Spotlight on forensic accounting and auditing

By Claudious Matizira

Forensic Accounting and Auditing

When people ask me about my areas of specialization, I am regularly met with amazement when I tell them that I am a forensic practitioner. For the ones out of doors of the profession, the term captivates up snapshots of crime combatants in the corporate world, equipped with devices used to unearth crimes at every turn. Even though that is far from an accurate picture of the work and life of a real forensic accountant/investigator, the profession is certainly exciting and worthwhile.

Forensic accounting and auditing is a rapidly growing profession that is used as a tool to prevent and fight financial fraud and white-collar criminal activities. It is a way of gathering and presenting financial information in a format that can be used in a court of law during the prosecution of economic crimes. It integrates accounting, auditing, and investigative skills to detect fraud and prevent fraudulent accounting practices in the future. By definition, forensic accounting is an investigation of a commercial offence with the following objectives:

• To gather evidence that can be presented during litigation processes such as disciplinary hearings, civil proceedings, and criminal prosecutions.
• To identify internal control weaknesses in the business process that can expose an organization to the commission of a commercial offence.

The origin of Forensic Accounting/investigation

The advent of forensic accounting can be traced back to ancient Egypt when scribes were used by Pharaoh to keep track of items of value as such the kingdom’s gold, grain, and other assets to ensure that there was no fraud inside the treasury. The scribes were required to work in pairs and record transactions impartial of each other as a form of internal controls. The idea of unbiased record-keeping became increasingly important in the ancient world, as court docket structures had been developed to resolve disputes among parties. In the thirteenth century, courts frequently trusted accountants to clear up instances involving monetary damages.

As corporations grew larger, fraud became more common. The South Sea Bubble is considered one of the first corporate frauds. The South Sea Company was a joint-stock company established in 1711 in Great Britain in order to conduct trade with Spanish South America. The company was unable to make any profits due to the fact that Spain and Great Britain were embroiled in the War of Spanish Succession and no trade was taking place. The company had bought government bonds worth £10 million and had to borrow an additional £2 million due to lack of profits.

The tension between England and Spain brought about the seizure of South Sea Company ships by Spain in 1718. In 1719, the South Sea Company offered to take over all of the British government’s debt, which was over £30 million. The company’s plan was to use its stock at 5% in exchange for government bonds lasting until 1727. Parliament approved this scheme, which resulted in the South Sea Company’s stock price rising from £128 in January 1720 to £550 by the end of May in the same year. Demand for the company’s stock increased rapidly due to speculation and rumors of a boom in the exchange between Britain and Spain. Domestic as well as Dutch investment in the company led to further increases in stock.

Different joint-stock companies then joined the market and took the opportunity to make income through spreading fraudulent claims about foreign ventures, a phenomenon nicked named the Bubble. In 1720, Bubble Act was passed, requiring all joint-stock companies to possess a Royal Charter. The South Sea Company, which had a Royal Charter, saw its shares bounce to a price of £1,000 by early August. Some of the company’s directors initiated a sell-off, selling the company’s shares to cash in on high profits. The massive selling of shares led to a decrease in stock price to £150 by the end of September. All efforts made by the company to stabilize its stock price were in vain and the South Sea Bubble burst.

Many aristocrats who had invested in the business enterprise have been outraged and demanded that Parliament investigate the matter. This was the first time in history that an external auditor had been hired to examine the accounting records of a company. Charles Snell, the auditor who examined the accounting books of the South Sea Company, revealed corruption and fraudulent practices among the directors of the company and the people who supported these practices in parliament. Some of the key people unveiled in this investigation had already fled, while others had their accounts examined and their properties confiscated.

Very little appears to be known about forensic accounting and auditing until 1817 when the first accountant was recorded testifying as an expert witness in the case of Meyer v Sefton. The court allowed the accountant who examined the applicable accounts to testify. Today, there is an accelerated reliance on forensic accountants and auditors to assist triers of facts in litigation matters and use their expertise to provide guidance on accounting matters in a court of law.

As incidents of white-collar crime increased, an important area that started to develop, understanding why fraud happens and what if something may be carried out to prevent it. This led to the creation of one of the foundations of forensic accounting known as the fraud triangle, created by renowned sociologist and criminologist Donald Cressey.

The field of forensic practitioners has additionally advanced significantly. This profession was once associated primarily with investigating fraud but is now often called upon to solve ramifications of disputes, both inside and outside the courtroom. Forensic accountants and auditors today are involved in a wide variety of cases, from marital disputes and insurance claims to business valuations and criminal matters, a much broader range compared to the field’s humble beginnings.

Claudious Matizira is a practicing Forensic Practitioner with more than 16 years of experience. He is a holder of a Master of Science in Forensic Accounting and Auditing(MScFAA), Honors Degree in Internal Auditing, CFE, CFA, CRM.