Forensic accounting comprises the use of auditing, accounting and investigative skills to interpret and analyse financial and commercial information suitable for use in legal proceeding. The distinguishing characteristics of a forensic account as compared with a chartered accountant, are that a forensic accountant provides a higher level of assurance, his / her judgments, opinions and findings will be subject to legal scrutiny, more time is spent focusing on the substance and purpose of transactions and their underlying motives, and one’s primary duty is to the Court rather than to a client.
There are two core areas of forensic accounting services namely litigation support / expert witness and financial investigations and I will explain each of these in turn.
Litigation Support/Expert Witness
As distinct from a witness of fact giving evidence from personal experience of an event or circumstance, an expert accounting witness gives an expert opinion on matters within his area of expertise. The role of the forensic accountant in respect of litigation support is to provide expert witness advice in respect of highly complex or technical accounting or auditing matters beyond the knowledge of a Court to assist in the resolution of disputes arising in the following areas:
- Commercial litigation cases for alleged breach of contract or warranty and insurance claim proceedings
- Civil litigation such as personal injury claims and matrimonial disputes
- Alternative dispute resolution processes such as arbitration and mediation
- Shareholding and partnership disputes
- Professional negligence cases
- Financial investigations
Financial investigations encompass a wide range of assignments during which forensic accountants are engaged to find out why financial results or behaviour has deviated significantly from the expected norms and to quantify the impact of such behaviour and to address the concerns and suspicions of an individual, entity or body concerning financial foul play.
The most common financial crime assignments are in the areas of fraudulent financial reporting, misappropriation of assets, obtaining a financial advantage by fraudulent means and engaging in insider trading.
The most common regulatory assignments would be in the areas of anti money laundering, competition law, tax investigations, and investigations under Company Law on behalf of the Office of the Director of Corporate Enforcement.
Other assignments in this field would comprise but not be limited to corporate intelligence assignments, asset tracing and electronic evidence recovery.
What makes a good forensic accountant?
The key attributes that a good forensic accountant will invariably possess are listed below:
- Integrity
- Specialist knowledge and qualifications
- First rate knowledge of the business world
- Excellent analytical skills
- Clear and concise oral and written communication skills
- Ability to collate, manage and interrogate significant volumes of data
- Inquisitive mind and refusal to accept explanations at face value
- Common sense
- Sound understanding of the legal framework and law of evidence in the jurisdiction in which he / she operates
- Research capabilities
- Flexibility to adapt to change during the course of an assignment
- Experience and knowledge of running investigations
- Ability to recognise when an assignment falls outside his / her area of expertise
- The key pitfalls which a good forensic accountant will avoid are providing opinions outside his / her sphere of expertise and making unsubstantiated assumptions.
How to get into profession.
A background in accounting and auditing is essential as these disciplines provide the foundation for the more specialist approach required of a forensic accountant.
The Institute of Chartered Accountants in Ireland introduced a new Diploma in Forensic Accounting last year. I successfully completed the first diploma which commenced in October 2008. The inaugural diploma proved to be an unqualified success, achieving the correct balance between traditional lecturing on the one hand and interactive participation on the other hand which took the form of case studies, mock examinations and cross examinations by barristers and mock interviews of suspects in a fraud investigation. Members of the Criminal Assets Bureau, former members of An Garda Siochana and barristers were also in attendance to share their experiences in the forensics field and to provide feedback on our performances in the witness box and as interviewers.
Due to unprecedented demand, the courses are now being run regularly in Dublin and the inaugural Belfast course commenced last week. The next available course in Dublin will commence in February 2010.
The course consists of six modules run over five months on Friday afternoons and early evening and Saturday mornings and early afternoon. Assessment comprises two case study assignments (40%), a final open book examination (50%) and attendance (10%).
How big is the market?
Forensic accounting is widely acknowledged to be the fastest growing sector in the accounting profession and this growth shows no sign of abating in the short to medium term. Domestically, the Financial Regulator is committed to spending up to €8 million on external consultants over the next four years including forensic experts in anticipation of further banking industry investigations.
