Forensic Accounting as an Investigative Tool

By Houck, Max M.; Kranacher, Mary-Jo et al. | The CPA Journal, August 2006 | Go to article overview

Forensic Accounting as an Investigative Tool


Houck, Max M., Kranacher, Mary-Jo, Morris, Bonnie, Riley, Richard A., Jr., et al., The CPA Journal


Developing a Model Curriculum for Fraud and Forensic Accounting

As the complexity and scope of commerce has expanded throughout the world, the need to track money and financial information has grown. There has been a corresponding increase in illegal financial activity, according to separate surveys by the U.S. Department of Justice, PricewaterhouseCoopers, and the Association of Certified Fraud Examiners (ACFE). Ironically, illegal businesses and perpetrators of financial crimes also need to keep track of their cash flow and manage their operational performance to generate profits, fund activities, and avoid detection, prosecution, and seizure of their assets.

An understanding of effective fraud and forensic accounting techniques can assist forensic accountants in identifying illegal activity and discovering and preserving evidence. Forensic accounting is the application of accounting knowledge and investigative skills to identify and resolve legal issues. It is the science of using accounting as a tool to identify and develop proof of money flow. These tools and techniques can be invaluable for fraud and forensic accounting investigators.

Because employee and management fraud, theft, embezzlement, and other financial crimes are increasing, accounting and auditing personnel must have training and skills to recognize those crimes. In addition, high-visibility corporate scandals, such as Enron, WorldCom, and Adelphia, demonstrate the need to better prepare entry-level accounting graduates and practicing CPAs in the areas of fraud prevention, deterrence, detection, investigation, and remediation. Finally, news reports following the September 11 attacks depicted how terrorists used the international banking system to fund their activities, transfer money, and hide their finances, and signaled a need for investigators to understand how financial information can provide clues as to future threats. These events raised public awareness of fraud and forensic accounting, and highlighted the importance of ensuring that financial professionals have the necessary training and skills to understand and act appropriately on any important evidence generated from financial information.

The TWGED-FFA

In December 2003, the division of accounting at West Virginia University received a grant from the National Institute of Justice to develop a model curriculum for fraud and forensic accounting. The impetus for this activity was the need for an in-depth examination of the intellectual competencies necessary to perform entry-level forensic investigation and analysis in a constantly changing environment The objective was to develop a model curriculum in fraud and forensic accounting that would assist academic institutions, CPA firms, and other public and private employers in preparing prospective students and employees with the necessary skills for entry into this profession.

This project was named the Technical Working Group for Education in Fraud and Forensic Accounting (TWGED-FFA). An exposure draft of the curriculum proposal was circulated in November and December 2005 for public comment. The outcome, a model curriculum, will be a set of voluntary guidelines for educational institutions, stakeholder organizations, faculty, instructors, and students that outlines the requisite entry-level knowledge, skills, and abilities for fraud and forensic accounting professionals.

Forensic Accounting

Forensic accounting includes the use of accounting, auditing, and investigative skills to assist in legal matters. It consists of two major components: litigation services that recognize the role of an accountant as an expert consultant, and investigative services that use a forensic accountant's skills and may require possible courtroom testimony. According to the definition developed by the AICPA's Forensic and Litigation Services Committee, forensic accounting may involve the application of special skills in accounting, auditing, finance, quantitative methods, the law, and research. …

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