CHAPTER 5

Forensic Accounting Practices, and Education and Research

Executive Summary

Forensic accounting has advanced from a narrow focus on fraud investigation to a profession with certification, education, and research in performing a variety of fraud and nonfraud services. Forensic accountants should possess education, knowledge, experience, and expertise in accounting, auditing, business, finance, law, psychology, and criminology. This chapter presents the structure of the legal system relevant to forensic accounting practice as well as forensic accounting education and research.

Introduction

Forensic accounting is considered as an important and rewarding field of accounting to investigate fraud and nonfraud incidents. In such an increasingly unstable economic and litigious environment, there has been significant growth in the demand for and interest in forensic accounting and investigative fraud and nonfraud services. To effectively perform litigation consulting, expert witnessing, valuation, and fraud investigation services, forensic accountants should understand the structure of the legal system as well as forensic accounting best practices and education and research presented in this chapter.

Structure of the Legal System

This section provides an overview of the legal, judicial, and regulatory environment in which a forensic accountant may practice. It introduces the basics of civil and criminal laws, dispute resolution, and federal and state rules of evidence and procedure applicable to forensic accounting practices. It also provides a description of the federal and state courts and an introduction to other applicable laws, rules, regulations, guidance, and agencies relevant to forensic accounting practices.

Civil Litigation Processes

The process for civil litigation and related lawsuits generally starts with disagreements and disputes among parties including individuals, businesses, or government and nongovernment entities. Civil lawsuits typically proceed through systematic steps: pleadings, discovery, trial, and appeal in the absence of voluntarily settling at any time before reaching trial or the use of arbitration.¹ Civil litigation statistics show, on the federal level, that 409 civil filings occurred with a median case time of 10.1 months (measure of filing to conclusion) during the first 3 months of 2018. The total number of civil cases in 2018 amounted to 277,010. The most common type was prisoner petitions, which contained 53,965 cases. The remaining top five were personal injury/product liability, civil rights, other civil, and contracts with 44,563, 40,371, 34,153, and 24,802 total cases, respectively.²

Pleadings

The civil litigation process begins here with the filing of papers by each party involved in a lawsuit. In this portion, each side gets to explain its side of the dispute. Pleadings are composed of two core components: the complaint and the answer. The complaint describes what the defendant did or failed to do that was the direct cause of harm and injury to the plaintiff and the legal basis for holding the defendant responsible for that harm.³

The answer is a phase in which the defendant is given a specific amount of time to file an answer to the complaint. During this period, the defendant may reply by filing a counterclaim, which is when a defendant claims that the plaintiff caused injury and must pay damages. In some cases, a request for clarification, amendments to factual allegations or legal theories, or dismissal can be achieved. After any replies are stated, the court now has the parameters for which issues can be resolved.⁴

Discovery

Discovery begins after a lawsuit is filed and stops shortly before the trial. During this period, parties seek information, about facts and issues, from one another as well as third parties. These requests are formally issued and may be questions, document requests, admission (admitting or denying facts) requests. Because of discovery being an important part of legal proceedings, there are various methodologies that can be applied. First, a deposition is a statement made from court under oath. The purpose of depositions is to give the opposing party and idea of the content of the upcoming trial. It can be given orally, via tape, or in writing. Along with the depositions, interrogatories may be conducted, which are written questions for the other party to answer.⁵

Trial

Forensic accountants take part in civil trials. In a civil trial, there are many phases, including pretrial, jury duties, examination of evidence, and motions. In the pretrial phase, the complainant files for the case to be heard in court and the defendant is the firm being charged with the offense. The defendant can admit guilt or deny the accusation. In the court, the jury is selected before the proceedings begin by the judge. This process is called voir dire, meaning to speak truthfully. This is done so that bias is not brought into the court proceedings. If the juror does not meet this criterion, another juror is selected. After selection of the jury, the trial commences. During the trial, evidence is examined both directly and in parallel. Before the examination, evidence must be determined to be either direct or circumstantial in nature. Direct evidence is clear and usually involves the obvious including weapons, admittance of guilt, and eyewitness accounts. Circumstantial evidence is much more difficult to facilitate as it involves an inference of fact. This type of evidence includes the crime scene and expert testimony.

