Current Status of Forensic Accounting

A synopsis of comparative study between national and international practices

Submitted to:
Ms Tanjila Hossain
Lecturer
Department of Accounting and Information Systems
Jahangirnagar University

Submitted by:
Marufa Akter
Student ID: 1443
MBA, 2nd Semester, Session: 2014-15
Department of Accounting and Information Systems
Jahangirnagar University

March 19, 2017

Jahangirnagar University
Savar, Dhaka-1342
Introduction
At first its necessary to describe what Forensic accounting means. Sometimes its called
investigative accounting, involves the application of accounting concepts and techniques to legal
problems happening in an organizations accounting systems. Forensic accountants investigate and
mark financial Fraud and white-collar crimes such as Embezzlement. They also provide litigation
support to law enforcement agencies by investigating financial wrongdoing.

Forensic accountants typically become involved in financial investigations after fraud auditors
have discovered evidence of deceptive financial transactions. After conducting an investigation,
they write and submit a report of their findings. When a case goes to trial, they are likely to testify
as expert witnesses.

Forensic accounting services generally involve the application of specialized knowledge and
investigative skills possessed by the accountants to collect, analyze, and evaluate evidential matter
and to interpret and communicate findings in the courtroom, boardroom, or other legal or
administrative venue. More simply, in the context of litigation, the term forensic means to be
suitable for use in a court of law. These resources are intended to assist practitioners in competently
performing these duties while staying current on issues that impact their day to day practice.

Forensic Accounting encompasses two areas: Litigation Support and Investigation 1. Litigation
represents the factual presentation of economic issues related to existing or pending litigation. In
this capacity, the forensic accountant quantifies damages sustained by parties involved in legal
disputes and can assist in resolving disputes before they reach the courtroom. If a dispute reaches
the courtroom, the forensic accountant may testify as an expert witness. Knowledge of the
courtroom sets the forensic accountant apart from a typical accountant. Investigation is the act of
determining whether criminal matters such as employee theft, securities fraud (including
falsification of financial statements), identity theft, or insurance fraud have occurred.

Investigation may also occur in civil matters. Also, a forensic accountant may be hired to search
for hidden assets in a divorce case (The practice in Bangladesh is very low). While forensic
accounting and fraud auditing are related, fraud auditing is more anticipatory. Fraud auditors try

1
Moncliff (2005)

pg. 1
to control a situation before something happens, whereas a forensic accountant may be hired after
the fact.

Literature Review
Many different organizations consult forensic accountants. Corporations hire forensic accountants
to investigate allegations of fraud on the part of their employees, suppliers, or customers. Attorneys
consult forensic accountants to obtain estimates of losses, damages, and assets related to specific
legal cases in many areas of the law, including Product Liability, shareholder disputes, and
breaches of contract. In criminal investigations, forensic accountants analyze complex financial
transactions such as those in Stock Market manipulations and price fixing schemes. They also help
governments achieve compliance with various forms of regulation.

So, on the basis of the statements in the previous paragraph, this can be logically deducted that the
birth of forensic accounting can be traced on the human nature of fraudulent and misrepresentation
of statements or falsification of a true event.

Fraud involves intentional acts and is perpetrated by human beings using deception, trickery, and
cunning that can be broadly classified as comprising two types of misrepresentation: suggestio
falsi (suggestion of falsehood) or suppressio veri (suppression of truth). 2 Fraud is a human
endeavor, involving deception, purposeful intent, intensity of desire, risk of apprehension,
violation of trust, rationalization, etc. 3

So, it is important to understand the psychological factors that might influence the behavior of
fraud perpetrators.

From a criminology perspective, white collar crime (as a part of the task of forensic accountants),
like other crime, can best be explained by three factors: a supply of motivated offenders, the
availability of suitable targets, and the absence of capable guardianscontrol systems or someone
to mind the store so to speak 4. To address that, another citation from a research paper is-
companies do not grow in a constant fashion with each quarters results better than last. In the long
run conforming to pressures to satisfy the markets desire for impossible predictability and unwise

2
Grazioli et al. (2006)
3
Ramamoorti and Olsen (2007)
4
Cohen and Felson (1979)

pg. 2
growth leads to the destruction of corporate value, shortened careers, humiliation, and damaged
companies. Along the way, it also leads otherwise honest executives to turn to the dark side.
They lie, cheat, and steal in order to relieve the immense pressure to meet analyst expectations of
unattainable performance, just to keep their jobs and, thus, for self-preservation. 5

An important conceptual framework in understanding fraud is the so-called fraud triangle, which
can be incorporated here to understand
the behaviors and motivation for crime
and fraud in forensic accounting. The
fraud triangle has three elements, viz.,
Perceived Incentives/Pressures,
Perceived Opportunities, and
Rationalization of Fraudulent Behavior.

