Peer-Review my rough draft (and Happy Holidays!!)
Hello everyone in EssayForum Land,
I'm a new user here and I've been ill for the past week. Given that, I was able to finish my rough draft on my research paper but I need it peer-reviewed ASAP (by midnight Christmas Eve Arizona time). If any of you out there can help me with this, it will be VERY greatly appreciated!!
Thank you all in advance, and Happy Holidays!! Wendy B. from Gilbert, AZ
(P.S. I'm an accounting major so my thesis and essay is about forensic accounting. Here it is. I don't think I can attach a word file on this, can I?)
Forensic Accounting Is Important in Financial Investigations
Believe it or not, there are some people who have never heard of the term "forensic accounting." Sometimes they would think of the television show Forensic Files and assume that anything and everything that is forensic-related has to do with physical evidence that is collected from crime scenes. However, that is not necessarily the case. With financial investigations on the rise, it is important to know and understand how forensic accounting is key in any matter that involves financial information. People are all-too familiar with the now-defunct Enron Corporation, an energy, commodities, and services company headquartered in Houston that had used the now-defunct accounting firm Arthur Andersen to falsify financial information to Enron's shareholders in November 2001. The scandal has led to the passing of the Sarbanes-Oxley Act in 2002, which requires top management in a corporation to individually certify the accuracy of financial information.
First, what is forensic accounting? According to Shanna Freeman, a contributing writer for the noted Internet site HowStuffWorks, "the term 'forensic accounting' was first used in 1946 by Maurice E. Peloubet, a partner in a New York accounting firm. He wrote about the use of accounting in courtroom proceedings as part of testimony, but acknowledged that investigation was becoming more prevalent for accountants due to the increase in government agencies that regulated financial practices. Journals began to publish articles about the connections between law and accounting. In 1953, a New York lawyer named Max Lourie claimed that he invented the phrase 'forensic accounting,' although Peloubet wrote about it first. Lourie stressed the need forensic accounting literature and training." Keep in mind that Peloubet's writings took place 70 years ago, and his writings still hold true to today, even with the advanced modern technology available.
A definition provided by noted Canadian forensic accountant Alan Zysman, CPA, defines forensic accounting as "the integration of accounting, auditing, and investigative skills." (Zysman, Forensic Accounting Demystified) D. Larry Crumbley, CPA, an endowed professor of accounting at Louisiana State University and editor of The Journal of Forensic Accounting, expounds on the definition as well. He explains, "An effective forensic accountant needs a solid understanding of accounting, which includes investigative auditing techniques, criminology, courtroom procedures, and written and oral communication skills." (Crumbley, 2013) He adds, "With the growing complexity of the business environment and the number of business related investigations, forensic accounting professionals are increasingly asked to assist in the investigation of financial and business related items." (Crumbley, 2013) Given the outcome of Enron, WorldCom, and the downfall of Ponzi-schemer Bernie Madoff, it's not difficult to understand why forensic accountants are asked to investigate various financial-related business matters.
Some people may think of forensic accounting and auditing as one and the same. That is not so, according to Professor Crumbley. He clearly explains the differences between an auditor and a forensic accountant. "A fraud auditor is an accountant specially skilled in auditing who is generally engaged in auditing with a view toward fraud discovery, documentation, and
prevention." (Crumbley, 2013) A good example of this is if a business or an individual is audited by the Internal Revenue Service, who generally demands to have proof of income and/or expenditures provided to them in case a tax return shows questionable information. However, Crumbley goes on to explain that "a forensic accountant may take on fraud auditing engagements and may in fact be a fraud auditor, but they will also use other accounting, consulting, and legal skills in broader engagements." (Crumbley, 2013) This kind of an investigation would not only include tax returns, proof of income and/or expenditures, but to also verify the accuracy of the company's financial statements (i.e. profit and loss, balance sheet, income statement, etc.)
With the definition of forensic accounting clearly stated, the next question is, what exactly does a forensic accountant do? Since attorneys who are preparing their cases generally do not have the time nor the knowledge of reviewing accounting information, they seek out accounting firms who are able to do so. Forensic accountants are employed to seek, interpret, and communicate transactional and reporting evidence (Crumbley, 2013). But sometimes forensic accountants are needed for matters other than presenting evidence in a court of law. They prevent fraud and manage risk (Crumbley, 2013). They are charged to detect fraud in financial reporting, to detect any misappropriation of assets (which includes inventory), and to verify any income and/or expenses incurred as legitimate.
Zysman also provides a more detailed yet comprehensive definition in regards to what forensic accountants do. "A forensic accountant is often retained to analyze, interpret, summarize and present complex financial and business related issues in a manner which is both understandable and properly supported. (They) can be engaged in public practice or employed by insurance companies, banks, police forces, government agencies and other organizations. (They are) often involved in the following: investigating and analyzing financial evidence; developing computerized applications to assist in the analysis and presentation of financial evidence; communicating their findings in the form of reports, exhibits and collections of documents; and assisting in legal proceedings, including testifying in court as an expert witness and preparing visual aids to support trial evidence." (Zysman, Forensic Accounting Demystified)
There are special types of data analysis that forensic accountants use to detect fraud. One type in particular is known as Benford's Law, a mathematical tactic which was named for a 1930's-era physicist who calculated the expected frequency of digits in lists of numbers. One of the most reputable accounting firms in the world, KPMG, performed a financial investigation that involved refunds that were issued by a national call center. By using Benford's Law, the forensic accountants determined that there were too many fours (the number 4) in the financial data, and it was their job to find out why that happened. The forensic accountants learned that several hundred operators across the country were authorized to issue refunds of up to $50.00. Any amount greater than $50.00 required a supervisor's approval. They also learned that each operator had processed more than 10,000 refunds over several years. In their investigation, what the forensic accountants did was to "remove" the first digit of the refunds issued by each operator, calculated the frequencies, and then compared the data with the expected distribution. The forensic accountants were able to identify a handful of operators (less than a dozen) who had issued fraudulent refunds to themselves, friends, and family totaling several hundred thousand dollars (McGinty, The Wall Street Journal, 2014).
