|
 |
|||||||
|
|
|
|
|||||||||||||||||
|
|||||||||||||||||||
|
|
|||
|
Feature
CSI General Ledger: The Directors’ Role in Forensic Accounting The forensic accountant’s job is to determine what happened or is happening, who is responsible, and how the situation can be prevented in the future.By Edith G. Orenstein Forensic accounting is a subspecialty of professional services that integrates aspects of accounting, audit and investigation. Forensic accountants gather the numbers and then look further to determine the fact pattern or reality behind them. The common deliverable is a legally accurate financial analysis that can help reveal the truth, resolve disputes and, if necessary, stand up in court. The attribute that distinguishes forensic accounting from general accounting is the same as the attribute that distinguishes forensic medicine from general medicine: that is, the process it follows and the facts it gathers are designed to withstand a legal or administrative review. Forensic accountants are routinely involved in business valuations and litigation support, specifically in cases involving insurance claims, damages, intellectual property and disputed matrimonial assets. Their current prominence results from recent high-profile corporate fraud cases as well as new regulations emerging from Sarbanes-Oxley and the effort to prevent future corporate crime by raising the standards for internal and external audits. How to Know When You Need One Corporate fraud covers two areas of criminal activity that can occur in tandem: misappropriation of assets and dishonest financial reporting. A board may have obvious reason to suspect fraud when a company’s trends move out of sync with its history or its industry; when executives seem to be living above their means; or when answers to tough questions are vague or slow in coming. In well-managed companies, red flags on these issues are raised internally through routine internal audit testing and corrected by the finance staff and executive group. In extreme cases, the problem is not caught until a request for information, a subpoena or a notice of investigation has been received from a regulator or law enforcement agency. The forensic accountant’s job is to determine what happened or is happening, who is responsible, and how the situation can be prevented in the future. The structure and scope of the services will vary with the circumstances. Where to Turn “In terms of ongoing fraud control, a company’s first line of defense is to have good forensic accounting skills on the internal audit staff,” says Dennis Beresford, former chairman of the Financial Accounting Standards Board who now serves on audit committees of three boards as well as the faculty of the J.M. Tull School of Accounting at the University of Georgia. Internal auditors are the people most likely to uncover fraud in the course of their routine work or to respond to tips that come through employee hotlines. The external auditor can also be a resource, and many CPA firms have recently added forensic accountants to their audit teams. The external auditor’s forensic role and responsibilities are in the process of being clarified by the profession, however. Auditors are obligated to identify red flags that could indicate fraud, but proving that fraud occurred is more a legal issue than an accounting one. Expectations for external auditors have been raised since Sarbanes-Oxley, which intensified the focus on internal controls and certification of financial statements while increasing criminal penalties for securities fraud. The American Institute of Certified Public Accountants (AICPA) is moving to provide clearer guidance and definitions for auditors in cases where the risk of material misstatement due to fraud requires a forensic response. A third-party forensic accountant is best used when the internal finance staff itself may be subject to scrutiny or when the board needs to enhance its credibility with the company’s shareholders in cases with the potential for significant impact. “An outsider can dig deeper and ask tougher questions than a familiar face,” says Darryl Neier, CFE, MS, Director of Litigation Services for Sobel & Co., a New Jersey-based CPA firm, and an instructor in forensic accounting on the faculty of New York University . Most experts agree that outside forensic accountants are best used on an as-needed basis, especially for companies with qualified internal audit staff. Who Qualifies? Forensic accounting skills are acquired through a combination of education and experience. Several training and certification programs promote the development of a common knowledge base and professional standards. The Association of Certified Fraud Examiners, which issues a credential known as the CFE, reports that its membership has hit a new record of 32,000 people in 125 countries, with 4,000 new members meeting the training and certification requirements in 2004 alone. Many universities offer courses, concentrations and certificates in the field In choosing an outside firm or hiring forensic auditors for your own staff, directors should look for people with the appropriate training and credentials, which include JDs, CPAs, CFEs, and former law enforcement professionals. Engaging Forensic Accounting Services “If you sense you need a forensic accountant, it will be more productive and cost-effective to bring one in sooner rather than later,” Neier says. “This usually means at least at the first notice that any sort of regulatory or criminal investigation has been initiated.” By conducting a parallel investigation on behalf of the shareholders, boards can take action to assure they are part of the solution rather than the problem. Boards and managements in need of forensic accounting services have in the past typically engaged them through an independent outside counsel that is spearheading an inquiry on the board’s or company’s behalf. Traditionally, that would have shielded the forensic results from public view as attorney work-product covered by attorney-client privilege, but the ability to protect the confidentiality of these reports has declined due to recent high-profile cases. “Prosecutors are increasingly pressuring corporations to waive attorney-client privilege in exchange for leniency,” notes Neier. “Boards should be prepared for any findings from a forensic investigation to eventually become public, regardless of who engages the services, at least for the time being.” A Delicate Balance for Boards “The general role of a board committee directing a third-party forensic financial investigation is to define the scope of the project; keep it on track so the costs do not get out of hand; review the results; oversee the development of the final report; and bring the review to closure,” Beresford says. Specific roles will differ from case to case. Sometimes the audit committee will be in the driver’s seat. In other cases, such as WorldCom, the audit committee may be part of the situation under review. Tensions can also arise between the board and management during these projects. The forensic accountants will need information from the company’s financial reporting systems, but some research may have to be conducted around them if there is a fear that insiders are involved in some wrongdoing. “In every engagement we take on, we make sure the direction of the work and the lines of communication are clear before we begin,” Neier notes. Communication can sometimes prevent problems before they occur too. As a member of several firms’ audit committees, Beresford tries to stay ahead of the curve by keeping in touch regularly with the CFO. “When I see something in the press about an issue under legal or regulatory scrutiny—things such as finite insurance or accounting for derivative financial instruments—I’ll e-mail the article to the CFO with a note asking if it could be a problem for us,” he says. “If the answer is yes, the board should ask for an internal review first. If that produces less-than-satisfactory answers, then calling in some additional resources may be warranted.” Boards and managements should be on the same side in terms of making sure all transactions are legal and accounted for properly. Promoting Integrity and Transparency Colleen Cunningham, President and CEO of Financial Executives International (FEI), notes that FEI seeks to promote behavior and reporting standards that would preclude the need for forensic accountants. “Nevertheless,” she says, “we recognize that these professionals can assist companies in preventing and detecting fraud. We encourage directors and boards to carefully consider use of forensic accountants, whether in hiring them to strengthen the skill set of internal audit and compliance staff, or in engaging outside firms when warranted. By using such resources wisely and well, board members and financial executives can promote integrity and transparency.” |
|||
| Edith
G. Orenstein is Manager of Research, Financial Executives Research
Foundation, the non-profit research arm of Financial Executives
International, www.fei.org, the
professional association of senior financial officers. The
author holds a Certificate in Forensic Accounting from New York
University’s School of Continuing & Professional Studies and can be
contacted at eorenstein@fei.org.
She wishes to acknowledge the assistance of Mary Anne Myers in the
writing of this article Copyright © 2005 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
||||
