Importance of forensic accounting : Case Study of Iran LEILA SEDIGHIKAMAL Department of Accounting Islamic Azad University, Science and Research branch,tehran IRAN Abstract : Accounting frauds and scams are perennial. They occurred in all eras and in all countries and affected many organizations, regardless of their size, location, or industry. accounting frauds and scams have been dominating news items in th e past decade.forensic accounting, also called investigative accounting or fraud audit, is a merger of forensic science and accounting.the " Forensic Accounting" activity which have not sufficiently been discussed in Iran.In this sudy, forensic accounting will be analyzed. Key-Words:accounting fraud, Forensic accounting, Litigation Support, Investigative Accounting,forensic accounting training,forensic accountant, Iran. 1 Introduction Accounting scandals and frauds are perennial. Innumerable instances of scandals and frauds have plagued our society since before the Industrial Revolution. They occurred in all eras and in all countries. During the last few decades, there have been numerous fina ncial frauds and scandals, which were milestones with historical significance[1]. Enron, WorldCom and Parmalat are just few examples of the well-know accounting scandals and/or frauds. Howe over, what is not so well-known is that almost every country had its own accounting scandals and frauds. The media has fortunately reported scandals and bankruptcies in companies. Indeed, fraud is a world-wide phenomenon that affect s all continents and all sectors of the economy, and most organizations may face regardless of their size, industry or country[2]. If the organization has valuable properties (like cash, goods, information, or services), then fraud may be attempted. As at this time, the issue of forensic accounting and fraud a continuingly being debated for the past few years as companies in developed co untries such as Enron Corp, WorldCom Inc, and Kmart Corp have been detected and proved of fraudulent conduct[3]. These still an issue to be addressed in th e business sector as fraud cases have only been detected after massive funds have disappeared from the coffer. Forensic accounting may be one of the most effective and efficient way to reduce and prevent accounting fraud. As forensic accounting is getting popular in these recent years, it has been provided as a course by many educational institutions in their respective countries. Forensic accounting is defined as a science dealing with the application of accounting facts gathered through auditing methods and procedures to resolve legal problems. It also requires the integration of investigative, accounting, and auditing skills[4]. These forensic accountants draw conclusions and calculate values and identify irregular patterns or suspicious transactions by critically analyzing th e financial data. It provides an accounting analysis to the court for dispute resolution in certain cases and it also provides the court with explanation to the fraud that has been committed. That is why forensic accounting may play a vital role in detecting and reducing
Accounting frauds[5]. 2 Literature review discussed below, th and importance of forensic accountants in the judicial process cannot be overstated. Federal Appeals Court Judge Harry T. Edwards considers, Forensic science [to be] the handmaid of the justice system [5]. A second reason stems from the nature of the forensic accounting certification industry to the forensic accounting and investigation industry as a sphere of professional practice that spans the boundaries of law, accounting, business, and the economy[6]. Here, the forensic accounting industry is more narrowly construed It refers simply to the supply side of forensic accounting re-lated certifications and the corporations that issue them Williams explains that the proliferation of unfamiliar spe-cialty forensic accounting certifications is the result of the extent to which the development of the forensic accounting industry is motivated by narrow organizational interests and objectives related to competition and profitability[7]..williams (2002) refers There are several reasons why forensic accounting canbe considered important enough to the subject of state reg-ulation. The first reason is the nature and function of foren-sic accounting and its role in the judicial process. Apart from expert witness considerations, Problems arise from the fact that forensic accounting service is still new to most of the businesses and even to the public in Iran. This leads to confusion among public and some may even be unaware of the existence of the system. Therefore, the importance of the service is ignored. Therefore this study focus on importance of forensic accounting. For example there are several empirical studies such as Cain (1999) and the KPMG, Australia fraud survey (KPMG), (2002) each indicate that over 50 percent of all respondents surveyed believed that fraud is a major business problem[3]. Moreover, similar reviews of fraud cases by Rezaee (2004) revealed that financial statement fraud has cost market participation more that USD$500 billion during recent years, with serious litigation consequences[ 4]. 2.1 Forensic accountig To define forensic accounting, we can use parts of the definition of forensic medicine and accounting taken from Websters' Dictionary. Forensic medicine is a "science that deals with the relation and application of facts to legal problems.accounting is the system of recording and summarizing business and financial transactions and analyzing, verifying and reporting the results." So a combination of the two definitions would yields: forensic accounting-an accounting method that deals with the relation and application of the system used to record and summarize business and financial transactions to a legal problem. Forensic Accounting is the application of a transaction reconstruction methodology to legal issues. It is frequently associated with the analytical investigation of civil or criminal actions, such as: White-Collar crime- Fraud and Embezzlement; Insurance Casualty Claims; Loss Measurement; Accounting Malpractice, and; General Abuse of Trust Relationships Within this area of accounting there are two broad classifications of accountant or areas of practice[6]
