Forensic Accounting

The large number of prominent fraud cases like that of Enron, which resulted in the collapse and bankruptcy of the company in 2001 and led to the passage of the Sarbanes-Oxley Act in 2002, have led to an increased emphasis on forensic accounting. Forensic accounting courses were seldom found until recent years. In March 2007 West Virginia University published the results of a task force formed to help educational institutions know how to plan for and teach forensic accounting. This report is entitled “Education and Training in Fraud and Forensic Accounting: A Guide for Educational Institutions, Stakeholder Organizations, Faculty, and Students.”

The task force report gives guidelines on curriculum and methods for teaching a forensic accounting course. Members of the task force included public accounting firms; educators; the American Institute of Certified Public Accountants ; the Bureau of Alcohol, Tobacco, Firearms and Explosives; The Federal Bureau of Investigation; the Internal Revenue Service; the legal community; and many more. Although an individual forensic accounting course might differ somewhat from what the task force recommended, the essentials will probably be the same. The following information is excerpted from the task force report.

A forensic accounting course should include information on the following: “Criminology, specifically oriented to the nature, dynamics, and scope of fraud and financial crimes; the legal environment; and ethical issues.” The reason for this is that students must understand the nature of the crime, the law, and other issues in order to be able to perform forensic accounting.

Forensic Accounting

Additional topics include “[f]raud prevention, deterrence, detection, investigation, and remediation.”Details of these topics are “asset misappropriation, corruption, false representations, financial statement fraud, fraud and forensic accounting and a digital environment.” Specific to the digital environment are “computer-based tools and techniques for detection and investigation, electronic case management tools, and other issues specific to computerized environments.”

The task force then recommends that the course also teach “Forensic and litigation advisory services, including research and analysis, valuation of losses and damages, dispute investigation, and conflict resolution (including arbitration and mediation).”

This type of course is built on a foundation of basic accounting concepts and will generally have a prerequisite of principles of accounting. For those wanting to work in uncovering fraud in computerized systems it will be important to also have at least a basic understanding of information systems and the equipment used for them. Without this understanding, it will be possible for people to conceal fraudulent activity successfully more easily.

Uncovering fraud also requires an ability to evaluate the business environment. Accountants refer to the concept of internal controls. Internal controls are those that are intended to prevent fraud from occurring. Well-designed internal controls will prevent fraud in many cases, unless there is collusion among several people to bring it about or unless the fraud is perpetrated at the highest management levels. This is one of the reasons that the Sarbanes-Oxley Act requires executives to take responsibility for and sign off on financial statements. Good business ethics help executives to report to shareholders accurately and fairly the results of operations. For this reason forensic accounting isn’t only about accounting, but also about people and their actions.

There are many different types of students who will benefit from taking a course in forensic accounting. The task force recognized this as well and stated, “Many students interested in fraud and forensic accounting have or will have a degree in accounting. Others may have degrees in related fields such as criminology, sociology, psychology, law, computer science, or business, or have obtained related job experience with or without accounting skills.” To accommodate students with varying backgrounds, the task force identified basic accounting and auditing knowledge as a prerequisite for the study of fraud and forensic accounting.