for Forming an Effective Forensic Accounting Team
Richmond Pope and Brian Ong
APRIL 2007 -
Imagine this scenario: A CPA is leading a team of financial statement
auditors assigned to the routine audit of a software manufacturer.
As the team begins reviewing sales transactions, it becomes apparent
that hundreds of seemingly inconsequential transactions present
a noticeable pattern. Each small transaction would fall below the
scope of audit testing, and each of these small transactions was
at or near quarter- or year-end. The CPA also determines that many
of these transactions were directly attributable to the activity
of a certain salesperson. Further analysis of the terms of the sales
revealed that many of these sales allowed for the immediate and
unconditional return of the goods following quarter- or year-end.
All of these indicators
are signs of a possible revenue-recognition scheme. CPAs have
neither the training nor the hands-on experience to tackle such
an assignment alone. The solution is to turn to a trained forensic
accountant to investigate more fully. Forensic accounting assignments
generally follow these steps:
- The forensic
accounting team is assembled;
are analyzed; and
are reached and communicated.
step, assembling an appropriate forensic accounting team, is the
most critical in the investigative process and one in which little
thought or advance planning seems to take place. As forensic accounting
assignments become more complicated, due to increasingly intricate
fraud schemes and complex industries, CPAs must apply a rigorous
and repeatable approach to structuring their forensic accounting
1: Evaluate the Specific Requirements of the Assignment
accounting teams should be selected based on the specific requirements
of the assignment. Using the revenue-recognition example above,
the investigative team would necessarily include forensic accountants
with hands-on experience investigating revenue-recognition schemes.
Depending on the complexity of the industry in which the company
is engaged, an industry expert—for example, a professional
with expertise in the software industry—may be necessary.
The acquisition and preservation of electronic evidence may be
a consideration, as could be regulatory issues for publicly traded
a forensic accounting team, a broad view of the assignment should
be taken when initially considering the full complement of skills
required to complete the engagement.
2: Evaluate the Team Members’
Training and Experience
step is to match the requirements to professionals who will deliver
the requisite services. A careful review of the training and prior
professional experience of the proposed team members should be
conducted. It is often helpful to briefly interview each potential
team member or talk to their colleagues and coworkers.
Many CPAs think that an accounting background based solely in
auditing will provide the necessary training to successfully conduct
forensic accounting assignments. Karyl Misrack, a former auditor
and current senior managing director with FTI Consulting, Inc.,
believes that training in auditing serves as a foundation. “I
think you can draw on some of the same audit skills,” she
says, “but what is different from a traditional auditor
is a person more interested in putting a puzzle together and being
naturally curious to keep digging.” Additionally, “real
world” experience in a given forensic accounting discipline,
such as electronic-evidence acquisition and preservation, or investigating
vendor kickback schemes, may be needed.
accounting teams can also benefit from the expertise of a forensic
technology specialist. David Remnitz, senior managing director
with FTI Consulting, notes that electronic evidence preservation
is a critical element in the investigation, because it often represents
the initial information-gathering steps of the investigative process.
Data mining (searching through large volumes of data looking for
patterns) and data extraction (pulling data from operational and
external sources for warehousing) are facilitated by sophisticated
technologies that allow forensic technologists to compile electronic
media (e.g., e-mail). One investigation used sophisticated data
screening and digital data search-and-retrieval techniques to
uncover numerous instances of accounting reserve manipulation
that resulted in the misreporting of financial results. Electronic
evidence consultants require advanced technical training that
may be beyond the abilities of a CPA. CPAs can and should, however,
know the types of electronic analysis that can be performed and
the resources—either internal or external—available
to the firm.
the prerequisites are determined to be, the capabilities of each
proposed team member should be thoroughly screened to ensure that
the identified skill requirements are matched to a professional
capable and qualified to deliver those services.
3: Reacquaint the Team with the Applicable Professional Standards
are familiar with the professional standards relative to traditional
services—audit, review, compilation, and tax advisory services.