1. Litigation support specialists within the litigation support specialist there are the categories of business valuation, revenue analysis, expert witness testimony, and future earnings' evaluation. 2. Investigative or fraud accountant. The investigative or fraud accountant has two areas of emphasis- seeking out evidence of criminal conduct and dispelling or supporting of damages. 2.1.1 Litigation Support In cases of litigation support work, the forensic accountant is asked to provide an opinion based on facts that can be known or as yet uncovered[8]. In the case of the latter, the accountant may have to become an investigator of sorts, and on some occasions, prepare information as a model of how things should look if done correctly. Key areas of litigation support services include engagements in both professional liability claims as well as a variety of civil claims. 3 The role of forensic accountant forensic accounting encompasses both litigation support and investigative accounting In the aftermath of accounting scandals, financial crimes, and business collapses, the rapidly growing specialty of forensic accounting continues to define itself. The need for forensic accountants (FAs) in government, industry, and public accounting continues to grow. There is also an incredible need within law firms for the specialized skills of FAs. Litigation often involves multiple, complex accounting and legal issues that overlap and intertwine. FAs with broad business backgrounds and forensic experience are a vital resource to the litigation team and provide valuable insight into financial issues. Litigation support provides assistance of all na ture in a matter involving existing or pending Included in the professional liability claims category would be quantifying the impact of lost earnings from events such as cons truction delays, stolen trade secrets, insurance disputes, damage/loss estimates and malpractice claims. 2.1.2 Investigative Accounting In this area the accountant is called upon to review of the factual situation and provision of suggestions regarding possible courses of action. Another area of work can be providing assistance in the protection and recovery of assets. Very often accountants can asked to undertake co-ordination of other experts, including private investigators, forensic document examiners, consulting engineers. This all will lead to an accountant providing assistance in the recovery of assets by way of civil action or criminal prosecution. litigation. It deals primarily w ith issues related with the quantification of economic damages, while investigative accounting is associated to the investigation of criminal matters.)under litigation support, forensic accountant assist in obtaining document necessary to support or refute a claim.[9]. Reviewing of the relevant documentation to form an initial assessment of the case in an identified area of loss.examination for discovering, including the formulation of the act re garding the financial residence. Attendance at the examination for discovery to review the testimony, assist with understanding the financial issues and to formulate additional questions to be asked.investigative accountant on the other hand
reviews factual situation and provides suggest ions regarding possibl e courses of action, 3.1 Principal Duties of a Forensic Accountant In other words, what does a forensic accountant do? Simply put, a forensic accountant's primary duty is to analyse, interpret, summarise and present complex financial- and business-related issues in a manner that is both understandable by the layman and properly supported by the evidence.forensic accountants are engaged by both government and private agencies cutting across industries ranging from insurance companies, banks, police forces, regulatory agencies and other financial and business organisations[11].the services rendered by forensic accountants cover a wide spectrum of which the following are commonly provided: investigation and analysis of financial evidence; assist with the protection and recovery of assets,co-ordinate other experts [10]. development of computerised applications to assist in the analysis and presentation of financial evidence; communication of findings in the form of reports, exhibits and collections of documents; and assistance in legal proceedings, including testifying in court as expert witness and preparing visual aids to support trial evidence. To properly carry out these functions, the forensic accountant must also be familiar with legal concepts and procedures, including the ability to differentiate between substance and form when grappling with any issue. 3.2 Key Benefits of Using Forensic Accountants Objectivity and credibility - there is little doubt that an external party would be far more independent and objective than an internal auditor or company accountant who ultimately reports to management on his findings. An established firm of forensic accountants and its team would also have credibility stemming from the firm's reputation, network and track record. Accounting expertise and industry knowledge - an external forensic accountant would add to the organisation's investigation team with breadth and depth of experience and deep industry expertise in handling frauds of the nature encountered by the organisation. Provision of valuable manpower resources - an organisation in the midst of reorganisation and restructuring following a major fraud would hardly have the full-time resources to handle a broad-based exhaustive investigation. The forensic accountant and his team of assistants would provide the much needed experienced resources, thereby freeing the organisation's staff for other more immediate management demands. This is all the more critical when the nature of the fraud calls for management to move quickly to contain the problem and when resources cannot be mobilised in time. Enhanced effectiveness and efficiency - this arises from the additional dimension and depth which experienced individuals in fraud investigation bring with them to focus on the issues at hand. Such individuals are specialists in rooting out fraud and would recognise transactions normally passed over by the organisation's accountants or auditors.
