written by: ciel s cantoria•edited by: Linda Richter•updated: 5/18/2011
The history of Forensic Accounting is associated with the massive multi-billion dollar frauds from 1997 to 2002 involving high-profile companies. These companies presented certified financial reports that tainted the integrity of CPAs, since investors relied heavily on their certifications.
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What Factors Gave Rise to Forensic Accounting?
In tracing the history of forensic accounting, we must first look into the underlying reasons why the doctrine of investigative accounting came into focus as an important addition to the accounting discipline. In fact, many have wondered why the American Institute of Certified Public Accountants (AICPA) is not at the helm of its specialization as a branch of the accounting profession.
Instead, the American College of Forensic Examiners International (ACFEI) was tasked to handle the special training, education, and certification of CPAs as forensic Accountants.
We will have to go back in time, when the failure to unravel the series of high-profiled white-collar crimes committed by some companies from 1997 to 2002 led to the 2002 stock market plunge. It was largely attributed as a failure of the American Institute of Certified Public Accountants (AICPA).
The accounting profession was under attack for its lack of contribution in preserving and protecting the public’s interest and, in fact, was berated for abetting deceitful companies in betraying the public trust. The financial reports presented by these devious companies were certified by prestigious CPAs who were members of the AICPA. Said certifications did not take into consideration that the auditor’s unqualified report was considered vital as the first line of defense against fraudulent white collar felony.
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The SEC's Role in Evaluating Certified Financial Reports
The Securities and Exchange Commission was also in a precarious position during these investigations, as the agency is the overseer of public corporations. Nevertheless, based on their assessments and investigations of financial reports, this agency was able to prove its contributions in protecting the public’s trust in investing people's money in securities. During the years in question, the SEC held a track record of enforcing policy rules by referring 609 public companies to the Department of Justice for investigation, with recommendations for possible prosecution of the key officers of these companies for criminal charges.
Unfortunately, only 76% were proven guilty; out of the 609 cases only 87 entities were punished with incarceration. It appeared that prosecutors shied away from handling the white-collar crimes pertaining to security fraud, because the cases were too complicated to prove in court.
Solid evidence was required to provide litigation support, and the certified public accountant was within the mainstream of professionals who could provide this kind of work.
The accounting profession was then wedged in a position of becoming a tool for strengthening litigation cases but at the same time assailed as an accessory to the white collar crimes, particularly securities fraud: Hence the need to distinguish the forensic accounting profession as a separate form of discipline, the expertise and skills of which could be molded into purely upholding the interests of the public.
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The Need for a CPA as an Expert Investigative Witness
Inasmuch as these white-collar criminal cases were not flourishing in courts, there was a need to establish an accounting profession whose members were geared mainly to act as expert investigative witnesses in court.
The CPA should be trained in giving unbiased and impartial analysis of accounting records to present as court evidence.
An accounting professional was needed who could withstand the pressures of court interrogations in order to hurdle tough and complex lines of questioning.
The accounting professional as an expert witness would not come to court as a shy and timid professional who was more accustomed to poring over books of accounts, but as an expert who could communicate the significance of the evidence to everyone who had a hand in deciding the outcome of the litigation proceedings.
His methods of investigating might be technical in nature but he could communicate and convey them in a way that the jury would be able to understand.
His opinion as an expert could shed light to the degree of the felony committed as well as its repercussions to the economy and the detriment it presented to the public. Judge and jury would then have sound bases for determining the degree of punishment to be inflicted so that justice could be served.
The accountant should have a certification of expertise conferred by an organization whose reputation for maintaining strict standards would remain beyond reproach and would not be tainted by any sign of weakness or hesitation in upholding its integrity.
The accountant's testimonies as an expert witness would be well-covered in all angles of examination so that it could not be broken down by an equally competent accountant who would provide testimony in favor of the fraudsters, to negate or rebut his findings and opinions.
Today, Forensic Accountants have redeemed the accountancy profession through their feats and accomplishments in court litigations, where they have been instrumental in bringing several white-collar criminal offenders to court. In some cases, they were able to identify fraudsters and even tracked the whereabouts of terrorists through their fund transfers. The history of forensic accounting includes bringing back the pride and integrity of an otherwise-tainted profession.
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Reference Materials and Images Credit Section
American College of Forensic Examiners. Expert witnesses and the truth, at http://www.truthinjustice.org/02FPERT.htm
National Check Fraud Center. Types and schemes of white collar crimes, at http://www.ckfraud.org/whitecollar.html
McClelland P and Stanton P. Forensic accounting: it's positively ancient, in Journal of Forensic Accounting, at http://www.rtedwards.com/journals/JFA/V-2/553.pdf