123 Forensic accounting

123 Forensic accounting Paragraph INTRODUCTION... [123.10] FIELDS OF PRACTICE... [123.50] Accounting and auditing... [123.60] Allied fields... [123.70] THE FINANCIAL ACCOUNTING PROCESS... [123.110] The basic accounting equation... [123.120] Double entry book-keeping... [123.130] Elements of financial statements... [123.140] Cash and accruals accounting... [123.150] General purpose financial statements... [123.160] The calculation of profit... [123.170] Special purpose financial statements... [123.180] THE ACCOUNTING PROFESSION IN AUSTRALIA... [123.220] Authoritative pronouncements on accounting and auditing... [123.230] Accounting standards... [123.240] International harmonisation of accounting standards... [123.250] Statements of accounting concepts... [123.260] Framework for the Preparation and Presentation of Financial Statements... [123.270] Interpretation of AASB Accounting Standards... [123.280] Auditing standards... [123.290] Compliance with Accounting Standards and Auditing Standards... [123.300] THE ROLE OF THE FORENSIC ACCOUNTANT... [123.340] OPINIONS AS TO LIABILITY... [123.380] Civil litigation... [123.380] Criminal litigation... [123.390] OPINIONS AS TO THE QUANTUM OF DAMAGES... [123.430] Damages models... [123.440] Valuation... [123.450] Interest... [123.460] Taxation... [123.470] Opinions on an account of profits... [123.480] 123-1 Update: 41

EXPERT EVIDENCE APPENDIX 1 - LIST OF AASB ACCOUNTING STANDARDS (JULY 2007)... [123.520] APPENDIX 2 - LIST OF AAS ACCOUNTING STANDARDS (JULY 2007)... [123.560] APPENDIX 3 - LIST OF STATEMENTS OF ACCOUNTING CONCEPTS (JULY 2007)... [123.600] APPENDIX 4 - LIST OF AUDITING STANDARDS (JULY 2007)... [123.640] APPENDIX 5 - SOURCES OF ACCOUNTING OR FINANCIAL INFORMATION... [123.680] APPENDIX 6 - STATEMENT OF FORENSIC ACCOUNTING STANDARDS - APS 11 (ISSUED JULY 2002)... [123.720] APPENDIX 7 - JOINT GUIDANCE NOTES - GN2 FORENSIC ACCOUNTING... [123.760] [The next text page is 123-51] 123-2 Freckelton and Selby

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 NIA National Institute of Accountants SAC Statement of Accounting Concepts UIG Urgent Issues Group 123-51 Update: 41

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) 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) income statement also known as the 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. 123-52 Freckelton and Selby

GLOSSARY 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) profit is the figure that results after deduction of expenses from revenues. profit and loss statement also known as the income 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. 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 financial performance also known as the income statement, 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 known as the balance sheet, it shows assets, liabilities and equity of the reporting entity at the reporting date. [The next text page is 123-101] 123-53 Update: 41

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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 41, December 2007] 123-101 Update: 41

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. [The next text page is 123-103] 123-102 Freckelton and Selby

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 http://www.hm-treasury.gov.uk. [The next text page is 123-201] 123-103 Update: 41

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