The court uses various methods to question and verify evidence in court proceedings. Direct examination involves both types of evidence mentioned in the previous paragraph. The witnesses must keep opinions out of the statements made to avoid a biased testimony. Cross-examination is a by-product of direct examination and involves the defendant’s lawyer pondering evidence to test its credibility. At the end of the trial, a motion is given. This motion determines whether the trial is over, and the jury can examine all the evidence and make the verdict.⁶

Appeal

To begin the appeal process, a notice of appeal must be filed with the court if it is allowed. Because of forensic accountants being involved in civil cases, the appeal can be done by either party (defendant or plaintiff). An appeal is usually done before trial proceedings commence, but it can be done after the trial is over. The party appealing must write a brief, which is a documented statement discussing why the party believes the decision was factually incorrect. An oral rebuttal to the decision is acceptable in some cases. After the case is appealed, judges may form a dissenting opinion, which is a disagreement with the majority, or a concurring opinion, which agrees with the majority. If the appeal is unsuccessful, it can be appealed to a higher court. If it is not, the verdict stands. If the appeal is successful, it will return to the lower courts to be retried. This is allowed because the US Constitution protects against double jeopardy, which means being tried repeatedly for the same crime.⁷

Alternatives to Litigation

Businesses may want to avoid normal court proceedings but still find a resolution to the problem. The process to address this issue is called Alternative Dispute Resolution (ADRs). There are many types of ADRs, including mediation and arbitration. Mediation is peaceful and designed to arrive at an agreement, as opposed to general litigation proceedings. This bypasses a jury and other forms of legal proceedings and lawyers are not required. An arbitration always involves lawyers with subpoena power; each side can present a case.⁸

Alternatives to litigation are usually used when pursing a case through normal court proceedings would be more costly than beneficial (cost–benefit analysis). It is important to note that sometimes courts may require ADRs, which is less common than individuals deciding to pursue this form of legal reprieve. According to the United States Department of Justice, in 2017, there was a 75 percent success rate for individual-instigated ADRs and a 55 percent success rate for court-ordered ADRs. The year 2017 had a combined 77 percent achieved benefit from resolved cases, which tied with the year 2014 for the highest in a 5-year period.⁹

Criminal Proceedings

The above-mentioned processes for civil trials are identical for criminal proceedings except for the pretrial. In a criminal pretrial, the process changes on the basis of how serious the offense is. For example, felonies are more punishable by federal law, as opposed to misdemeanors, which are generally locality-based offenses. Every other crime lower than the preceding two, is usually punishable by fines.¹⁰According to the Department of Justice, in 2016, there were 66,961 criminal cases at year end. Of those cases resolved, 50,973 defendants were found guilty, 148 were found not guilty, and 2,582 were dismissed. Broken down by crime type, the top three crimes were drug offenses, violent crime, and white-collar crime, each totaling at 11,731, 11,688, and 4,791, respectively. The Department of Justice releases criminal court statistics every fiscal year.¹¹

Forensic Accounting Fraud Standards and Practices

Several auditing standards provide guidelines for forensic accountants and external auditors to assess risk of financial reporting fraud and discover Financial Statement Fraud(FSF). These standards are the Statement on Auditing Standards (SAS) No. 99 entitled “Consideration of Fraud in a Financial Statement Audit” and the International Standard on Auditing (ISA) No. 240 entitled “The Auditor’s Responsibility Relating to Fraud in an Audit of Financial Statements.”

These auditing standards emphasize the importance of evaluating fraud risk from the view of fraud-triangle factors and the use of brainstorming sessions to assess fraud risks and evaluate how fraud could be perpetrated. However, SAS 99 (AICPA 2002) does not provide detailed instructions on how auditors should consider fraud schemes in risk assessment and how auditors adjust audit programs to respond to the assessed fraud risk. SAS 99 (AICPA 2002, p. 31) states, “The auditor may identify events or conditions that indicate incentives/pressures to perpetrate fraud, opportunities to carry out the fraud, or attitudes/rationalizations to justify a fraudulent action.”¹² The existence of these conditions, or events, are commonly referred to as “fraud risk factors” that provide signals, symptoms, and possible red flags that fraud could exist.¹³

SAS 99 (AICPA 2002) states that when management has incentives or pressures to perpetrate fraud, opportunities to carry out the fraud, and attitudes or rationalizations to justify a fraudulent action, it might intend to commit fraud. Therefore, the first phase of fraud is normally the assessment of the presence of risk factors in the fraud triangle. When these factors are present in the business environment of a company, there is a higher likelihood that management will commit fraud. Given the intention to commit fraud, management must then decide how to perpetrate it. Since the management attempts to falsify financial statements, the first step in perpetrating fraud could be to decide which accounts and how they should be manipulated. For example, when management notices that the company cannot meet the projected net income for the period, it might decide to overstate sales revenue to increase the net income.

