Strategies for Forming an Effective Forensic Accounting Team

By Kelly Richmond Pope and Brian Ong

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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;
  • Data are collected;
  • Data are analyzed; and
  • Conclusions are reached and communicated.

The first 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 teams.

Strategy 1: Evaluate the Specific Requirements of the Assignment

Forensic 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 companies.

When assembling 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.

Strategy 2: Evaluate the Team Members’ Training and Experience

The next 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.

Forensic 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.

Whatever 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.

Strategy 3: Reacquaint the Team with the Applicable Professional Standards

Most CPAs 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).

Strategy 4: Determine What the Client Deliverables Will Be

Client deliverables 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.

Many organizations 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.

Strategy 5: Understand the Client’s Perspective

Gaining 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.

Multidisciplinary Approach

Combining 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:

[B]ack 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.

Multidisciplinary 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.

There are 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 FTI Consulting:

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 done.

The specially 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.


Kelly 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).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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