Every financial scandal only increases the corporate governance and regulatory framework and its complexity leading to inevitable compliance misunderstandings and / or errors.
The lack of available credit to individuals and corporate entities in recessionary times obviously leads to increased litigation as individuals struggle to meet financial commitments or try to extract themselves from legal binding commitments previously entered into due to the changed economic circumstances.
Furthermore, in recessionary times, there is reduced tolerance in society generally for perceived wrongdoing or negligence whilst individuals and corporates are rightly or wrongly looking for someone to blame for their own deteriorating financial circumstances.
As employees struggle with the effects of salary reductions and a reduced working week, resentment increases the motivation to commit fraud or theft and to be able to justify such action to oneself. In addition, employment disputes become more commonplace in recessionary times.
As every business sector continues to suffer deteriorating financial results, there is greater pressure for fraudulent financial reporting.
Changing the age old perception of accountants as dry and boring.
Whilst the perception of forensic accounting is that of solitary number crunching and reviewing endless boxes of financial information, the reality is significantly different. Whilst of course there is significant close reading and analysis of financial and business records, the work is interesting, varied and lucrative. No two assignments are the same and one is constantly being challenged. One is constantly liaising with other professional advisers and there is a significant adrenaline boost from having been an important component in a successful case and thus enhancing either your own or your firm’s reputation in this field.
Forensic accountants are to be found in all walks of commercial life including in the FBI and CIA. For example, assisting an international intelligence agency in cracking down on global terrorist money laundering and other crime rackets could not be described as boring.
Process in a typical case.
There is no standard step by step process in financial investigations as the specific work programme undertaken is dependent on the exact terms of the engagement.
Whilst this is also true for expert witness / litigation support assignments, it is possible to give a broad outline of the steps involved in such a process which I have done below.
The starting point in reaching a decision as to whether you or your firm will accept the engagement is by considering the following two questions:
- Is the firm willing to accept the engagement?
- and, if so, can the firm carry out the engagement?
The first question is answered by employing normal new client engagement procedures to establish identity and to assess the integrity of the client
The second question has two constituent parts. Firstly, has the firm the necessary resources and expertise to accept and successfully carry out the engagement, and secondly, are there any actual or perceived conflicts of interest or threats to the firm’s independence which cannot be adequately mitigated by appropriate controls and safeguards.
Assuming that the firm is willing and can accept the engagement, the next step is to meet with the solicitor to obtain a precise understanding of the exact scope of the engagement.
An engagement letter would then be issued to the solicitor as the instructing party clearly setting out your understanding of the terms of engagement, the work to be undertaken, reporting deadlines, reporting obligations, legal professional privilege, any restrictions on distribution, and limitation of liability.
The next step would be to meet with the client to determine if there are any other facts or information of potential relevance which were not mentioned in the initial meeting with the instructing solicitor whilst always keeping in mind that your primary duty is to the Court rather than your client.
One would then carry out research and calculations by reviewing all information received from instructing solicitor and supplementing this with relevant third party research and evidence.
Once the above has been collated and organised, the next step would be the drafting of your expert witness report tailored to the individual circumstances of the case. The key point is to ensure that the report clearly sets out the issues at hand and the expert witness’ opinions, conclusions and findings. A poorly presented report will significantly damage the case, will not be looked upon favourably by the Judge, and may lead to difficulties under cross examination.
A meeting would then be convened with the instructing solicitor, Counsel, and your client to discuss the expert report.
The report would then be updated for any matters arising as a result of your meeting with the legal team and client and then your report would be issued.
A meeting with the opposing side’s expert in advance of proceedings either voluntarily or under direction of the Courts on a non prejudice basis will hopefully minimise the number of matters in dispute. A joint meeting note must be prepared following the meeting to ensure that there have been no misunderstandings on either side as to any matters agreed during the meeting.
A final meeting would then be convened with the instructing solicitor, Counsel, and your client.
Finally, your expert witness testimony.