ISA 240 pertains to the auditor’s looking for fraud in financial statements. ISA 240 was developed from a need to prevent and detect fraud in 2004 through the risk of material misstatement (RMM). The RMM is the likelihood that material misstatements enter into the accounting information process, were undetected by the system of internal controls, and are not discovered by auditors. As a result, when there is likelihood for fraud, the risk is higher. The auditor must use professional judgment and skills to use the RMM for ISA 240 standards. The requirements for professional judgment include skepticism, processes designed to manage, assess, and mitigate risk, and auditors discussing the audit with each other on a consistent basis.¹⁴

ISA 240 is a set of standards; however, when it comes to forensic accounting, the standards vary by case according to the laws, the requirements of the investigation, and the evidence compiled. For these reasons, a forensic accountant needs to know ISA 240 from the perspective of the external audit team and management. This will allow the accountant to identify areas of possible manipulation of the standards that may lead to fraudulent activities.¹⁵

Normally, if management has not used any evidence to conceal account schemes, the fraud might be detected by an auditor through regular audit procedures. Therefore, the assertion that fraud occurred without the use of evidence schemes is linked to evidence gathered by regular audit procedures. However, if there is a risk that management has used evidence schemes to conceal fraud, auditors should assess what specific evidence schemes could have been used. Therefore, the last level of assertions is the occurrence of specific evidence schemes. Auditors should perform special procedures to assess the risk of specific evidence schemes being used. As mentioned previously, it should be noted that the special audit procedures do not have to be new procedures, but those that are designed and performed for the special purpose of examining whether the audit evidence has been manipulated by management.

In recent years, the PCAOB has encouraged the Auditing Section of the AAA to sponsor a series of literature syntheses on Financial Reporting Fraud (FRF). These syntheses were aimed at compiling findings of academic studies on FRF and providing insights into their policy, practical and educational implications for regulators, practitioners, and academics. The first FRF synthesis was conducted by Hogan et al. (2008) and concluded that the rationalization element of the fraud triangle has received the least amount of attention in academic literature.¹⁶ The second synthesis was conducted by Trompeter et al. (2013), which further advanced the fraud triangle in the areas of antifraud measures and legal elements of fraud, such as fraud schemes, concealment, and conversion.¹⁷ These syntheses address all components of FRF by focusing on the capability and compliance elements of the FRF model in further occurrences and deterrence of fraud.

Forensic Accounting Fraud-related Cases

Throughout the twenty-first century, forensic accounting grew as an industry, mostly because of the development of new technologies that make committing fraud easier. There have been several prevalent cases that have occurred during 2017 that were reported by the IRS, Big 4, and the FBI. One example, provided by the Internal Revenue Service (IRS), involves a man named Masud Sarshar, who stored millions of US dollars in Israeli bank accounts. He had an account in Bank Lumei and two other banks, which he connected to his business, Apparel Limited, Inc. He hid 23.5 million in these banks to avoid paying tax to the IRS by not disclosing his income on his 2006 to 2012 tax returns.¹⁸

The FBI, situated in the United States, places high value on investigating and solving white-collar crime. In the 2016 Fiscal Year, the FBI, in its report on Health Care Fraud and Abuse Control Program, highlighted several cases that it solved using its Strike Force team. The first case, Regent Management Services L.P., a nursing company, was receiving kickbacks from several companies regarding ambulatory transportation services. These kickbacks were given in trade for very prominent Medicare and Medicaid transportation referrals. The Strike Force (SF) found out about this and charged Regent Management Services a fine totaling $2.7 million in 2015. As a resolution to this case, Regent had to enter into a Corporate Integrity Agreement, a contract established by the HHS-OIG, for 5 years. This is the first case in U.S. history in which any medical company was held responsible for the kickbacks. Another case took place in June 2016, in which the FBI SF team found that Irving Holdings, one of the biggest taxicab firms in the United States, gave the State of Texas government a false affidavit pertaining to 10 North Texas business’ and individuals. The total payout was $1.1 million.¹⁹