To define the accounting fraud- Fraud is a legal term that refers to the intentional misrepresentation
of the truth in order to manipulate or deceive a company or individual. David (2005) states that
fraud is not a possibility but a probability. It also explains that fraud can be better prevented if
decisions are made by a group and not an individual. 6

Albrecht, (2005) argued that fraud is rarely seen. However, the symptoms of fraud are usually
observed. The symptoms do not necessarily mean fraud is being undergone as it may be caused by
mistakes. The writer advices are mainly to be cautious when fraud is reported as it may be false
allegations. Fraud is not easily proven since frauds have themselves at a safe line where authority
could not convict them. 7

Ramaswamy (2005) states that poor corporate governance and accounting failure is one of the
reasons why fraud cases emerge. This is because poor corporate governance will lead to the ability
of certain individual or a group of people with the same interest to act upon it to commit fraudulent
activities in the company. 8 Loebbecke & Willingham (1998) conclude that the probability of
material financial statement misstatement due to fraud as a function of three factors. There is the

5
Enron, Nortel, and Cisco, Fuller and Jensen (2002)
6
David (2005)
7
Albrecht, (2005)
8
Ramaswamy (2005)

pg. 3
degree to which those in authority in an entity have reason to commit management fraud, the
degree to which conditions allow management fraud to be committed, and the extent to which
those in authority have an attitude or set of ethical values that would facilitate their commission of
fraud. These three factors show that the management could simply commit fraudulent activities
since the knowledge of the public which includes shareholders are limited regarding the option
they could take to ensure that financial crime could be prevented. There should be a set of
guidelines created for the public and also the management to ensure that actions could be taken in
the financial fraudulent activities. 9

Summary of the Papers

A History of Forensic Accounting
Like any other job, Forensic Accounting has evolved with time. The industry has been affected by
changes in technology, society, and the economy. One of the most well-known cases of Forensic
Accountancy is the capture of Al Capone. A team of Forensic Accountants gathered information
in an irrefutable case against Capone in 1931. In the early 2000s the infamous Enron scandal took
the accounting world by storm. Sarbanes-Oxley opened up a whole new field of investigation for
Forensic Accountants. Jobs have been changed in forensic accounting. Education to become a
Forensic Accountant is a relatively new concept. Until recently, it was common for a Forensic
Accountant to learn through experience on the job. After that, legislation has taken place.
Sarbanes-Oxley provided one of the biggest changes in history to the Forensic Accounting. Theres
also changes in societal forms. However, its assumed that all of this pressure that fraud is likely
to increase, thus Fraud is the reason Forensic Accounting is necessary. In just the past 10-15 years
Forensic Accounting has evolved its processes in order to be more effective, thanks to the change
in technologies. Change in economy has an impact to materialize forensic accounting. So keeping
the forensic accountants and professionals up-to-date is somewhat mandatory.

The Role of Forensic Accounting in Reducing Financial Corruption: A Study in Iraq

According to Transparency International (TI) reports, Iraq occupies advanced position among the
list of most corrupt. The main findings of the study revealed that there is a significant relationship
between the forensic accounting methods and effectiveness of the control and auditing bodies to
detect financial corruption cases. On the other hand, the majority of the audit and accounting

9
Loebbecke & Willingham (1998)

pg. 4
personnel in Iraq are suffering from poor perception and information of the forensic accounting
methods.

In Iraq, forensic accounting subject and education couldnt have a chance to be emphasized.
Consequently, such a thing will increase both fraud and corruption and lead to have a negative
impact on the economy of the country. Fraud could be prevented and limited by using forensic
accounting. The financial fraud and corruption have increased in Iraq; the reason is that the forensic
accounting is not included in the curricula taught in Iraqi universities as is the case in the
universities of the developed countries. As a result, it is recommended that the techniques of
forensic accounting should be an important aspect imposed at educational curricula and training
of undergraduate accountants in Iraqi universities and also for other professionals that belong to
the Iraqi Institute of Chartered Accountants. This consequently ensures that there will be many
ways to limit or at least mitigate the fraud and corruption in the country.

The Role of Forensic Accounting in Mitigating Financial Crimes

The study finding reveals that Forensic accounting is an effective tool for addressing financial
crimes in the banking system.

Forensic accounting is seen as encapsulating all the other areas in the use of accounting for
investigative purposes. The increasing sophistication of certain crimes requires that forensic
accounting be added to the tools necessary to bring about the successful investigation and
prosecution of those individuals involved in criminal activities. The increasing need for forensic
and investigative accounting in the banking sector results from the nature of modern-day banking
involves large volume of complex data, which makes it difficult to monitor those transactions by
applying manual audit processes. This in turn makes the control utility of auditing ineffectual.
Virtually all the weaknesses and challenges identified in the banking industrys post-consolidation,
and criminal investigations and prosecutions arising from them, are issues for forensic accounting.

