123 Forensic accounting

Transcription

1 123 Forensic accounting by Mark Bryant MA, FCA Victoria Bradbury MA, ACA Brendan Halligan BEc, MA, FCA [Original authors] updated by Brendan Halligan BEc, MA, FCA [Updating author, Update 65, November 2012] Update: 68

2 EXPERT EVIDENCE Author information Brendan Halligan is a chartered accountant and business valuer. He is the principal of Halligan & Co, which specialises in forensic accounting services and business valuation services. Mr Halligan was formerly a partner of Ernst & Young and a director of Ernst & Young Transaction Advisory Services Limited, where he specialised in the valuation of shares, businesses, options and intangible assets. Before that he was a partner of Andersen and a director of Andersen Corporate Finance Limited. At Andersen, Mr Halligan was a partner in the forensic accounting practice and later was the national head of the business valuation practice. Mr Halligan was a co-founder and the inaugural national chairman of the Forensic Accounting Special Interest Group of the Institute of Chartered Accountants in Australia. He was appointed as a subject matter support to a task force of the Australian Professional and Ethical Standards Board. Mr Halligan may be contacted at: Halligan & Co PO Box 588 North Sydney NSW 2059 Australia Phone: brendan.halligan@halligan.com.au Expert Evidence

3 TABLE OF CONTENTS INTRODUCTION... [123.10] FIELDS OF PRACTICE... [123.50] Accounting and auditing... [123.60] Allied fields... [123.70] THE FINANCIAL ACCOUNTING PROCESS... [ ] The basic accounting equation... [ ] Double entry book-keeping... [ ] Elements of financial statements... [ ] Cash and accruals accounting... [ ] General purpose financial statements... [ ] The calculation of profit... [ ] Special purpose financial statements... [ ] THE ACCOUNTING PROFESSION IN AUSTRALIA... [ ] Authoritative pronouncements on accounting and auditing... [ ] Accounting standards... [ ] International harmonisation of accounting standards... [ ] Statements of accounting concepts... [ ] Framework for the Preparation and Presentation of Financial Statements... [ ] Interpretation of AASB Accounting Standards... [ ] Auditing standards... [ ] Accounting Professional and Ethical Standards... [ ] Compliance with Accounting Standards and Auditing Standards... [ ] THE ROLE OF THE FORENSIC ACCOUNTANT... [ ] OPINIONS AS TO LIABILITY Civil litigation... [ ] Criminal litigation... [ ] OPINIONS AS TO THE QUANTUM OF DAMAGES... [ ] Damages models... [ ] Valuation... [ ] Interest... [ ] Taxation... [ ] Opinions on an account of profits... [ ] LIST OF AASB ACCOUNTING STANDARDS... [ ] LIST OF AAS ACCOUNTING STANDARDS... [ ] LIST OF STATEMENTS OF ACCOUNTING CONCEPTS... [ ] LIST OF AUDITING STANDARDS... [ ] LIST OF APESS... [ ] SOURCES OF ACCOUNTING OR FINANCIAL INFORMATION... [ ] APES 215 FORENSIC ACCOUNTING SERVICES (ISSUED DECEMBER 2008)... [ ] [The next text page is ] Update: 68

4 EXPERT EVIDENCE Expert Evidence

5 ABBREVIATIONS Abbreviations AASB...Australian Accounting Standards Board ASA...Auditing Standards issued by AUASB AUASB...Auditing and Assurance Standards Board AUS...Australian Auditing Standards CA...Chartered Accountant (Associate) CPA...Certified Practising Accountant CPA Australia...Certified Practising Accountants Australia FCA...Chartered Accountant (Fellow) FCPA...Certified Practising Accountant (Fellow) FRC...Financial Reporting Council IAASB...International Audit and Assurance Standards Board IASB...International Accounting Standards Board ICAA...Institute of Chartered Accountants in Australia IPA...Institute of Public Accountants SAC...Statement of Accounting Concepts UIG...Urgent Issues Group Update: 68