Exhibit 5.1 summarizes many high-profile and profound fraud cases that have happened in the past 20 years. The most notable is the Enron scandal, which is the largest accounting scandal to date, amounting to $74 billion over 4 years. As a result, Congress established the PCAOB which resulted from the SOX. Now the SEC has established new regulations regarding securities and FSF. There were several cases that happened in 2007, including Qwest, UBS, and Mc’Afee. Collectively, the companies were fined $69 million and many CEOs were let go. Most of the cases in Exhibit 5.1 pertain to financial statement or securities fraud, and as a result, disclosure of the cases to the public is mandated by law. The effectiveness of SOX can be questioned as a result of several of these high-profile crimes. The passed legislation, which promised to reduce fraud, has not held true. The overall fraud rate has not had a significant change since 2002. This is made evident by Exhibit 5.1, which displays many damaging cases after the SOX era.

Forensic Accounting Best Practices

Forensic accountants are typically well trained and educated to perform risk and vulnerability assessment associated with global corruption, fraud, allegations of financial misstatements and mismanagement, and antifraud investigation and prevention. Best practices of forensic accounting suggest that forensic accountants conduct full and extensive fact-finding and investigations in performing litigation consulting, expert witnessing, and anticorruption and fraud examination services. Forensic accountants’ hands-on training, on-the-job experience, and application of best practices enable them to assist their clients with forensic accounting services including

• Antifraud and anticorruption examination
• Corporate consulting and investigations
• Examination of allegations of corporate fraud or financial misstatement and mismanagement
• Foreign Corrupt Practices Act investigation and consulting
• Investigation of whistle-blower allegations
• Cybersecurity assessment
• Responding to regulators’ inquiries and requests
• Troubleshooting and prevention and detection of problems before they occur

In performing the above-mentioned services among others, forensic accountants should sharpen their skills in the following:

• Identification of the elements of fraud, both civil and criminal
• Assessment of an organization environment and culture, including governance, ethics, risk management, and antifraud policies and procedures
• Identification of fraud schemes, their red flags, symptoms, and detection techniques
• Application of a comprehensive and robust fraud risk assessment methodology
• Evaluation of fraud risk and ways to mitigate this risk
• Assessment of the need for internal controls and fraud risk management
• Classification of the types of persons most likely to commit fraud and their motivations and rationalization
• Assessment of the importance of managing fraud risk from in and outside the business
• Definition of the roles and responsibilities of corporate gatekeepers for detecting, deterring, and investigating fraud
• Identification of rules, regulations, and professional standards governing prevention and detection of Financial Reporting Fraud.
• Discussion of elements of Financial Reporting Fraud.
• Description of fraud triangle of incentives/pressure, opportunities and rationalization
• Application of antifraud policies and best practices
• Identification of fraud schemes and scenarios relevant to numerous industries, including banking, insurance, stock exchanges, and government
• Discussion of professional standards pertaining to prevention and detection of both employees’ and management fraud
• Performance of forensic accounting and investigative audit procedures
• Encouragement of effectual “brainstorming sessions” discussing fraud possibilities
• Identification of risk exposures and designing of remediation responses to fraud risk
• Performance of a fraud risk assessment
• Discussion of securities fraud and money laundering

Antifraud policies and programs should address corporate culture, control structure, and fraud procedures.

1. Corporate culture—corporate culture should create an environment that sets an appropriate tone at the top that promotes ethical behavior and reinforces antifraud conduct, demanding “doing the right thing always.” The corporate culture provides incentives for everyone in the company, from directors to officers and employees, to act competently and ethically.
2. Control environment—an effective control environment could reduce opportunities for individuals to engage in fraudulent activities. Authoritative guidelines including Section 404 of SOX, SEC-related implementation rules, and PCAOB auditing standards Nos. 2 and 5 emphasize the importance of effective internal controls in the prevention and detection of FSF.
3. Antifraud procedures—adequate fraud-related procedures should be developed and performed to ensure prevention and detection of potential fraud.

