ISSN 1524-5586

Journal of Forensic Accounting D. Larry Crumbley Editor-in-Chief

education anticipation investigation verification documentation communication anticipation education

WHAT IS FORENSIC ACCOUNTING?
Simply put, forensic accounting is accounting that is suitable for legal review, offering the highest level of assurance, and including the now generally accepted connotation of having been arrived at in a scientific fashion. That is, forensic accounting is sufficiently thorough and complete so that an accountant, in his/her considered independent professional judgement, can deliver a finding 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. Findings are based upon the scientific detection and interpretation of the evidences of phenomena introduced into the books and records of an accounting system (expansively defined) and the effects of such phenomena upon the accounts, inventories, or the presentation thereof. (Alternatively, if there is no impact on an accounting system, there is no accounting evidence, nor is there any effect upon the accounts, inventories, or the presentation thereof; and such situations are not within the realm of forensic accounting.) The primary orientation of forensic accounting is explanatory analysis (cause & effect) of phenomena - including the discovery of deception (if any), and its effects - introduced into an accounting system domain. The primary methodology employed by forensic accountants is objective verification.

Since all professional accountants operate within a commercial legal environment, all professional accountants are, in a sense, forensic accountants. What distinguishes forensic accounting in common parlance, however, are the engagements. That is, when a professional accountant accepts an engagement where they anticipate that their finding or analysis may be subject to adversarial or judicial scrutiny or administrative review, the professional accountant seeks a level of evidentiary detail and analytical precision which will be sustainable within the legal framework of such scrutiny or review. This approach is based on no more than the realistic appreciation that, while there is some evolutionary dialogue, in the end, the courts or appropriate administrative bodies are the ultimate arbiters of what accounting facts are.

Forensic accounting is focused, therefore, 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 to the purpose(s) of establishing accountability and/or valuation. Forensic accountants are typically CPA/CAs that specialize in those types of engagements where there is a need for such evidence. Engagements are wide-ranging, and include transaction reconstruction and measurement; bankruptcy, matrimonial divorce, and probate asset identification and valuation; falsifications and manipulations of accounts or inventories or in the presentation thereof; and accountability within the statutory audit and other environments; among many others. Increasingly, as various parties perceive the value of such evidence, grounded as it is in "accounting facts," forensic accountants are called upon to play important peremptive roles (as of right, without cause), offering independent assurance in such diverse areas as audit committee advisory services, merger and underwriting due diligence, investment analyst research, and enterprise risk management. The validation and enhancement of the body of knowledge (the models and methodologies) relating to the evidentiary value of accounting data, within a strict legal framework, is the raison d'être of the Journal of Forensic Accounting.

ADVANTAGES OF OBTAINING A CPA

Forensic accountants detect and interpret the evidences of both normal (nonfraudulent) and abnormal (fraudulent) phenomena introduced into the books and records of an accounting system (expansively defined) and the resultant effect upon the accounts, inventories, and the presentation thereof. It is imperative, therefore, that forensic accountants first understand what is normal, since even extremely high value abnormalities are introduced by such simple mechanisms as improper account classification or the presentation policy of routine transactions. Therefore, just as forensic dentists and forensic anthropologists are dentists or anthropologists first (that is, they are foremost professionals in the underlying discipline and are specialists in its forensic aspects), so too forensic accountants are accountants first. Students not desirous of a professional accounting orientation might wish to pursue careers as financial investigators or analysts; fields in which cross-fertilization of ideas and engagement teaming naturally arise.

Students in the United States desiring a career as a professional accountant specializing in forensic engagements might wish to consider first obtaining their CPA. CPAs have a social obligation which transcends the client-accountant relationship. The strictures of AICPA standards not withstanding, the specialization of forensic accounting is rapidly evolving to demand a standard of professionalism that begins with the social obligation of CPAs, but goes farther in demanding independent, objective (bias-free) analysis and reporting of economic transactions.

In addition, certain SEC Rules, including some related to the Sarbanes-Oxley Act, provide CPAs with a powerful tool which makes it unlawful for large portions of a subject population to mislead "any independent public or certified public accountant" in a variety of engagement situations. Many states have passed mirror legislation that provides an equivalent tool to CPAs in a variety of non-public company engagements.

Moreover, CPAs are uniquely qualified to tackle fraudulent financial reporting by executive management in public companies, the magnitude of which typically dwarfs employee or external fraud.

Lastly, most states provide a licensing exception for CPA's who perform investigative tasks commonly undertaken by forensic accountants. Without this exception, performance of many of these investigative tasks would require a situationally-limited exemption (e.g., in some states working as an employee and focused exclusively on the affairs of the employer - such as an internal auditor), a Private Investigator's license, or be prohibited altogether. Public-sector financial investigators are generally excluded from licensing requirements.

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