Now, given the fact that forensic accounting has been defined and the responsibilities of a forensic accountant have been explained, the next question is: how have financial investigations benefitted from forensic accounting? There are many answers to that inquiry. One of them is explained in the previous paragraph about Benford's Law. However, the word "benefit" may not be an accurate term, since financial investigations generally result in scandals and downfalls. Think of the aforementioned Enron, as well as WorldCom, Arthur Andersen, Merrill Lynch, and of course, Bernie Madoff. Those examples are a very good reason why, according to Professor Crumbley, that "forensic accounting professionals are increasingly asked to assist in the investigation of financial and business related items." (Crumbley, 2013)
It is important to keep in mind that most companies do not release financial misconduct detail, but the following are some excellent examples of how forensic accounting worked:
In 1996, a city manager in Contra Costa County, California became suspicious when a disposal service company had requested assistance to keep the company afloat. The company, Orinda-Moraga Disposal Services, had submitted a request to increase the rates on its customers and needed the approval of the Contra Costa County Sanitation District. What the city manager couldn't understand was that the company had previously stated its desire to lower their rates, so he hired a forensic accountant to conduct an investigation. The accountant examined the company's records and discovered that the company had issued checks to fictitious individuals at nonexistent companies that had fraudulent addresses. The owner of the disposal company deposited the checks into an account, and the accountant soon learned that the owner had created the phony companies to embezzle the company's funds, in addition to raising its business costs to justify the increases of the company's rates. As a result, the disposal company's owner and his partner were convicted in criminal and civil trials. (Freeman, HowStuffWorks).
Another example is the ex-wife of noted musician Paul McCartney, the former model Heather Mills. During their high-profile divorce proceedings, there was a dispute over the financial worth of McCartney. He himself claimed to be worth about $780 million (the figures are provided in U.S. dollars instead of British pounds for comprehensive purposes), however, Mills insisted that McCartney was in fact worth about $1.6 billion. She had hired a team of forensic accountants to investigate his financial worth, and at the same time had hoped that if the accountants proved that she was correct, she could then receive a larger settlement. Unfortunately for her, the presiding judge denied the numerous requests of her accounting firm and awarded her a lower settlement.
The popular small appliance manufacturer Sunbeam Products had also been involved in an accounting scandal as well. In 1997, Sunbeam had followed a practice known as "bill and hold," which is when a company records sales of its products as profits for the current quarter while waiting to deliver the product. Generally, the sales wouldn't be recorded as such until the product was actually delivered. Sunbeam had sold vast amounts of its products to other companies at a discount, but kept the products in warehouses. On its financial reports, Sunbeam had appeared to have achieved high sales, but their warehouses were full of unsold products. The "bill and hold" practice was discovered by a financial analyst at an investment firm, who later downgraded the value of Sunbeam's stock. Even though "bill and hold" wasn't illegal, the Sunbeam shareholders claimed they were deceived and took legal action against the corporation. The accounting firm for Sunbeam, Arthur Andersen (remember that four years later, Arthur Andersen would be dissolved as a result of its role in the Enron scandal), performed an audit and reported that Sunbeam's accounting records were correct and in accordance with federal guidelines. However, the Board of Directors for Sunbeam did not believe Arthur Andersen and used a different firm to review the audit. The firm discovered that Sunbeam's figures had been manipulated. The resulting aftermath of the scandal was that the United States Securities and Exchange Commission investigated Sunbeam and CEO Alfred Dunlap, who was subsequently removed as CEO by the Sunbeam Board of Directors, fined $500,000, and permanently barred from serving as an officer in a publicly traded company. Sunbeam Products was also forced to pay millions of dollars to settle the legal action that was taken against them by its shareholders. (Freeman, HowStuffWorks, 2008)
In closing, the aforementioned cases have confirmed how forensic accounting is important in financial investigations. It has been said in the business world that the idiom "another pair of eyes" may help uncover a matter that may have been previously overlooked. Professor Crumbley underscores the importance of forensic accounting: "The substance of forensic accounting is the real-life encounter with fraud, which can have far-reaching effects. Beyond the financial damage suffered by the particular business attacked, fraud can undermine investor confidence in an entire industry or a large segment of the economy." (Crumbley, 2013) Another idiom that comes to attention in the matter of forensic accounting is that it is always "better to be safe than sorry." Unfortunately, financial fraud is inevitable and unavoidable, but with laws such as Sarbanes-Oxley in place and the proper and ethical education and knowledge of individuals who desire to become (or have already become) forensic accountants, the damaging aftermath caused by financial fraud may be lessened or even prevented.
There will always be Enrons or WorldComs or Bernie Madoffs who may believe that they can get away with dishonesty. With forensic accounting, "honesty is the best policy."
Works Cited
Crumbley, D. Larry, Lester E. Heitger, and G. Stevenson Smith. Forensic and Investigative Accounting. CCH Incorporated
Freeman, Shanna. "How Forensic Accounting Works."
Zysman, Alan. Forensic Accounting Demystified
McGinty, Jo Craven. "Accountants Increasingly Use Data Analysis to Catch Fraud." The Wall Street Journal