Forensic Accounting Research

Forensic accounting research conducted by academic scholars and practitioners are intended to promote and advance forensic accounting research in all areas of forensic accounting services, including fraud examination, valuations, litigation consulting, and expert witnessing. Exhibit 5.2 presents a synopsis of forensic accounting published articles in the past two decades. These published research studies cover theoretical, practical, and empirical aspects of forensic accounting. Many of these published articles provide policy, practical, educational, and research implications and further our understanding of forensic accounting. Forensic accounting research summarized in Exhibit 5.2 presents the journals, purposes, and research methods, most commonly used variables constructed, and findings of these studies. This is a synthesis and synopsis of high-profile studies in forensic accounting. Summarized articles suggest that fraud and quantitative methods make up the higher portion of topics and research methods published in forensic accounting journals.

In total, 25 articles from various journals were selected. Most of the journals centered around business sustainability, financial reporting fraud, and financial reporting quality. The consensus from the articles selected is that internal control systems are needed to minimize financial fraud and maximize business sustainability. It is important to select a few articles from the exhibit to explain this reasoning. The American Accounting Association’s Journal of Auditing published an article in August 2017 that discussed the impact of internal control on the fraud risk equation. The conclusion from the study was that weak internal controls led to an increase in financial reporting fraud. To reduce financial reporting fraud, the authors state that a high-quality internal control system is needed. This would allow the company to detect, prevent, and correct any potential or committed fraudulent behavior. Another document, released by the Journal of Accounting Research, investigated a CEO’s relative narcissism and its impact on financial reporting. The authors found that narcissism affects financial reporting.

Two Earnest Young surveys (2014, 2016) report the trends toward the use of information technology (IT) in general and Big Data/analytics in particular in forensic accounting practices. First, there is an increasing use of forensic data analytics. Second, cyber breaches (illicit transferring of funds, disrupting critical operations, or stealing intellectual property/confidential personal data and other critical digital assets) and insider threats (malicious insiders stealing, manipulating, or destroying data, fraud, IP theft, unauthorized trading, espionage or IT sabotage) are emerging as the fastest growing fraud risks faced by forensic accountants. Forensic accountants increasingly use Big Data (analytics) in their practices to deal with the datasets exceeding the typical constrains of a traditional spreadsheet.²⁰ As traditional rules-based relational database techniques, such as matching, sorting, filtering, and query design, often result in false positives or missed fraud detection opportunities, forensic accountants nowadays incorporate data visualization, predictive analytics, behavior analytics, content analytics, social network analysis, geospatial analytics, and numerous advanced antifraud techniques.²¹

Forensic accounting education and practice have gained attention from research scholars. One survey examined both academics and practitioners in the United States and provided evidence of the importance of forensic accounting education and practice and its integration into the business curriculum.²² Another survey examined the update availability of forensic accounting education in the United States and other English-speaking countries and found that in the United States, there are 422 universities and colleges offering forensic accounting courses, with 97 of them providing forensic accounting programs; while in Canada and other English-speaking countries, there are 25 universities and colleges offering forensic accounting courses, with 23 forensic accounting programs among 186 Canadian and other English-speaking universities and colleges.²³

Several academic studies promote integration of forensic accounting into the business curriculum. For example, a recent research examined availability of forensic accounting education in the Western countries including the United States and found that in the United States, there are 422 universities and colleges offering forensic accounting courses, with 97 of them providing forensic accounting programs.²⁴ There are 25 universities and colleges offering forensic accounting courses, with 23 forensic accounting programs in Canada and other English-speaking countries.²⁵

There is a lack of diversity in forensic accounting research topics and methods, with the keen focus on fraud and FSF and fraud investigation, with less emphasis on other topics of forensic accounting such as expert witnessing and litigation consulting. Many of the published articles identify gaps between practice and research in forensic accounting and encourage research in emerging topics using diverse methods that contribute to the literature and are valuable to forensic accountants. The emerging research topics in forensic accounting are, but not limited to, cybersecurity attacks and threats, financial misstatement and mismanagement, bankruptcy and insolvency, valuations and fair value estimation, economic damage calculations, digital forensic and computer forensic techniques, financial reporting fraud and securities fraud, the role of gatekeepers in preventing and detecting FSF, antibribery and anti-money laundering, government inquiries and foreign corrupt practices, insurance and personal injury claims, and the use of Big Data and Data Analytics in forensic accounting.

