Forensic Accounting Versus Accounting (Auditing) for White Collar Criminals
Forensic accounting vs accounting (auditing) are fundamentally different, in forensic accounting education on detection is is more valued than regular accounting audits. Forensic accountants specialize in investigating fraud rather than the more familiar work of accounting audits. Assessing and presenting white collar crimes, embezzlement, money laundering, hidden assets, financial statement fraud, and financial schemes in court is different than a thorough review of company financial records. It involves field work, excellent communication, and detective like thought process. Forensic accounting is critically important and under appreciated when finding, auditing, and prosecuting white collar criminals.
Unlike an accounting audit (financial audit) which is a thorough analysis of a company’s financial statements and internal controls (usually by independent auditors) to review the effectiveness and reliability of the financial statements. Forensic accounting is usually initiated by a referral or identified suspicious transaction. Forensic accounting is the investigation and questioning of transactions whereas audits balance and review transactions. Once fraud has been identified the forensic accountant will usually be asked to testify, communicate, and explain the evidence in court. This will require knowledge of laws and rules of evidence.
“Mr. Antar, who now makes speeches to educate people about white-collar fraud, says that reform has to start with accounting education -9- by which he does not mean learning generally accepted accounting principles. ”The kids who are out on the front lines of auditing, they know nothing about people like me,” he said in an interview. ”It is easy to fool them.”
— Joe Nocera
White collar crime is reportedly going up (http://www.fbi.gov/stats-services/publications) year over year from the FBI. White collar crimes is not just going up in the United States of America. They are going up all over the world. In Ireland there is a backlog of cases due to insufficient funds. In Australia, Greg Medcraft says, “Civil penalties for white-collar offences are just not strong enough.”
When trying to catch a white collar criminal, an accounting audit is not enough. They are expecting and have prepared for an financial audit. Whether that is forging financial papers, going through loop-holes, creating false entities, going through sanctions, hiding money, messing with internal controls, etc., the points-of-attacks are as unlimited as the creative mind. For example Sam Antar, a former CPA convicted of financial fraud at Crazy Eddie’s electronic chain took advantage of the company’s independent auditors and forged financial statements to create half-billion dollar fraud case.
Forensic Accounting vs Accounting
To catch the criminals we need education on the following:
White collar crime – general white collar crime and how accounting is different from forensic accounting.
Criminology – understanding how criminals think is critically important to finding them. The old adage is so very true here, “It takes one to know one.”
Proper questions – to get the right answer you need to ask the right question
Field interviews – field interviews are important because not only do you have to ask the right question you have analyze how they respond, their body language, clues, and questions.
Interrogation – you need to know when someone is lieing and dig deeper. By asking physiological questions it will put holes in their story and create opportunity for you.
Securities law – you need to have an understanding of securities laws so you know which to refer to.
Internal controls – understanding internal controls will allow you to spot flaws and potential areas of problem or conflict that should not be there.
“Sam Antar, a former CPA with the now-defunct Crazy Eddie’s electronic chain, would be the first to agree that CPAs need to learn more about fraud. That’s because Antar, now a convicted felon, helped engineer a half-billion dollar financial statement fraud that was made possible by taking advantage of the company’s independent auditors.”
To the accounting profession and the public at large: listen my warnings and wake up. Not every former fraudster is willing to come forward and give you this advice. The profession needs to do more work to address white collar crime.”
Regulatory Auditors vs Forensic Accountants: Large White Collar Criminals
Enron 2001 – one of the biggest financial fraud cases that hit the early 2000’s. Enron was the 7th largest American company at the time. It was accomplished by fraud, loopholes, and false entities. By using the false entities as shell companies they were able to hide millions of dollars in dept from Enron’s books. This gave the illusion that Enron had fruitful profits and earning potential. The hidden debt eventually caught up when the Securities Exchange Commission investigated Enron. Enron was forced to adjust their statements, reporting $586 million dollars in losses; they were forced to file for Chapter 11 bankruptcy. This is where forensic accounting versus accounting (auditing) differs because auditing records the dept in the shell companies, whereas forensic accounting would have questioned and investigated that dept.
WorldCom 2002 – after the fall of Enron, billion dollar giant WorldCom was set back after mergers fell through. Revenues and profits started to dry up and the company was under immense pressure from banks and investors. By covering billions of dollars of dept through fraudulent accounting practices, WorldCom was able to keep their stock prices artificially high before plummeting to less than 20 cents. A forensic accountant vs accountant in this situation would have had questioned the false earnings of WorldCom.
Bernard Madoff 2008 – was the largest ponzi scheme of all time, amounting in over 65 billion dollars lost. He encouraged investors all over the world to give him money for a consistent return. He took money from new investors to pay old investors and kept the difference. He was prominent in USA, Asia, Middle East, and Europe. Millions of people lost their retirement and savings. The recession dried up Bernard liquidity which lead to his downfall. Forensic accounting versus accounting practices could have been executed to possible detected the ponzi sooner.
For more information on forensic accounting please check out – wiki page. If you need assistance with your forensic accounting, or think you have been the victim of fraud please contact forensic accounting firm of New York City.