Magazine article The CPA Journal

A Phased Engagement Approach to Forensic Accounting

Magazine article The CPA Journal

A Phased Engagement Approach to Forensic Accounting

Article excerpt

There are several approaches to a forensic investigation. A phased engagement approach manages the investigation efficiently because it controls the engagement with decision points throughout the process. A phased engagement is a step-by-step methodology that manages time and fees, and yields conclusions based upon parameters defined by the client (often an attorney) and the forensic accountant.

In recent years, attorneys, as well as management and other interested parties, have come to rely on forensic accountants as the primary financial investigator, the consulting financial expert, or the testifying expert in financial investigations and disputes. Equally critical to their investigative skills is forensic accountants' ability to communicate financial information in a clear and concise manner. Forensic reports are written as words with numbers supporting them, as compared to traditional accountants' reports, where numbers are presented with words to support them.

Why Is It Effective?

A phased engagement is effective because the scope and timeframe of each phase is controlled. That permits the client to decide whether to expand or limit the scope of each phase or the scope of the entire engagement. Accordingly, each phase stands on its own and has its own parameters and deliverables.

As a result, costs for each phase and, therefore, the cost of the entire engagement, can be controlled. A phased engagement also allows faster response and completion times because all time and energy are devoted to the completion of each phase before the next phase is commenced.

Phase 1: Exploration and Evaluation

Before any work can begin, the client and the forensic accountant must define the problem, the issues involved, and the scope of the engagement. Then a projection of the timeframe, cost, and expected deliverables for each phase can be determined.

In identifying the areas to examine, consideration must be given to both the obvious and the not so obvious. For example, in a potential defalcation engagement, the obvious areas may include cash, receivables, and inventory. The not-so-obvious areas may include accounts payable, payroll, and property assets, as well as intellectual property and propriety information.

One purpose of this phase is to determine if a cause of action is supportable. A forensic accountant miist identify what information is needed and then perform an initial review sufficient enough to conclude whether there is a potential cause of action. During phase 1, the forensic accountant limits the review to readily accessible information. This information is usually contained in an entity's (or individual's) books and records, thirdparty documents, and any information previously obtained during discovery.

Phase 1 concludes with a report of preliminary findings, written or oral. The report should indicate what additional information and documents are needed, a recommendation on how to proceed, and the identification of any potential risks. These might include risks to the business from public disclosure or government scrutiny, and to clients for their actions or inactions, as well as litigation risk. Forensic accountants must bear in mind that all written communications may be subject to discovery.

At this point, a determination must be made whether to continue to phase 2 (i.e., expansion of scope) or to conclude the engagement. This determination is made after the client, the client's attorney, and the forensic accountant have discussed the matter. This is where a major advantage of a phased engagement comes into play. If it is decided to end the engagement, there will be no further costs. If it is decided to proceed to phase 2, the problem and the issues involved have been clearly defined, as to allow for a focused continuation of the investigation.

Phase 2: Expansion of Scope

Tracking and tracing. Phase 2 commences with specific document analysis. …

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