Forensic Accounting Education

Forensic accounting is an exciting field that started in the business world. Playing catch-up, educational institutions are trying to implement classes to fill the demand for educated professionals. Although it is becoming increasingly more popular in the field of education, there is still a lack of standardized forms of education and skillset taught across the board. The greatest obstacle in offering a more comprehensive forensic curriculum is the perception of a lack of room for it. Electives within accounting degrees are becoming fewer and fewer, so offering more forensic classes would take away from other required courses. However, fraud is discovered mostly from internal sources, so students need to be aware of the red flags of various fraud schemes if they are going to be working for a company. This shows a need for all students to take forensic accounting classes, not just future auditors.

Forensic accountants are regarded as experts in deterring, preventing, and detecting FRF by researching for at least one irregular transaction or event that may lead to a big financial scandal and fraud. Skills required for being effective and successful forensic accountants are enormous, including being team-oriented, having the ability to analyze problems and complex situations, having adequate computer skills, possessing interpersonal and communication skills, being creative and skeptical, and finally having a keen curiosity and being persistent. A keen curiosity is needed to keep forensic accountants on their toes and forcing them to look for red flags, irregularities, and symptoms of fraud. Persistency is needed to conduct thorough investigation of connecting the dots. Forensic accountants should possess a working knowledge of accounting, the legal system, criminology, and investigative techniques; they should also be detail oriented and organized; they should think critically and have excellent communication skills.

Effective antifraud policies and programs should be designed to prevent and detect fraud. Antifraud programs should deter, prevent, and detect all variations of fraud, from misrepresenting financial information to misappropriating assets and employee fraud. Effective antifraud programs should also address the antifraud role of corporate governance participants. Entities of all sizes and types are susceptible to both employee fraud (e.g., misappropriate of assets, theft, embezzlement) and management fraud (e.g., earnings management, FSF, manipulation of financial reports). Effective antifraud programs—focusing on fraud awareness and education in the workplace environment, whistle-blowing policies and procedures of encouraging and protecting employees to report suspicious behavior, adequate internal control procedures designed to prevent and detect fraud and conduct surprise audits—can significantly reduce fraud. The demand for and interest in forensic accounting, ethics, and corporate governance and antifraud practice and education has significantly increased in the post-SOX era. Forensic accounting, ethics, and corporate governance have made significant improvements in the past two decades—yet, many have expressed concern over the corporate governance, ethics, and forensic accounting education, as well as the training provided in an effective antifraud program.

Forensic accountants are regarded as experts in deterring, preventing, and detecting FRF by researching for at least one irregular transaction or event that may lead to a big financial scandal and fraud. This one transaction or event is typically referred as a “tip of the iceberg,” which encourages forensic accountants to acquire specialized knowledge, skills, education, and experience in identifying and evaluating this entire threatening iceberg (fraud). Exhibit 5.3 presents forensic accounting education in training the most competent and ethical forensic accountants possessing skills. Exhibit 5.3 describes forensic accounting course description, objectives, requirements, prerequisites, and course assignments and universities that offer these courses.

Many universities worldwide are now offering forensic accounting education; the courses cover important topics relevant to the three areas of forensic accounting practice of litigation consulting, expert witnessing, and fraud examination. Colleges and universities must do their part by encouraging business, criminology, and law faculty to carry out much-needed research in this important area and teach courses in fraud and forensic accounting. Behavioral sciences—psychology, sociology, criminology, and anthropology—are needed to support the interdisciplinary field of fraud examination and forensic accounting in theory development and in practice, and in fraud prevention, deterrence, and detection.²⁶ A survey of forensic accounting education finds that the (1) demand for and interest in forensic accounting education continue to increase: (2) more universities are offering forensic accounting courses; (3) forensic accounting education is beneficial and relevant to accounting and business students, the accounting profession, and business communities; and (4) there are many of forensic accounting education topics and universities chose among topics those that best fit their programs.²⁷

Some universities worldwide are now offering forensic accounting courses at either undergraduate or graduate levels to train most competent, ethical, and professional future forensic accountants. Exhibit 5.4 presents forensic accounting course offerings at undergraduate and graduate levels, course title, and universities that offer forensic accounting courses and programs and their URL addresses. Forensic accounting certificate programs typically require several specialized courses in accounting, auditing, business, IT, psychology, law, and criminology. A few schools, such as Georgia Southern University, Florida Atlantic University, the University of West Florida, Carlow University and Edinboro University in Pennsylvania, Franklin University and Tiffin University in Ohio, Rider University in New Jersey, the University of Wollongong in Australia, and Villa Julie College in Maryland, have created separate forensic accounting undergraduate or graduate degree programs. These degree programs offer several fraud and nonfraud specific courses as either minor or major in forensic accounting at the undergraduate or graduate level.

