Part I
Investigating Forensic Accounting
In this part . . .
We start at the very beginning, by explaining what forensic accountants do, how their work differs from the work done by other accountants and auditors, and how you can steer your career toward forensic accounting by taking the right courses and looking for the right types of jobs.
We then get deeper into the discussion of why forensic accountants are necessary (and becoming more in demand every day). The reason for this is because lots and lots of people commit fraud. We devote a whole chapter to outlining the most common types of fraud, focusing largely on those committed within businesses. Forensic accountants don’t always deal with fraud, however, so we also offer a chapter explaining other types of work you may do as a forensic accountant.
Chapter 1
Why the World Needs Forensic Accountants
In This Chapter
Keeping accounting and auditing straight Figuring out what forensic accounting is Getting an overview of fraud Considering where forensic accountants work Enron, WorldCom, Tyco, Bernie Madoff — their names are infamous, and they’re all known to us for the same reason: fraud. Recent estimates indicate that almost $3 trillion is lost globally to occupational fraud and abuse (the kind that occurs within a business) each year. That number would seem hard to believe if we hadn’t all heard about the massive scale of fraud that has occurred at businesses such as Enron.
Investigating fraud can be complex. In a larger engagement, forensic accountants assist in performing various procedures that include reviewing millions and millions of documents, decoding financial information, interviewing scores of people, and gathering background information about key company players. Using technology is critical to the investigative process, and at the end of the investigation forensic accountants report their findings and sometimes provide testimony in a litigation context.
Forensic accounting as a profession has evolved in the past two decades. Recently, some universities and colleges have included it in their curricula. Organizations such as the Association of Certified Fraud Examiners (ACFE) and the American Institute of Certified Public Accountants (AICPA) now offer designations in fraud examination and forensics.
What motivates people to commit fraud? What are common types of fraud schemes? How can frauds be detected or prevented? How should they be investigated? These are some of the questions we explore in this book. To get you started, we offer an overview in this chapter of what forensic accounting is and why the proliferation of fraud has created such a strong need for it.
Accounting versus Auditing: Defining Our Terms
Accounting and auditing are substantially interrelated. In brief, accounting is the preparation of financial statements, and auditing is the examination of those financial statements. Every collegiate accounting program also offers auditing. Auditors have traditionally been certified public accountants (CPAs).
In this section, we examine accounting and auditing more closely to illustrate what they are and how they interrelate.
Working as an accountant
What is accounting? When Frimette teaches introductory accounting classes, she defines accounting as the gathering, analyzing, recording, summarizing, reporting, and interpretation of financial transactions for an entity. Wow, what a mouthful! What does it mean? Accountants gather information about transactions, record that information, and then massage it so that the end product is a set of financial statements that various types of users can use to make rational financial decisions about the entity.
The recipe that accountants use to do all this gathering, recording, and massaging is called generally accepted accounting principles or GAAP. Way back in 1494, a Franciscan monk in Venice named Friar Luca Pacioli published a book called Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything about Arithmetic, Geometry, and Proportion). In it, Fr. Pacioli described the double-entry method of accounting — the method we still use today. Double-entry accounting reflects the fact that businesses have two sides:
They have claims on those assets, as well as sources that create the assets. Although the basics of double-entry accounting have been around a while, business transactions have become much more complicated than they were in 1494. To refine how accounting should be used in today’s complex world, we have guidelines. In the United States, these guidelines — GAAP — are determined by the Financial Accounting Standards Board (FASB), an accounting think tank in Norwich, Connecticut. Most developed countries have their own version of the FASB and GAAP. There is even an International Accounting Standards Board (IASB) that sets International Financial Reporting Standards (IFRS). All these systems of standards have a lot of similarities because they are all based on Fr. Pacioli’s work.
In the United States, financial accountants may work inside industry (working for one company) or in public accounting (having many clients). They help companies prepare their financial information and present it in the form of financial statements.
For detailed information about working as an accountant in the United States, check out Accounting For Dummies, 4th edition, by John A. Tracy, CPA (Wiley).
Working as an auditor
An audit is an independent, objective, and systematic examination of underlying data in order to form an opinion about someone else’s assertions. Wow, another big definition! Let’s pull it apart a bit.
First, let’s focus on what independent and objective mean. An auditor must be independent of the entity he audits, which means he c...