Fraud and Forensic Accounting in a Digital Environment

The modern digital environment offers new opportunities for both perpetrators and investigators
of fraud. In many ways, it has changed the way fraud examiners conduct investigations, the
methods internal auditors use to plan and complete work, and the approaches external auditors
take to assess risk and perform audits. The act of fraud investigation is comprised of several

pg. 5
activities, including initial discovery, public record search, interviews of various types, document
recovery and search, legal prosecution, and computer forensics.

Computer aided fraud detection is a new, exciting field for accounting researchers. Topics like
data mining techniques, ratio analysis for the detection of financial statement fraud, issues
surrounding external information sources, and computer forensics bring opportunities for robust
research and for collaboration between accounting faculty and information systems, legal,
computer science, mathematics, and other researchers.

Forensic Accounting as a Tool for Detecting Fraud and Corruption: An Empirical Study in
Bangladesh
The present study reveals the current scenario of forensic accounting in Bangladesh and how much
it is being introduced and recognized to the professional accountants, Multinational Corporation
as well as local organizations and used as a fraud detection tool. The research also reveals that
forensic accounting as a fraud detection tool has relevance to efforts for combating fraud and
corruption in Bangladesh.

It is true that in Bangladesh there are no effective tools to measure, detect and prevent fraud and
corruption. In such a context forensic accounting now appears as a one of the strategic and dynamic
tool for the management of all types of corruption.

In a country like Bangladesh where the unethical aspects of creative accounting are rampant, the
practice of forensic accounting (i.e., investigative accounting done by forensic accounting
consultants to solve problems in courts) needs to be introduced and recognized. Besides this, it can
also be recommended that some courses, related to this issue should be launched by public and
private institutions to make the accounting students expert for detecting fraud and corruption.
Some workshops, seminars, and symposium can be arranged to make people in corporate sector
more familiar with this issue.

Characteristics and Skills of the Forensic Accountant

Enron and WorldCom debacles as well as other accounting scandals created a new branch of
accounting. With the spotlight on the accounting profession, a new market with a new breed of
accountants, forensic accountants have emerged. And those accountants need some special skill to
act proficiently in detecting the anomaly in the assessed organization.

pg. 6
The following chart shows the most important Traits and Characteristics of a forensic accountants.

And the following diagram shows the core skills needed by a forensic accountant.

pg. 7
Forensic Accounting and Bangladesh
Bangladesh is a country which has a well constituted Securities and Exchange Commission (SEC)
and well-structured stock exchanges. Despite all measures still there are financial scams and
financial losses due to companys practicing creative accounting techniques and able to take
advantages of the loopholes of International Accounting Standards (IASs) and Generally
Accepted Accounting Principles (GAAPs).

So, its better if the Institute of Chartered Accountants in Bangladesh has a forensic cell and as
external audit is mandatory to make such forensic audit also mandatory for the publically listed
companies so that financial scams may be minimized and have a healthy financial and sound
environment of investment and accounting practices.

Forensic accounting has come into limelight due to rapid increase in financial frauds and white-
collar crimes. The opportunities for the forensic accountants are growing fast; they are being
engaged in public practice and are being employed by insurance companies, banks, police forces,
government agencies, etc. 10

Many wonder if, but not all agree that the failure of Sonali Bank, Ruposhi Bangla Branch to
prevent the fraudulent misappropriation of Tk.3, 607 crores by Hallmark Group (Tk.2, 668 crores)
and others is the biggest scandal in the banking industry. In recent times, several such frauds

1. Misappropriation of Tk.622 coroes by one Nurunnabi in Chittagong in 2007 through a false

local letter of credit,
2. Embezzlement of Tk.596 crores withdrawn without cheque from Oriental Bank in 2006
(alleged Hawa Bhaban connection),
3. Transfer of Tk.300 crores by forgery from five banks by one Om Prokash in 2002 -- were
not as heinous as bank defrauding.
4. Perhaps more damaging has been the transfer in their personal accounts of more than Tk.4,
500 crores by the powers that be from the mother account of the infamous Destiny Group

10
Bhasin (2007)

pg. 8
 before the eyes of the banking authorities several months into the first sighting of the
alleged fraudulent and illegal deposit taking from the members of the public. 11

Now lets look at the scenario of present condition of forensic accounting in Bangladesh.