An important issue is the methods of integrating forensic accounting into the business and accounting curriculum. Two suggested methods of covering forensic accounting education are (1) integration of forensic accounting through accounting and auditing courses and (2) offering of a stand-alone forensic accounting course.²⁸ The rationale for the first method of infusing forensic accounting education into the accounting curriculum throughout existing accounting and auditing courses is that all three fields of forensic accounting (litigation consulting, expert witnessing, and fraud examination) can shape all aspects of today’s business. Forensic accounting topics can be integrated into existing upper-level accounting and auditing courses to ensure coverage of all critical aspects of forensic accounting. Most of the impediments to this integrated approach relate to the fact that adding forensic accounting to existing accounting and auditing courses may not be feasible and that faculty and students may not feel comfortable in covering additional forensic accounting topics to their courses.

The second approach is to offer a stand-alone course in forensic accounting at either the undergraduate or graduate level. Offering a separate forensic accounting can give the opportunity to accounting and business programs to tailor forensic accounting education to their own interest, specialization, and needs. The major impediments to offering a separate forensic accounting course are lack of administrative support and faculty interest and financial resources.

The topical coverage of forensic accounting education is important regardless of the method of delivery of forensic accounting (integration, separate course). The convergence of forensic accounting topics in a separate course or the integration of those topics into upper-level courses requires the classification of interrelated topics into smaller subsets or modules. These modules can be used individually or in groups to allow instructors to customize their forensic accounting syllabi. Forensic accounting topics can be arranged into several modules. The first module can consist of fundamental forensic accounting topics such as forensic accounting principles, standards, services, fundamentals of fraud investigation and so on. The second module can cover types of fraud, FSF, fraud prevention and deterrence programs, antifraud auditing standards, effective report writing, and environmental and business red flags. The next module can focus on corporate governance, fraud deference, prevention and detection policies and procedures, financial reporting process and analysis, earnings management, criminology and white-collar and economic crimes, occupational fraud, security and privacy, cybersecurity, and legal elements of fraud.

Another module can present careers in forensic accounting, litigation consulting techniques, shareholder litigation, crime control techniques, expert testimony and expert witness techniques, conflicts of interest investigating techniques, compliance with applicable laws and regulation, business valuations and cost estimates, and rules of evidence, interview skills and legal aspects of interviews, intellectual property fraud, cyberattacks, and cyber fraud. The following modules for forensic accounting education are suggested: (1) forensic accounting theories, principles, tools, and techniques; (2) forensic accounting standards and procedures; (3) financial reporting process; (4) fraud and fraud examination; (5) investigation and law; (6) evidence-gathering procedures and analysis; (7) litigation consulting; and (8) expert witness.

Universities based on the available resources, including faculty, database, and facilities, can decide to offer a forensic accounting course at either undergraduate or graduate level or both. Regardless of infusion of forensic accounting education into several businesses and accounting courses, offering of a stand-alone forensic accounting course at either graduate or undergraduate level, relevant forensic accounting topics should be classified into manageable modules. Each module should cover at least 10 topics and can be arranged on the basis of the classifications of forensic accounting services (expert witnessing, litigation consulting, and fraud investigation) or expertise and knowledge requirements (soft skills, technical education, analytical skills). The coverage of forensic accounting topics in a separate course, or the integration of them into business and accounting courses, requires the classification of related topics into teaching modules. The use of the module approach to forensic accounting enables instructors to customize their syllabus by promoting critical thinking, skepticism, and the flexibility to cover all or selected modules in their courses. Exhibit 5.5 presents many forensic accounting topics, which are classified into the three categories of general, fraud-related, and non-fraud-related that can be included in teaching modules.

Conclusion

Forensic accountants should possess education, knowledge, experience, and expertise in accounting, auditing, business, finance, law, psychology, and criminology. This chapter presents the structure of the legal system relevant to forensic accounting practice as well as forensic accounting education and research. Business colleges and accounting programs should integrate forensic accounting education into the business and accounting curricula for preparing and training future generations of forensic accountants who are competent and ethical in conducting fraud and nonfraud examination. Future research should also explore new methods, technology, and advances in forensic accounting practices.

