An Overview of Forensic Accounting and the Role of Forensic Accountants in Investigations

What is forensic accounting? Why should companies investigating fraud within their organisations engage a forensic accountant? How may such an accountant aid lawyers in their pursuit of evidence? Winston Chew, of KPMG's Forensic and Litigation Support Team, answers these questions.

Introduction
The term 'forensic' has usually attracted an unfortunate connotation with the morbid world of forensic medicine. It conjures images of forensic pathologists, battered corpses, blood-splattered implements at the scenes of crime and autopsies and post mortems. Nothing can be further from the truth. Forensic accounting shares only one thread in common with forensic pathology. That common denominator is the pursuit of evidence that will stand the rigorous scrutiny that the rules of evidence and procedure demand for its admission as evidence before the courts.

Indeed, the term 'forensic' as defined in Webster's Dictionary means 'belonging to, used in or suitable to courts of judicature or to public discussion and debate'. Forensic accounting, for want of a better definition, is therefore a specialised mode of accounting analysis that is suitable to the court which will form the basis of discussion, debate and, ultimately, for dispute resolution whether before the courts or other decision-making tribunals.

What is Forensic Accounting?
Forensic accounting in its present state can be broadly classified into two categories encompassing litigation support and investigative accounting. These two major categories form the core around which other support services, that traditionally come within the sphere of investigative services, revolve - including corporate intelligence and fraud investigation services. However, it would also be remiss not to define what encompasses litigation support and investigative accounting.

• Litigation support - is the provision of assistance of an accounting nature in a matter involving existing or pending litigation. It is primarily focused on issues relating to the quantification of economic damages, which means a typical litigation support assignment would involve calculating the economic loss or damage resulting from a breach of contract. However, it also extends to other areas involving valuations, tracing assets, revenue recovery, accounting reconstruction and financial analysis, to name a few. Litigation support also works closely with lawyers in matters involving, but not limited to, contract disputes, insolvency litigation, insurance claims, royalty audits, shareholders disputes and intellectual property claims.
• Investigative accounting - in contrast, investigative accounting is concerned with investigations of a criminal nature. A typical investigative accounting assignment could be one involving employee fraud, securities fraud, insurance fraud, kickbacks and advance fee frauds. No doubt in many assignments, both litigation support and investigative accounting services are required. In many cases, the combination of these services will not be adequate to address the problem unless there is in place an effective programme for fraud risk management and control. Creating an ethical work environment with a vigorous anti-fraud culture, implemented seriously by senior management through the promotion of a clear anti-fraud policy, is the only viable option if management is serious about preventing or reducing the recurrence of corporate fraud in its various guises.

Emergence of computer forensics
The proliferation of e-commerce has led to an increaseing e-fraud in recent times, which in turn has meant an increasing demand for forensic IT services aimed at identifying unauthorised or unethical IT activities. It is undeniable that this is the fastest growing forensic discipline that will assume greater importance; hence no paper on forensic accounting would be complete without a passing mention of this specialised field. Computer forensics is simply the application of computer science to the investigative process. As investigative accounting is an important aspect of forensic accounting, computer forensics and its sub-disciplines are important tools for the forensic accountant in his task of retrieving and analysing evidence for the purposes of uncovering a fraud or challenging any financial information critical to the outcome of any dispute. As a full treatment of this area would warrant a separate article, it would suffice to add that the sub-disciplines of computer forensics, like computer media analyses, imagery enhancement, video and audio enhancements and database visualisation, are tools, techniques and skills which are becoming more critical in the field of forensic accounting in general and investigative accounting in particular. Fraud detection services and the techniques of data matching and data mining would be impossible without the application of computer forensics.

Principal Duties of a Forensic Accountant

In other words, what does a forensic accountant do? Simply put, a forensic accountant's primary duty is to analyse, interpret, summarise and present complex financial- and business-related issues in a manner that is both understandable by the layman and properly supported by the evidence.

Forensic accountants are engaged by both government and private agencies cutting across industries ranging from insurance companies, banks, police forces, regulatory agencies and other financial and business organisations.

The services rendered by forensic accountants cover a wide spectrum of which the following are commonly provided:

• investigation and analysis of financial evidence;
• development of computerised applications to assist in the analysis and presentation of financial evidence;
• communication of findings in the form of reports, exhibits and collections of documents; and
• assistance in legal proceedings, including testifying in court as expert witness and preparing visual aids to support trial evidence.

To properly carry out these functions, the forensic accountant must also be familiar with legal concepts and procedures, including the ability to differentiate between substance and form when grappling with any issue.

Specific Assistance in Investigative Accounting and Litigation Support

The forensic accountant can provide more specific assistance in the following ways.

Investigative accounting

• Reviewing the factual situation and providing suggestions on alternative course of action.
• Assisting in the preservation, protection and recovery of assets.
• Co-ordinating with other experts, including private investigators, expert document examiners, consulting engineers and other industry specialists.
• Assisting in the tracing and recovery of assets through civil, criminal and other administrative or statutory proceedings.