Many are less knowledgeable about the authoritative and nonauthoritative
guidance applicable to consulting services, including forensic
accounting. Professional organizations such as the Association
of Certified Fraud Examiners (www.acfe.com)
offer courses on the criminology and legal elements of forensic
investigations. The AICPA also offers resources for professionals
needing additional training through its Business Valuation and
Forensic & Litigation Services Center (bvfls.aicpa.org).
4: Determine What the Client Deliverables Will Be
vary based on the complexity of the engagement. At the outset,
it is important to gain a clear and thorough understanding of
the client’s expectations and the team’s capabilities.
Oftentimes, client deliverables result in investigative report
writing. Therefore, forensic accounting teams should include individuals
who possess investigative report writing skills. As noted by Kenneth
Dickson, a partner with Dickson and Warren, CPAs, LLP, in Raleigh,
N.C., “Report writing is so critical because if you do work
as an expert witness, then your opinions can become discoverable
by the other side.” Even in situations where the work of
the forensic accountant is not initially anticipated to lead to
expert opinions, it is important for the forensic accountant to
understand the importance of investigative report writing and
the legal nuances surrounding the documentation of the work. One
forensic accounting assignment the authors know of, which entailed
several suspicious transactions involving self-dealing by a former
CFO, resulted in the development of narrative investigative reports
that were given to local law enforcement and became the basis
for filing criminal charges against the CFO.
offer instruction in effective interviewing techniques and business
writing. CPAs interested in developing these skills—not
traditionally an area of strength for accountants—would
be well served by such a program.
5: Understand the Client’s Perspective
an understanding of the needs and demands of those who retain
the services of forensic accountants is important when considering
the composition of a forensic accounting team. Attorneys frequently
retain forensic accountants to assist in assignments involving
questions of accounting and reporting of financial information.
The penalties are much more severe in the current environment,
with increased scrutiny from regulators and shareholders. It is
imperative to employ a team that possesses the appropriate forensic
experience and training to intellectually challenge the client
and legal team when necessary. A CPA should maintain an independent
and objective mindset even when the conclusions run counter to
the outcome sought by the client.
expertise from various fields is perhaps the most efficient way
to conduct forensic accounting engagements, and it reflects the
demands of the times. Joseph Spinelli, a former special agent
with the FBI and New York State Inspector General, now the COO
of Daylight Forensic & Advisory LLC, offers an interesting
historical perspective on the evolution of diverse teams:
in the 1970s when the FBI reprioritized their approach to investigations,
they put together people with extensive backgrounds in white-collar
crime, many of which were CPAs, with pure investigators to formulate
investigative teams. The white-collar crime teams that they put
together in the late ’70s, I believe, are the basis for
the type of forensic accounting teams that you are seeing today.
investigative teams complement the audit process by proactively
assisting in identifying problematic areas where fraud could exist.
“[A] forensic practice should consist of individuals that
are able to join the audit team to meet the requirements of SAS
99,” says Spinelli.
vast differences in the requisite competencies between financial
investigation engagements and audit and attestation engagements.
As the market continues to recover from the pervasive reports
of corporate accounting scandals, forensic accounting teams will
continue to be used. According to Spinelli, “Without the
proper segregation of duties, individuals will always have an
opportunity to steal and commit fraud for their own gain, so that
necessitates the establishment of policies and procedures that
would, in fact, attempt to preclude fraud from happening.”
SAS 99 and the Sarbanes-Oxley Act of 2002 have had a great impact
on the role of the traditional accountant, but how have they impacted
accountants in an investigative role? According to Misrack, of
Five or ten years ago, general issues would come up in the audit,
but it may never rise to the level of the audit committee. But
now, with all the statutes in place, we are often called on several
times before quarterly releases to assist during an investigation
to make the audit committee and the auditors comfortable on issues
that would not have risen to that level five years ago. As a result,
I think you will see greater use of our skills to get these jobs
designed training programs in forensic accounting offered by national
CPA organizations, state CPA societies, and colleges and universities
are all good ways to acquire basic competencies in forensic accounting.
Richmond Pope, PhD, CPA, is an assistant professor in
the school of accountancy and MIS at DePaul University, Chicago,
Ill. Brian Ong, CPA, CFE, is senior managing
director of forensic and litigation consulting practice in the
New York City office of FTI Consulting, Inc. (www.fticonsulting.com).