As an agreed-upon procedures engagement, the forensic accountant will normally prepare a report for the client that sets out their findings, based on the scope agreed in the engagement letter. This report may be addressed to management, often in the case of a fraud, or to the insurer. It may be that a witness statement/report for submission to the court/arbitrator is required in addition to or instead of a report to the client. However, planning the investigation is likely to be similar to planning an audit or any other assurance engagement.
Planning will commence with a meeting with the client in which the engagement team will develop an understanding of the issue/events “the fraud, theft etc.” and actions taken by the client since it occurred. A key part of planning is to confirm exactly what format the output is required in, and exactly what matters are required to be covered within. At this stage any key documentation will be obtained and scrutinised – for example, the insurance policy, the partnership agreement, and the evidence that led to the discovery of the fraud, etc. The team will agree with the client, what access to other information or personnel will be required and this will be arranged.
Based on the above, the team will design procedures that enable them to meet the requirements of the client, as agreed. This may or may not include test of controls, depending on the circumstances, testing controls will be key to determining how a fraud took place.
Procedures and Evidence
Any method of obtaining evidence can be used in a forensic accounting engagement – this is not a limited assurance engagement in which procedures are likely to be restricted to enquiry and analytical procedures. Forensic engagements will include a detailed and wholesale review of all documentation and electronic evidence available. The opinion given by the expert accountant must be reasoned, and backed up by evidence. Their opinion cannot be objective if only based on what they are told; they must corroborate that information. They must be specific enough that the engagement team could actually follow instructions.
For example, it would not be sufficient to write ‘interview the suspect’. You must suggest questions that should be asked of the suspect in interview, depending on the circumstances in the scenario. For example, the suspect could be asked to explain their job role and what access that gives them to systems, cash, inventory etc. This also applies when recommending enquires of or discussions with management – it must be clear what it is the engagement team should ask of them, e.g. have they informed the police, has the suspect been suspended, have they informed the insurer etc.
Equally it is not sufficient to suggest the use of computer assisted auditing techniques (CAATs). You must specify how the CAATs could be used. For example, data matching bank accounts used for paying suppliers with bank accounts for paying employees. In order to design appropriate procedures, you must identify the type of forensic accounting engagement, and the specific type of fraud, insurance or negligence claim. For example, quantifying the theft of goods will be very different from quantifying a loss from payroll or ‘ghost employee’ fraud or loss of profits following a business interruption.
Ethical Issues
The range of ethical and professional issues will be similar to any other type of engagement. However, the importance of ethics is arguably much greater in relation to forensic accountancy. Often both ‘sides’ will bring an expert witness to the hearing where they do not agree. The decision maker must decide which evidence they ‘prefer’ – the credibility of the witness is often the primary factor on which they can base that decision and the credibility of an accountant is reliant on their compliance with the fundamental ethical principles.
Also we need to note whether the client requesting the forensic accounting service is an audit client, if so, this will present an additional and particularly important threat to objectivity; a self-review threat. The investigation is likely to involve the quantification of an amount, which will then be reviewed as part of the financial statements audit. The significance of the threat will be affected by the materiality of the amount and the subjectivity involved in quantifying it, e.g. if for loss of profits following business interruption this will be more subjective than quantification of the value of stolen inventory.
Finally
The decision to prosecute is a matter for the client. Often, clients do not want to prosecute for fear of damaging their reputation. The forensic accountant can provide the client with an analysis of all of the facts, but must not make the decision to prosecute “a management threat to objectivity”. The forensic accountant has a duty of confidentiality, unless it is in the public interest to do so, they must not disclose the fraud to any third party including the police, without client permission.
Forensic accounting is the term used to describe the type of engagement. It is the whole process of carrying out a forensic investigation, including preparing an expert’s report or witness statement, and potentially acting as an expert witness in legal proceedings.
A forensic accountant is an accountant! Their role is to provide an accountant’s expert opinion or analysis of the facts. They are not the law-enforcer, prosecutor or judge.
Dr. Dada Adefolami, MBA. PhDCPFAcct. is a Finance / Management Consultant and Certified Forensic Accountant ( [email protected]; 08052043855)
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