6 EXPERT EVIDENCE Glossary assets are resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. (Framework para 49) assets, criteria for recognition of an asset is recognised in the balance sheet when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably. (Framework para 89) balance sheet also known as the statement of financial position, it shows assets, liabilities and equity of the reporting entity at the reporting date. credit entry to the right-hand side of an account. debit entry to the left-hand side of an account. depreciation cost of an asset spread over more than one accounting period. economic entity means a group of entities comprising the parent entity and each of its subsidiaries. entity means any legal, administrative, or fiduciary arrangement, organisational structure or other party (including a person) having the capacity to deploy scarce resources in order to achieve objectives. (AASB101 para 11) equity is the residual interest in the assets of the entity after deducting all its liabilities (Framework para 49). expenses are decreases in economic benefits during the accounting period in the form of an outflow or a depletion of assets or an incurring of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. (Framework para 70) expenses, criteria for recognition of expenses are recognised in the income statement when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. (Framework para 94) Framework is the Framework for the Preparation and Presentation of Financial Statements, issued by the AASB (which is in line with the IASB international Framework). It sets out the concepts that underlie the preparation and presentation of financial reports for external users and provides a guide to the application of the AASB Accounting Standards. general purpose financial report a financial report intended to meet the information needs common to users who are unable to command the preparation of reports tailored so as to satisfy, specifically, all of their information needs. (AASB101 para 11) general purpose financial statements financial statements that are intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs. (Glossary of Defined Terms) income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. (Framework para 70) income, criteria for recognition of an income is recognised in the income statement when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. (Framework para 92) Expert Evidence

7 GLOSSARY income statement also commonly known as the profit and loss statement or statement of financial performance or statement of comprehensive income, it shows the items of revenue and expense for a reporting entity arising in the reporting period, and the resulting profit including other comprehensive income. liabilities are the present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. (Framework para 49) liabilities, criteria for recognition of a liability is recognised in the balance sheet when it is probable that an outflow or resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably. (Framework para 91) other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other Australian accounting standards. profit is the figure that results after deduction of expenses from revenues. profit and loss statement also commonly known as the income statement or statement of financial performance or statement of comprehensive income, it shows the items of revenue and expense for a reporting entity arising in the reporting period, and the resulting profit including other comprehensive income. reporting entity an entity (including an economic entity) in respect of which it is reasonable to expect the existence of users dependent on general purpose financial reports for information which will be useful to them for making and evaluating decisions about the allocation of scarce resources. (SAC 2) revenues are the gross inflows of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. (AASB118 para 7) statement of comprehensive income also commonly known as the income statement or profit and loss statement or statement of financial performance, it shows the items of revenue and expense for a reporting entity arising in the reporting period, and the resulting profit including other comprehensive income. statement of financial performance also commonly known as the income statement or profit and loss statement or statement of comprehensive income, it shows the items of revenue and expense for a reporting entity arising in the reporting period, and the resulting profit. statement of financial position also commonly known as the balance sheet, it shows assets, liabilities and equity of the reporting entity at the reporting date. [The next text page is ] Update: 68

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9 INTRODUCTION [123.10] Forensic accountants use their expertise in accounting, auditing, taxation, financial analysis and related fields to answer questions arising in civil and criminal proceedings. In civil proceedings, forensic accountants are often asked to express their opinion of the quantum of the losses suffered by the plaintiff as a result of a breach of contract, tort or statutory duty. Less frequently, forensic accountants may be asked to express an opinion on a matter related to the liability aspects of the case. For example, in auditor-negligence cases forensic accountants may be asked to express an opinion on the adequacy of the audit work performed by the defendant auditor. In criminal proceedings, the work of forensic accountants is often investigative and may involve tracing assets or establishing the flow of funds. While these proceedings often involve white-collar commercial crime, there is an increasing role for forensic accountants in investigating international crime: What the use of fingerprints was to the 19th century, and DNA analysis was to the 20th century, so financial information and forensic accounting has come to be one of today s most powerful investigative and intelligence tools available in the fight against crime and terrorism. 1 This chapter describes the types of forensic work that accountants often undertake, outlines the basic financial accounting process, provides an overview of the accounting profession in Australia and its regulation and, finally, considers the roles of the forensic accountant in litigation. 1 Speech by the Rt Hon Gordon Brown MP, Chancellor of the Exchequer, on Meeting the terrorist challenge given to Chatham House, 10 October 2006, and available at [The next text page is ] Update: 68