4 Forensic accounting training A capable Forensic Accountant should have the following characteristics : curiosity ; persistence ; creativity ; discretion ; organization ; confidence; and sound professi onal judgement. A Forensic Accountant must be open to consider all alternatives, scrutinize the fine details and at the same time see the big picture. In addition, aforensic Accountant must be able to listen effectively and communicate clearly and concisely. Accountants can play a very vital role and as fight agai nst corruption and organized crime is gaining momentum in the developing countries the requirement of Forensic accountants is on the rise. ICMAP and other professional bodies should come forward in creating the requisite capacity in the sector, so that white- collar crimes are dealt with in a more professional manner[11]. Based on the re sult of our library study we conclude as follows: 1.Performance of training courses, general and private, for accountants in order to enhance their perception of financial rules and forensic accounting. 2.To provide necessary trainting in fraud and its prevention. 3.Encourage active personals to learn financial rules of crimes and their application. 4.Standardization of forensic accounting source to help accountants perception. 5.Providing a good database of financial fines and its prevention method 6. Establishment of consultation society for accountants in forensic accounting. 7. To provide courses in forensic accounting basis a university 8.To hold specialized seminars in forensic accounting. 5 Conclusion here are some courses to take and certifications to consider so you can be at the top of the forensic accounting pack.forensic accounting is considered as a specialized field of accounting relating frequently to legal problems (claims) and complaints. It is clear from the above treatment of the subject that the forensic accountant must possess not only Fraud can be a huge problem for a business or a government entity, and that problem is growing. Most frauds involve financial matters, so the most logical people to investigate them are accountants. Forensic accountants are specially trained to investigate and report fraud in relation to legal cases. If you want to tap into this growing career field,
indeed a rare creature. However, the forensic accountant does not work in isolation. He brings with him the collective experience and varied skills of his team, which comprises not only accountants but also investigators, attorneys, financial analysts and computer forensic specialists. multiple skills but should have the qualities of curiosity, persistence, creativity, discretion, organisation, confidence and sound professional judgment. You may be sceptical as to whether all these commendable qualities could reside in a single individual. I would be the first to concede that such an individual is References: [1] European Federation of Accountants,(2002) The Role of Accounting and Auditing in Europe. [Online] Available : www.farse/doc/feeposition.com (2002). [2] Junaid M. Shaikh, & Mohammad Talh, Credibility and expectation gap in reporting on uncertainties, Managerial Auditing Journal, 18/6/7,(2003), pp. 517-529. [3] Cain, S,Fraud in the workplace, Orange County Business Journal, Vol. 22, No, 16, (1999). pp.78. [4] Rezaee, Z. & Burton, E.JForensic Accounting education: insight from academiciansand certified fraud examiner practioners, MCB University Press. Vol12/9, (1997),pp. 479-489. [5]Edwards,H.T).How reliable is forensic evidence in court? Retrieved from http://www.pbs.org/wgbh/pages/frontline/crim inal-justice real-csi/judge-harry-t-edwardshow-reliable-is-forensic-evidence-incourt.(2012). [6] Zysman, A, Forensic Accounting Demystified, World investigators netw ork Standard Practice for investigative and forensic accounting engage ment?, Canadian Institute of Chartered Accountants, Journal of Forensic Accounting., Available at ifa.alliance@cica.ca (2008). [7]Williams, J. W,Playing the corporate shell game: The forensic accounting andinvestigation industry, law, and the management of organizational appearances. Doctoral Dissertation, Dissertation Abstracts International. Toronto: York University,(2002)..[8] amaswamy, V, Corporate Governance and the Forensic Accountant, The CPA Journal, vol75 no. 3,(2005), pp. 68-70. [9] Robinson, S.N. and Robertson, J.C, The Effects of Contextual and Wrongdoing Attributes on organizational Employees Whistle-blowing Intentions Following Fraud, Journal of business ethics, vol. 106, issue 2, March,(2012), pp. 213-227. [10] Bologna, G.J. and Li ndquist R.J. Fraud Auditing and Forensic Accounting: New Tools and Techniques'', Hoboken, New Jervey: Wiley Publication,(1987). [11] Fortin, A. and Legault, M. (2010), Development of Generic Competencies: Impact of a Mixed Teaching Approach on Students Perceptions, Accounting Education: an international journal, Vol. 19 nos. 1-2,(2010), pp. 93-122...