. There were good numbers of corporate scandals in the 2000s, one of which was Enron, the largest bankruptcy with assets of $62 billion. Though the management was responsible to file the correct financial statements, which the company failed to do, external auditors who were governed under law to provide accurate details of the company, failed in their responsibility. It is important to mention that most of the scandals that erupted in the corporate houses had due support by the accounting and auditing firms which has led to decrease in the honesty of auditing firms. These scandals have led to the erosion of confidence in the auditors’ independence resulted in Congress passing the Sarbanes – Oxley Act in 2002 (Trudeau, 2007, Volume 5, No.7, P1). The act strips the accounting firm of its privileges to self regulate and requires the board of directors’ audit committee to preapprove both audit and non audit services offered by the entities’ public accounting firm ensuring that audit committee play a key role in hiring, monitoring and compensating entities’ external auditors (Makar, Alam and Pearson, 2004). The main reasons for collapses in the business that give rise to scandals are tumbling and volatile share prices which reduces the trust of shareholders and investors, loss of savings and jobs, which in turn reduces foreign investment in country The above collapses may occur due to mismanagement by the board of directors, corporate executives, accountants and auditors, bribery, corruption and scandalous clandestine operations in the business resulting in reduction of share prices and faith in investors. Existing corporate accountability mechanisms 1. Australian Corporations Act 2001 2. Corporate Law Economic Reform 3. Uniform international Accounting Standards 4. Criminal liability and tougher penalties Some are changes since collapses in the early 2000’s include the following: 1. Audit Committees – Mandatory audit committee for top 500 losted companies 2. Restrictions on ex-auditors joining companies. An ex-auditor cannot join an company he/she audits for 2 years after leaving the accounting firm 3. Uniform International Accounting Standards 4. Greater criminal liability for CEO’s, directors, banks, and accounting firms. Also tougher penalties when found guilty of breaches of corporation law. 5. Transparency in corporate governance – Executive salaries should be open 6. Ability to seize assets of suspect executives 7. Encourage corporate whistle blowing References 1. Crumbley, Larry, D. 2008 What is Forensic Accounting, Journal of Forensic Accounting, R.T.Edwards, Inc. 18th October 2010, Web. http://www.rtedwards.com 2. Dunne, Patrick and Morris, Glynis, D. 2008 Non Executives Director’s Handbook, Ed.2nd Butterworth-Heinemann, US, Print. 3. eHow Contributor n.d Forensic Accounting Information, eHow, 18th October 2010 Web. http://www.ehow.com 4. Makar, Stephen, D.’ Alam Parvaiz and Pearson, Michael,D. 2004. Earnings Management Revisited: Further Suggestions in the Wake of Corporate Meltdowns, ACFE, 18th October 2010, Web. http://www.acfe.com 5. MoneyInstructor 2009 Internal Controls of an Accounting System, 18th October, 2010, Web. http://www.moneyinstructor.com 6. Potter, Michael, 2005 CPA Australias Forensic Accounting and Fraud Management Conference, A practical look at fraud and financial scams through the eyes of the investigator Axiom Forensics, http://www.axiomforensics.com.au 7. Samocuik, Martin; Iyer, Nigel; and Doody, Helenne 2010 A Short Guide to Fraud Risk: Fraud Resistance and Detection, Ed.2nd, Gower Publishing Ltd, England, Print 8. Trudeau,. Gregory P. 2007. Assessing Board Members in the Non Profit Organizational Arena: Increased Board Responsibilities Dictated by Sarbanes Oxley, Journal of Business and Economics Research, Volume 5, No. 7., 18th October, 2010, Web. http://www.cluteinstitute-onlinejournals.com 9. Vogt, Peter 2004 Forensic Accountants, Young Money, 18th October 2010 Web http://www.youngmoney.com 10. Whatley, Tiesha Why are Forensic Accounting Skills Needed?, eHow., 18th October 2010, Web, http://www.ehow.com Read More