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11 FIELDS OF PRACTICE [123.50] Most practising accountants are employed in one of three sectors: the private sector (either by a business or a not-for-profit organisation); the government sector; or in professional practice. Within these sectors, accountants fulfil a variety of roles, some of which are within the traditional scope of accounting and others which may be quite removed but which require or benefit from an accounting background. In the following sections, we briefly outline the major fields of accounting practice. Accounting and auditing [123.60] Financial accounting is concerned with the preparation of general purpose financial statements of the reporting entity, such as the balance sheet and the profit and loss statement. These reports are designed for users such as investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public, who are not in the position to demand special reports from the reporting entity that meet their specific information needs. The preparation of general purpose financial statements is subject to external regulation: see [ ] and [ ]. A significant objective of general purpose financial statements is to provide a mechanism for management to discharge its obligation of accountability to the owners of the reporting entity. Accountants often are closely involved in the design of accounting systems and the use of information technology. Management accounting, in contrast, is concerned with the preparation of specific purpose financial reports for use by the management of the reporting entity. These reports are generally intended for use solely by the management of the reporting entity and not by any external party, and their preparation is, accordingly, generally free from external regulation. Management may use information for making operating decisions, monitoring and controlling the performance of employees and operating divisions, and planning and budgeting for the future. Cost accounting is a part of management accounting that is concerned with providing information about the costs of the reporting entity. It is particularly relevant to manufacturing businesses. Information about costs is used for making decisions about such matters as the optimal mix of products to be made, the volumes of goods to be produced, and pricing. External auditing is the formal process of independently examining the general purpose financial statements of a reporting entity and expressing an opinion to its owners on a number of matters and particularly, in respect of companies, as to whether the reports have been drawn up so as to provide a true and fair view of the financial position of the reporting entity and its results for the reporting period. The practice of external auditing is governed by professional and statutory regulation. Internal auditing, while similar in some respects to external auditing, differs fundamentally in that whereas the aim of the external auditor is to give an opinion to the owners of an entity on Update: 68

12 [123.60] EXPERT EVIDENCE the truth and fairness of general purpose financial statements, the nature of the internal auditor s role is determined by the entity s management and may vary significantly between organisations. Internal auditing is concerned with matters such as the quality and maintenance of the internal controls of the reporting entity, compliance with regulations, and the efficiency and cost-effectiveness of operations. Allied fields [123.70] Accountants, and particularly those in public practice, may be engaged in one or more allied fields, including: (1) taxation consulting; (2) insolvency and reconstruction services; (3) corporate finance; (4) strategic and business planning; (5) financial planning; (6) regulatory and corporate affairs; (7) estate planning; (8) management consulting; (9) risk management services; (10) treasury services; and (11) share registration services. In addition, some of the larger accountancy firms may organise teams of accountants along industry lines rather than service lines. For example, a firm may have a banking team which brings together expertise in accounting, auditing, taxation, regulation, risk management etc as it relates to the banking industry. In some of the fields shown above, accountants will be in competition with other professionals such as, for example, lawyers in regard to taxation, merchant bankers in regard to corporate finance, and financial planners in regard to financial planning. For some fields there is a specific professional body. For example, insolvency practitioners may be members of the Insolvency Practitioners Association of Australia. An accountant practising as an insolvency practitioner will often be a member both of one of the accountancy professional bodies (see below, [ ]) and the Insolvency Practitioners Association of Australia. The nature and extent of the expertise, and the degree of specialisation, of accountants varies considerably. In public practice it is usually related to the size of the firm and the nature of the clients: professional firms range in size from sole practitioners whose clients are individuals and small businesses, to international firms with many thousands of partners and employees, whose clients are major international corporations and government agencies. [The next text page is ] Expert Evidence