Litigation support

• Assisting in securing documentation necessary to support or rebut a claim.
• Reviewing relevant documentation to provide a preliminary assessment of the case and identify potential areas of loss and recovery.
• Assisting in the examination and discovery process, including the formulation of relevant questions regarding financial evidence.
• Attending to the examination and discovery process to review the testimony, assisting with understanding the financial issues and formulating additional questions for counsel.
• Reviewing the opposing expert's reports on damages and the strengths and weaknesses of the positions taken.
• Assisting in settlement meetings and negotiations.
• Attending the trial to hear testimony of opposing experts and assisting in the cross-examination process.

Why Engage a Forensic Accountant?
A logical question to pose is why bring in a forensic accountant and his team when the organisation's internal auditor and management team can handle the situation which can range from a simple employee fraud to a more complex situation involving management itself? The answer would be obvious when management itself is involved and the fallout to the discovery of the fraud leads to low employee morale, adverse public opinion and perception of the company's image and organisational disarray generally. Engaging an external party can have distinct advantages from conducting an internal investigation.

Key Benefits of Using Forensic Accountants

• Objectivity and credibility - there is little doubt that an external party would be far more independent and objective than an internal auditor or company accountant who ultimately reports to management on his findings. An established firm of forensic accountants and its team would also have credibility stemming from the firm's reputation, network and track record.
• Accounting expertise and industry knowledge - an external forensic accountant would add to the organisation's investigation team with breadth and depth of experience and deep industry expertise in handling frauds of the nature encountered by the organisation.
• Provision of valuable manpower resources - an organisation in the midst of reorganisation and restructuring following a major fraud would hardly have the full-time resources to handle a broad-based exhaustive investigation. The forensic accountant and his team of assistants would provide the much needed experienced resources, thereby freeing the organisation's staff for other more immediate management demands. This is all the more critical when the nature of the fraud calls for management to move quickly to contain the problem and when resources cannot be mobilised in time.
• Enhanced effectiveness and efficiency - this arises from the additional dimension and depth which experienced individuals in fraud investigation bring with them to focus on the issues at hand. Such individuals are specialists in rooting out fraud and would recognise transactions normally passed over by the organisation's accountants or auditors.

Typical Approach to a Forensic Investigation
What does a forensic accountant do when alerted to a fraud and instructed to proceed when appointed? There are usually five areas which the forensic accountant will address in his approach towards any case:

• Focus on the who, what, when, where and how of what happened - this is vital in order to understand the whole situation that is made more complex by the lack of full documentation or other evidence. A thorough analysis and evaluation of what happened would assist in framing the issues for the forensic accountant, the management and their lawyers to consider when deciding on what steps to take.
• Consider all suspects - nobody is ruled out or beyond suspicion.
• Be on the alert for forged documents - seemingly innocuous documents or transactions may hide potential frauds or lead to more incriminating evidence.
• Conduct extensive searches of company documents and computer files for evidence of fraud - this is where the forensic accountant's team of forensic IT personnel would be indispensable in any investigation.
• Interview key company employees - formally and informally.

Common Accounting Fraud Areas
Usually in any typical fraud investigation, the forensic accountant and his team would encounter similar factual scenarios or frauds, which are not peculiar to any organisation. The more common types are illustrated in the following table:¹

Conclusion
It is clear from the above treatment of the subject that the forensic accountant must possess not only multiple skills but should have the qualities of curiosity, persistence, creativity, discretion, organisation, confidence and sound professional judgment. You may be sceptical as to whether all these commendable qualities could reside in a single individual. I would be the first to concede that such an individual is indeed a rare creature. However, the forensic accountant does not work in isolation. He brings with him the collective experience and varied skills of his team, which comprises not only accountants but also investigators, attorneys, financial analysts and computer forensic specialists.

Notwithstanding the formidable array of experts' resources at his disposal, the forensic accountant would be doing his client a disservice if he fails to know at which point his investigation must end. As in anything in life, there must be a beginning or commencement and an ending. When witness interviews are incomplete, records lost or destroyed and seemingly endless accounting records and transactions are available, the experienced and astute forensic accountant must know when to end the investigation.

A caveat should be sounded here that no fraud investigation concludes with absolute assurance that all irregularities have been identified or all wrongdoers caught. What matters is that the investigation should be sufficient to assist the directors and the company management in forming their own opinion and making their own decisions on the next steps to take. Although there is no guarantee that every improper transaction has been uncovered, there should be a strong level of conviction and confidence that the investigation has been as thorough and complete as the circumstances and the resources permit. In making his recommendations to the directors and the company management on the steps to take, the forensic accountant must simultaneously consider all alternatives, scrutinise the fine details and be able to see the big picture. Only then can the forensic accountant be certain that his engagement has concluded.

Winston Chew
KPMG
E-mail: winstonchew@kpmg.com.sg

The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG.

Endnote
1 Exhibit adapted from Harvey R Kelly, Accounting Irregularities and Financial Fraud Ch 6.