Action Items

1. Understand the structure of the legal system.
2. Apply forensic accounting research and education in practicing forensic accounting.
3. Participate in forensic accounting courses and programs to meet professional continuing education requirements.
4. Conduct research on fraud and nonfraud forensic accounting issues that provide policy, educational, and practical implications.

Endnotes

  1. Stoel Rives LLP. 2012. How Does a Lawsuit Work? Basic Steps in the Civil Litigation Process. https://www.stoel.com/how-does-a-lawsuit-work-basic-steps-in, (accessed December 7, 2017).

  2. UScourts. 2018. Federal Court Management Statistics. http://www.uscourts.gov/statistics/table/na/federal-court-management-statistics/2018/03/31-1

  3. Ibid.

  4. Ibid.

  5. American Bar Association. 2017. Discovery. https://www.americanbar.org/groups/public_education/resources/law_related_education_network/how_courts_work/discovery.html

  6. American Bar Association. 2017. How Courts Work: Steps in a Trial. https://www.americanbar.org/groups/public_education/resources/law_related_education_network/how_courts_work/steps_in_a_trial2.html

  7. Ibid.

  8. D. Radunz. 2017. Alternatives to Litigation. http://www.radunzlaw.com/alternatives-to-litigation/

  9. Department of Justice. 2017. Alternative Dispute Resolution at the Department of Justice. https://www.justice.gov/olp/alternative-dispute-resolution-department-justice

10. Ibid.

11. Department of Justice. 2016. United States Attorneys’ Annual Statistical Report. https://www.justice.gov/usao/page/file/988896/download

12. American Institute of certified Accountants (AICPA). October, 2002. Statement on Auditing Standards No. 99: Consideration of Fraud in a Financial Statement Audit. Available at https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00316.pdf

13. Ibid.

14. IFAC. December 15, 2009. International Standard on Auditing 240. http://www.ifac.org/system/files/downloads/a012-2010-iaasb-handbook-isa-240.pdf

15. PCAOB. February 22, 2007. Panel Discussion – Forensic Audit Procedures. https://pcaobus.org/News/Events/Documents/02222007_SAGMeeting/Forensic_Audit_Procedures.pdf

16. C.E. Hogan, Z. Rezaee, R.A. Riley, and U.K. Velury. 2008. “Financial Statement Fraud: Insights from the Academic Literature,” Auditing: A Journal of Practice & Theory 27, no. 2, pp. 231–252.

17. G.M. Trompeter, T.D. Carpenter, N. Desai, K.L. Jones, and R.A. Riley. 2013. “A Synthesis of Fraud-related Research,” Auditing: A Journal of Practice and Theory 32(sup.1): 287–321.

18. Internal Revenue Service. 2018. Examples of International Investigations—Fiscal Year 2017. https://www.irs.gov/compliance/criminal-investigation/examples-of-international-investigations-fiscal-year-2017, (accessed October 31, 2017).

19. HHS. January, 2016. Health Care Fraud and Abuse Control Program Annual Report for Fiscal Year 2016. https://oig.hhs.gov/publications/docs/hcfac/FY2016-hcfac.pdf, (accessed November 21, 2017).

20. Ernst and Young (EY). 2014. Global Forensic Data Analytics Survey 2014. http://www.ey.com/GL/en/Services/Assurance/Fraud-Investigation---Dispute-Services/EY-Global-Forensic-Data-Analytics-Survey-2014, (accessed March 14, 2018)

21. Ibid.

22. Z. Rezaee, D.L. Crumbley, and R.C. Elmore. 2004. “Forensic Accounting Education: A Survey of Academicians and Practitioners,” Advances in Accounting Education 6, pp. 193–231.

23. M. Seda, and B.K. Peterson Kramer. 2014. “An Examination of the Availability and Composition of Forensic Accounting Education in the United States and Other Countries,” Journal of Forensic & Investigative Accounting 6, no. 1, pp. 1–46.

24. Ibid.

25. Ibid.

26. S. Ramamoorti. 2008. “The Psychology and Sociology of Fraud: Integrating the Behavioral Sciences Component into Fraud and Forensic Accounting Curricula,” Issues in Accounting Education. http://proquest.umi.com.proxy1.ncu.edu/pqdweb?did=1613190661&sid=6&Fmt=4&clientId=52110&RQT=309&VName=PQD, (accessed September 22, 2010).

27. Rezaee, Crumbley, and Elmore. 2004.

28. Ibid.