Scribd Logo
Upload

Welcome to Scribd!

  • 161 views

    Chapter 1 Summary PDF

    Uploaded by

    shidqi_2008

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Chapter 1 Summary PDF

    Uploaded by

    shidqi_2008
    161 views3 pages

    Original Title

    Chapter 1 Summary.pdf

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    161 views3 pages

    Chapter 1 Summary PDF

    Uploaded by

    shidqi_2008

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Chapter 1

    Introduction to Forensic and Investigative Accounting


    CHAPTER SUMMARY
    Overview
    This chapter defines a broad approach to forensic accounting and creates a frame of reference for students to
    read and understand the rest of the book. Upon tracing the threads of forensic accounting through its history and
    development, students will understand forensic accounting to be a challenging discipline that substantially interacts
    with economics, finance, information systems and the law.

    Definition and Development of Forensic Accounting


    1)1001

    Defining Forensic Accounting

    Forensic accounting is the action of identifying, recording, settling, extracting, sorting, reporting, and verifying
    past financial data or other accounting activities for settling current or prospective legal disputes or using such past
    financial data for projecting future financial data to settle legal disputes.
    Implicitly, there are a couple of other factors to incorporate in the definition: time and purpose. Forensic
    accounting focuses on the past, although it may do so in order to look forward. Forensic accounting is accounting
    performed in some circumstances for a specific legal forum; in other circumstances it is accounting performed in
    anticipation of presentation before a formal forum.
    Forensic accountants may be employed in a wide variety of risk management engagements, along with areas
    such as valuation, damages, intangibles, and so on.

    1)1011 Historical Roots of Accounting


    The history of accounting dates back to temple priests taking inventory of livestock and has evolved through
    time to such present events as the examination requirements for the CPA certificate being passed by all states.

    1)1021

    History of Financial Reports and Legal Challenges

    Financial reports on business operations and performance were created by accountants in the United States,
    Canada, and F>urope for a long time before actual independent audits were mandated. The current system of accounting
    checks and balancesfinancial reporting coupled with both internal and external auditingis relatively recent. Before
    financials were audited by independent outside experts, the courts were often the place where challenges were made
    and accounting experts were brought in to give testimony on the disputes in question.

    1)1031 Threads of Forensic Accounting


    Forensic accounting (or at least, accounting expert witnessing) can be traced as far back as 1817 to a Canadian
    court decision of Meyer v. Sefton. Thus, the website of the Association of Certified Forensic Investigators of Canada
    maintains that the field of forensic and investigative accounting had its genesis in Canada. Seven years after the
    Canadian case, on March 12, 1824, a young accountant by the name of James McClelland started his business in
    Glasgow, Scotland, and issued a circular that advertised the various classes of forensic-type work he was prepared to
    undertake.

    2011 CCH. All Rights Reserved.

    Chapter 1

    2
    fll041

    Forensic and Investigative Accounting


    Accounting Literature Parallels Accounting Practice

    With the development of accounting literature the role of the accountant as an expert witness was getting growing
    attention. Articles on the topics of forensics, arbitration, fraud, investigation, and expert witnesses started appearing in
    the late 19th century. Cleveland Bacon and Alex Moore each contributed articles about expert witnesses.
    1)1051

    The Phrase "Forensic Accounting" Is Born

    The first person to coin the phrase in print was probably Maurice E. Peloubet in 1946. Kenneth W. Robinson
    suggested that there is teamwork to be done by lawyers and accountants. In the following year, George B. Pearson, Jr.,
    a former judge, gave 10 warnings to the accountant who wishes to do a good job on the witness stand. Max Lourie, a
    lawyer employed in the New York Supreme Court published an article in which he suggests that he probably invented
    the term forensic accounting, although his article appeared seven years after Maurice E. Peloubet had apparently
    coined the term. In 1964, Philip J. Gallagher in the Journal of Accountancy suggested that an accounting expert
    witness must be able to define the basic concepts of the profession and be able to explain accounting terminology.

    Forensic Accounting and Investigative Accounting Come of Age


    1)1061

    The Forensic Accountant Becomes an Investigator

    Once accrual accounting took hold and the role of external auditor became much more broad based and controloriented than transaction-oriented, there developed a need for a fraud auditora specialist who would ferret out
    deception in financial statements and reporting. Gradually the definition of forensic accounting expanded from the
    accountant who testifies in court to the investigative accountant as Peloubet chronicled. The forensic accountant
    learned to detect fraud itself, not merely to testify about it. Perhaps nowhere is this more evident than in the use of
    accountants and forensic accounting skills by the FBI.

