Insights
J.S. Held Acquires Shechter & Everett to Expand Forensic Accounting Capabilities for Family Law Disputes in Florida
Read MoreIn the first article discussing the differences between an audit and a forensic investigation, the objectives, responsibilities, professional standards, engagement, risk assessment, the concept of materiality, and building the right team were compared. In this article, the differences in the gathering of evidence and in reporting responsibilities for forensic accountants and auditors are examined.
The auditor and forensic accountant should never rely on circumstantial evidence. They must obtain sufficient, appropriate evidence to support the objective. They both must maintain professional due care throughout their respective engagement. Professional due care is an attitude that includes a questioning mind, being alert to conditions that may indicate a fraud or error, and a critical assessment of evidence.
The quality of all audit evidence is affected by the relevance and reliability of the information upon which it is based. An objective of an auditor is to design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base an opinion. [1]
The audit procedures may include:
The forensic accountant should gather evidence with the assumption that the case may result in litigation and the professionals on the team may be asked to provide expert testimony in a court of law or similar forum. Before gathering evidence, the forensic accountant should discuss with in-house or outside counsel whether a document preservation notice should be circulated. The preservation notice may be distributed to relevant personnel, which will provide instructions to preserve all documents and electronic data until further notice. Evidence should be gathered in a manner suitable for scrutiny. For instance, only IT professionals with expertise in collecting data in an acceptable and forensically sound manner should gather electronically stored information (ESI) used in the forensic investigation.
Sources of evidence may include business laptops, smartphones, removable storage devices, voicemail, instant messaging software, security systems, databases, and servers. Additional sources of evidence may include third-party records, such as from banks, vendors, customers, suppliers, government agencies, as well as public records. To avoid accusations of evidence tampering or spoliation [2], the investigating team should protect the integrity of the original documents and preserve them in a manner that withstands a legal challenge.
Conducting interviews is an important means for the forensic accountant to gather evidence related to allegations of fraud. The forensic investigation team should include a member with appropriate experience in conducting interviews. They are typically conducted with counsel present – again, to maintain the privilege. The interviewees should include relevant parties, such as executives, employees, customers, vendors, suppliers, and alleged perpetrators. The interviews can help gather important information, such as names of other potential interviewees and specific documents an interviewee can provide that are relevant to the forensic investigation.
The forensic accountant should maintain an inventory of documents and information gathered during the forensic investigation and document the investigative procedures they performed. The evidence gathered during the forensic investigation may be presented in court, and team members may be called to court to describe the evidence.
The objectives of the auditor are to form an opinion on financial statements based on an evaluation of the audit evidence obtained, and to express clearly that opinion on the financial statements through a written report that also describes the basis for that opinion. [3] Auditing standards require the auditor’s report to be in writing, among other specific requirements. For example, the standards state that the report should be signed by the accounting firm, not an individual, because the firm stands behind the opinion on the financial statements.
There are no mandated formats for forensic investigative reports, except for matters in litigation. For example, Federal Rule of Civil Procedure 26(a)2(B) requires experts to prepare and sign a written report that counsel must disclose to other parties before the court will allow the expert to testify at trial. Expert reports need to contain the following six elements:
The forensic accountant should confirm with the client the form, timing, and format of communication as part of the initial planning of a forensic investigation. The reality is that the reporting process in a forensic investigation may never get to the final, total summary stage. Most cases require interim reporting, phase reporting, and oral reports of progress and findings, so important decisions can be made regarding the scope, depth, and findings of the investigation. Many times, the investigation may end if certain objectives are met or realizations are made at the interim level of reporting.
If the forensic accountant is asked to prepare a summary report, it must include a summary of the documents reviewed, an opinion as to the amount of loss suffered, and other relevant findings. The report will also explain evidence that supports how the fraud was perpetrated, and which controls, if any, were circumvented. It may include recommendations for improvements to controls within the organization to help prevent similar frauds from occurring in the future. In addition, as explained in my previous blogs, the forensic accountants should avoid opinions on whether “fraud” exists because a component of fraud is the intent to deceive.
Only a trier of fact should be determining intent; the expert should stick to the facts and evidence. The forensic accountant should present evidence and findings objectively, clearly, concisely, and professionally. The forensic accountant should be able to simplify complex accounting and financial issues in a manner that nonaccountants can understand the evidence and its implications.
While there are many similarities between an audit and a forensic investigation, there are substantial differences. These two articles are intended to highlight some of the differences associated with the overall objective, standards, risk assessments, concept of materiality, the team, evidence, and reporting. The forensic investigation is a highly specialized type of engagement that requires highly skilled team members who understand the legal framework and have expertise across a variety of areas, not just accounting and auditing techniques. However, in either type of engagement, the certified public accountant (CPA) plays an essential role.
We would like to thank our colleague L. Erik Ringoen, CPA, CFF, CIRA, for providing insight and expertise that greatly assisted this research.
L. Erik Ringoen, CPA, ABV, CFF, is a Senior Vice President in J.S. Held’s Economic Damages and Valuations practice. He joined J.S. Held in January of 2024 as part of J.S. Held's acquisition of Forensic Resolutions, Inc. He has more than 30 years of experience assisting clients on matters including financial investigations, litigation and dispute consulting, financial auditing, tax, and economic damages. Erik is a licensed certified public accountant in Pennsylvania and Delaware, is certified in financial forensics, and is accredited in business valuation by the American Institute of Certified Public Accountants. He has led multi-disciplinary teams performing fraud and financial investigations, due diligence, Foreign Corrupt Practices Act (FCPA) investigations, bankruptcy, and claims management services, domestically and internationally.
Erik can be reached at [email protected] or +1 856 433 6059.
[1] AICPA AU-C Section 500.04.
[2] Spoliation of evidence happens when a document or information that is required for discovery is destroyed or altered significantly. If a person negligently or intentionally withholds or destroys relevant information, that person is liable for spoliation of evidence.
[3] AICPA AU-C Section 700.10.
In the first article of this series, we compare the roles of the auditor and the forensic accountant, including their objectives, responsibilities, and engagement terms....
The first steps in a fraud investigation are crucial to setting the tone and can set the stage for a successful, or lack thereof, investigation. This article details the first steps a company should take...
This update on conducting fidelity claim investigations adds new insights into the impact of increasing check and vendor fraud....