Criteria
Knowledge of forensic accounting
Whether forensic accounting has been used in
practice to investigate fraudulent/ dishonest
acts in their organization
Whether forensic accounting is used as a fraud
detection tool
Impact on Internal Control Systems
Impact on External Audit
Whether Forensic Accounting is solely enough
as a tool to detect suspicious or fraudulent
transactions.
Whether risk assessment process under
forensic accounting specifically cover risk of
fraud.
Whether they have any pressure to practice
Forensic Accounting in your organization
Description
Only a few professionals are aware about this
forensic accounting.
40 percent of Multinational Corporation use
forensic accounting to investigate fraudulent.
Local companies lag behind using this.
Multination companies think the method is
used with care. Local companies dont think
that forensic accounting is strongly used as a
fraud detection tool.
Most of the multinational agrees that forensic
accounting has impacts on internal control.
Almost half of the companies believe that
external audit is influenced greatly by
forensic accounting
Most of the companies disagree on that. They
think only forensic accounting is not solely
sufficient.
Local companies think that if the forensic
accounting is conducted, the risk of fraud is
well covered by that.
Companies are not pressurized to use tools of
forensic accounting in Bangladesh.

11
(Mohammed Farashuddin, Daily Star, September 09, 2012).

pg. 9
Conclusion
Forensic account is still in its very early stage in Bangladesh, still with no professional bodies yet
to practice it. Still to date the members of the Institute of Chartered Accountants of Bangladesh
(ICAB), are practicing the issues as per terms of reference in the engagement letter. Bangladesh
do have long way to go as far as transparency of financial statements are concerned. Establishment
of forensic cell, making more awareness amongst management, mass people still needed to a lot
extent for the proper and adequate allocation of this sector.

Recommendation
Among behavioral approaches and solutions to the fraud risk factors mentioned are:

1. The government should enact some mandatory auditing in response to fraudulent and other
misconduct for all of the companies.
2. Adequate training for the accountants should be introduced in order to make them more
proficient I haunting any anomaly in the given information.
3. Affiliation with international organizations is important for knowledge sharing.
4. Sound tone at the top, with management walking the talk; aligning incentive structures
within the organization in such a way that does not encourage fraud perpetration; an active
Board and audit committee overseeing management performance and activities (as well as
the work by external and internal auditors).
5. Nurturing a culture of integrity and ethics, supported by an organizational code of conduct,
periodic ethics audits, and enforcement of noted violations of the code; maintaining an
ethics and/or whistleblower hotline; explicitly rewarding good behavior.
6. Routine background checks on new and experienced hires, as well as for making senior
leadership appointments (Human Resources needs to be leading this effort).
7. Swift, decisive action to respond to incidents of fraud so that employees and others are
aware of the organizations serious commitment to dealing with fraud issues head-on.
8. Fraud awareness training, perhaps delivered by internal audit professionals or outside
consultants, including description of ethics hotlines and guidance on what to do when fraud
is encountered; control self-assessments that consist of process risk owners performing risk
and control mapping (and including fraud risk considerations in such exercises).

pg. 10
References
Albrecht, W. S., K. R. Howe, and M. B. Romney. 1984. Deterring Fraud: The Internal Auditors
Perspective. Altamonte Springs, FL: The Institute of Internal Auditors Research
Foundation.

Albrecht, W.S. (2005). Identifying Fraudulent Financial Transactions: A Framework for

Detecting Financial Statement Fraud. Brigham Young University.

Bologna, G.J. and Lindquist R.J. (1987). Fraud Auditing and Forensic Accounting: New Tools
and Techniques, Hoboken, New Jervey: Wiley Publication.

Cain, S. (1999). Fraud in the workplace. Orange County Business Journal, Vol. 22, No, 16, pp.78.

David, A. (2005). Low Level Fraud is a High Level Issue, Supply Management. [Online]

Anwar, N. and Uddin, M.S. (2008), Forensic accounting: A dynamic tool for combating
corruption. Paper presented in CPE seminar at ICAB.

Bailey, Charles D. "Journal of Forensic Accounting Research." Journal of Forensic Accounting

Research 1.1 (2016): n. pag. Web.

Bhasin, M.L. (2007), Forensic Accounting and Auditing Perspectives and Prospects, Accounting
world magazine,
http://www.iupindia.in/107/AW_Forensic_Accounting_Auditing_40.html

Kabir, H. (2008, April 20), Importance of deploying forensic accounting techniques, The Financial
Express, Dhaka.

Owojori, A. A., & Asaolu, T. O. (2009). The role of forensic accounting in solving the vexed
problem of corporate world. European Journal of Scientific Research, 29(2), 183-187.

Sridhar Ramamoorti., (2008), The Psychology and Sociology of Fraud: Integrating the
Behavioral Sciences Component into Fraud and Forensic Accounting Curricula, Issues in
Accounting Education, Vol. 23, No. 4, November 2008, pp. 521533.

pg. i