    1)1071

    FBI and Forensics

    According to Lee R. Pennington, during the period of hostilities in WWII, the FBI employed a total of 500
    agents who were accountants. In 1960, J. Edgar Hoover began to emphasize fraud detection. Agents investigated
    violations of the Federal Reserve Act, check kiting, embezzlements, fraud in government contracts, criminal
    investigations under the National Bankruptcy Act, various civil investigations, fraudulent check schemes, securities
    frauds, confidence game swindles, embezzlements, false bills of lading, fraudulent bankruptcies, false claims, and
    various frauds perpetrated against the government. Today there are more than 600 FBI agents with an accounting
    background, and many are CPAs. The FBI today has a Financial Crimes Section that investigates money laundering,
    Internet crimes, financial institutions fraud, and any other economic crime.
    1)1081

    First Forensic Accounting Books in United States

    The first forensic accounting book appeared in 1982, written by Francis C. Dykeman, a retired partner of Price
    Waterhouse. Four years later in 1986, Kalman A. Barson published a second forensic book entitled Investigative
    Accounting. In 1987, a third book was published entitled Fraud Auditing and Forensic Accounting: New Tools and
    Techniques.
    1)1091 AICPA Practice Aid
    In 1986, the AICPA broke forensic accounting into two broad areas: investigative accounting and litigation
    support. The Institute issued Practice Aid 7, which outlined the six areas of litigation services: damages, antitrust
    analyses, accounting, valuation, general consulting, and analyses.

    1)1101 American Management Association Course


    The American Management Association now offers a self-study course, "Forensic Accounting and Financial
    Fraud," which breaks forensic accounting into four broad areas: pretrial support, trial support, expert witnessing, and
    settlement support.

    Chapter 1

    2011 CCH. All Rights Reserved.

    Textbook Solutions

    1)1111 The Panel on Audit Effectiveness


    The Public Oversight Board (an independent private sector body created in 1977) appointed the Panel on Audit
    Effectiveness in 1998 at the request of then SEC Chairman Arthur Levitt to review and evaluate how independent
    audits of the financial statements of public companies are performed and to assess whether recent trends in audit
    practices serve the public interest. The Panel conducted the most exhaustive study ever undertaken of the audit
    model and on September 6, 2000, released a report of more than 200 pages entitled Report and Recommendations.
    The report's goal is to foster more effective audits that improve the reliability of financial statements, enhance their
    credibility, contribute to investors' confidence in the profession, and improve the efficiency of the capital markets.

    1)1121 AICPA Fraud Task Force Report


    In 2003, the AICPA's Litigation and Dispute Resolution Services Subcommittee issued a report of its Fraud
    Task Force entitled "Incorporating Forensic Procedures in an Audit Environment." The task force paper provides
    guidance to practitioners in applying procedures in an audit environment in light of the Sarbanes-Oxley Act and
    newly issued AICPA Statement on Auditing Standards (SAS) No. 99, Consideration of Financial Fraud in Financial
    Statement Audit.
    The AICPA takes the position that auditors are not required to carry out specific forensic procedures, but rather
    provide guidance on how to include forensic techniques within the SAS 99 process. Public accountants may need to
    use forensic accountants in certain circumstances.

    1)1131 Controversy Surrounding the Accountant's Role in Fraud Detection


    In the early 1980s, companies began to use computers to perform their record keeping, and intense competition
    caused the auditing fees to fall as much as 50 percent from the mid-1980s to the mid-1990s. Thus, auditors had to cut
    costs by reducing the labor-intensive process of reviewing hundreds of corporate accounts. They grew more reliant on
    internal controls and worked less with account balances and entries. Because top executives can circumvent internal
    controls, they could manipulate the records and cook the books.
    Accounting experts debate the role of auditors in uncovering fraud and hold many different views. Some believe
    that every audit engagement should include much more skepticism and detailed review of transactions. Others suggest
    that only special engagements specifically targeting fraud can adequately and effectively root out the problem.

    1)1135 American Accounting Association Finally Permits a Forensic Section


    A new Forensic and Investigative Accounting (FIA) section of the American Accounting Association was
    created in 2009 by Larry Crumbley. This FIA section is dedicated to the continual improvement of forensic accounting
    research and education, through the encouragement, development, and sharing of:
    The promotion and dissemination of forensic and investigative academic and practitioner research.
    The relevant and innovative curricula with an emphasis on effective and efficient instruction.
    The exploration of knowledge-organizational issues related to forensic accounting programs.
    The creation and presentation of CPE courses to members and professionals.

    1)1141 Conclusion
    The computer helped direct a revolution in accounting because business transaction volume grew to such an
    extent that it was impossible for accountants to examine each transaction. Internal controls, determining risks, and
    sampling became the focus. Unfortunately, unethical managers learned to skirt the modern controls; thus, weaknesses
    in the modern risk control and sampling approach grew during the 1990s and became even more apparent in the first
    few years of the 21 st century. For broad-based, system-wide relief from today's financial scandals, many suggest that
    the weaknesses can be attacked successfully in repositioning the auditing engagement and mandating more stringent
    ethical and independence requirements to start.

    2011 CCH. All Rights Reserved.

    Chapter 1

    You might also like