Divider
Divider


Kenneth Neumann

Mary O’Connor

The Forensic Accountant’s Evolving Role

In today’s business climate, investigative accounting is just the beginning.

June 23, 2008
by Kenneth Neumann, CPA/CFE and Mary O’Connor, ASA

With the proliferation of crime programs on television, the layperson might be led to believe that forensics is synonymous with criminal investigation or something morbid. In fact, we are invariably asked, as forensic accountants, if we count dead bodies. According to Wikipedia, the adjective “forensic” refers to something “of, pertaining to or used in a court of law.” However, in practice, forensic typically refers to the method of obtaining evidence related to any investigation, not just a crime or legal matter. In the latter context, the forensic financial expert investigates and analyzes financial evidence with the goal to provide expert testimony on financial damages for parties in litigation.

Background

The role of the forensic accountant has expanded significantly during the last several years for many reasons, including the requirement for greater scrutiny on corporate governance brought about by the Sarbanes-Oxley legislation and the widespread recognition of the risks and prevalence of financial fraud in today’s business environment. As a result, forensic financial specialists are usually retained to support special investigations related to a broad range of subjects. This can include the financial impact of marketplace events, such as intellectual property infringement and anti-trust actions, financial reporting fraud, asset impairment and business valuation. These investigations occur in contexts such as civil litigation, alternative dispute resolution, insurance claim adjustment, internal fraud investigation, securities class action and internal corporate investigations.

The questions posed to the forensic financial expert are increasingly more complex, requiring skill sets beyond a typical understanding of financial records and Generally Accepted Accounting Principles (GAAP). Knowledge of forensic accounting is only part of the equation. More often, a team of forensic financial specialists with a variety of skill sets is needed to address the many challenges posed by a case. For example, the logistics of finding data in numerous locations such as tape drives, personal computers and BlackBerry wireless devices require forensic technology specialists who are familiar with electronic data systems and who can identify and ferret through electronic storage devices to find case critical documents. An allegation of market manipulation often requires an understanding of economics, finance and how financial investment firms operate to fully document issues of causation and actual loss sustained. Permanent impairment of a company’s value due to an alleged act will necessitate the use of accepted valuation skills. This complexity has created a need for a multidisciplinary profession of “Financial Forensic Experts” who are proficient in accounting, finance, economics, computer technology, statistics, valuation and legal processes. Specific industry expertise is also an important element in the equation, making this team a group of highly-specialized experts indeed.

The investigative forensic team rarely has access to all of the relevant information related to a case. Therefore the ability of the team to respond with absolute certainty is not always possible. Manipulation of records, destruction of evidence, time limitations on completing the investigation and restrictions imposed by the litigation investigative process by the parties involved are some of the reasons that certain data cannot be found. With this in mind, the forensic team must utilize a number of skills and techniques to reconstruct or uncover the facts. As many damage calculations require construction of a theoretic reality “but for the event,” the team must also be adept at working through the facts and a hypothetical situation as if no damage event occurred.

Resources

The Forensic and Valuation Services section of the AICPA published a Special Report in 2006 that provides a comprehensive discussion of forensic techniques. Further, the report provides a useful comparison of Generally Accepted Auditing Standards (GAAS) audit evidence with Forensic Procedure Evidence. While a good reference with regard to forensic accounting skills, it is important to remember that it includes seven forensic investigative techniques and discusses each in detail.  It also discusses how forensic procedures differ from audit procedures.

While both the auditor and the forensic investigator review written or electronic documentation and interview certain key personnel, the similarity between their jobs ends there. In the case of an auditor, his or her work is that of attestation and related to historic facts used to draw conclusions about GAAP accounting and ultimately, the fair presentation of a company’s financial position. In the case of a forensic investigator, his or her work is often about what did not get recorded, was hidden, deleted or would have happened in the theoretic reality. As such, tasks are uniquely employed to the facts and circumstances of each case depending upon the nature of the inquiry and the accessibility of the relevant data. The forensic investigator must shape an opinion from available facts knowing that every situation is different and that there is no “one way” to determine the next step through the maze. Often, the next step requires a specific skill of another team member to accomplish the project.

For example, in cases of suspected fraudulent market trading, the forensic investigator may be restricted in his ability to question the suspected fraudster. However, he may have unfettered access to pertinent documentation. The investigator’s familiarity with specialized trading policies in the financial markets, as well as market trends, will be important replacements to the information that might have been provided in an interview. In another example, access to documentation and key employees is often controlled and filtered by the discovery process in cases involving a permanent diminution in value of a business. A standard lost profits calculation for damages will likely not be an adequate substitute for a full professional understanding of financial valuation.

Conclusion

The complexity of the financial issues posed in litigation and forensic investigations requires a very broad, multidisciplinary approach to the investigative and damage calculation phases of the legal process. The new professional field of financial forensics and the variety of experts that fill this bill provide corporations and attorneys with the tools required to respond to complex litigation and dispute resolution.

Rate this article 5 (excellent) to 1 (poor).
Send your responses here
.

Kenneth R. Neumann, CPA, CFE, is Director of the Litigation and Technology Practices at RGL — Forensic Accountants & Consultants, a global forensic accounting and consulting firm. Mary A. O’Connor, ASA, is Director of Valuation Services at RGL. O’Connor has more than 25 years of valuation experience.