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Running head: FORENSIC ACCOUNTING Forensic accounting Student Name Institution 1 FORENSIC ACCOUNTING 2 Abstract This paper discusses the combination explanation of fraud examination and the fraud triangle. The paper includes an introduction, discussion on the fraud triangle, my thoughts about the fraud triangle and how fraud examiner might utilize it. The paper also discusses the fraud examination and how the fraud triangle work. Finally, the paper discusses what the requirements are required to become a forensic accountant. FORENSIC ACCOUNTING 3 Introduction There was a great shock in the world due to the accounting scandals at Enron, WorldCom and other companies. These scandals exposed great potential for deceit that can blind corporate greed. Most managers have become so greed in the running of the business activities of the company. Therefore, this has resulted to the necessity of the forensic auditors who will investigate the fraud and testify in the court. Huge finances have lost over the years in many companies all over the world. Recently, the financial crisis exposed a vast number of fraud schemes such as Bernie Madoff multi-billion dollar Ponzi scheme (Trompeter, Carpenter, Jones & Riley, 2014). Forensic accountant are tasked with piercing together the financial puzzle after the fallout of scandals. Forensic accountants are also involved in rebuilding financial systems, trace funds, uncover financial statement fraud and discover hidden assets. The financial scandals that have occurred have given general public a glimpse into just one of many areas of forensic accounting. Forensic accounting refers to the integration of accounting and auditing skills with investigative techniques and professional scepticism. This paper provides an overview of the fraud triangle and fraud examination. In the organizational setting, fraud is increasing both in quantity and frequency. There are high percentages of fraud perpetrators that are being caught. Financial statement fraud and health insurance fraud are the most costly schemes. Over the years, a hypothesis that attempts to explain the conditions that are generally present when fraud occurs is known as fraud triangle (Williams, 2014). Fraud triangle Forensic accounting mostly relies on the fraud triangle to identify weak points in the business systems and find possible suspects in cases of fraud. Fraud triangle consists of three core concepts that are together creating a situation ripe for fraud: incentive, opportunity and FORENSIC ACCOUNTING 4 rationalization (Matson, 2016). It is noted that people must have incentive and opportunity to commit financial fraud as well as the ability to justify it. It is clear that people may have the opportunity and incentive to steal but does not necessarily mean that they have the capability to do so. IF someone does not understand how to make journals or ledger entries in the books of accounts, they would not know how to manipulate numbers no matter what the incentive or opportunity is. Perceived pressures arise when people inside the organizational structure have at least some access to cash, checks or other assets. However, it is perceived pressure that causes individuals to consider seriously availing themselves of the opportunity presented by e.g. an internal control weakness. Fraud pressures occur from financial problems such as living beyond one's means, greed, high debt, poor credit, family medical bills, investment losses or children educational expenses. In this case, forensic accountant investigating the fraud should recognise the human nature. According to Gbegi & Adebisi (2014), perceived opportunity arises when one want to commit fraud when internal controls environment. This allows the account clerk to abscond with the cash and checks of a business. To reduce the fraud, forensic accountants direct their efforts in minimizing opportunity through the internal control environment. Another way is through providing adequate training and supervision of personnel, effective monitoring of company management by auditors, audit committees and board of directors. There should be put in place proactive antifraud programs, a strong ethical culture and whistle blowers protections. The perception of detection states that fraud begins in employees mind. Employees who perceive that they will be caught are less likely to commit fraudulent conduct. Rationalization is the last according to the fraud triangle hypothesis. The characteristics that puts fraudster over the top is rationalization. Rationalization may include an employee/manager feeling of job dissatisfaction, lack of recognition for a job well done, FORENSIC ACCOUNTING 5 low compensation. The theory of rationalization has its skeptics. It is difficult to know the thought process of the perpetrators. Fraud examinations Fraud examination refers to the resolving allegations of fraud from tips, complaints or accounting clues. This involves obtaining documentary evidence, interviewing witnesses and potential suspects, writing investigative reports, testifying to findings, and assisting in the general detection and prevention of fraud. Fraud examination has many common characteristics similar to the field of financial forensics. Fraud examination uses accounting or financial knowledge, skills and abilities for courtroom purposes. On the other hand, financial forensics involves not only investigation of potential fraud but also host other litigation support services. In addition, fraud examination and auditing are related. Occupational frauds are financial crimes and therefore a certain degree of auditing is required. A successful fraud examiner must be diligent, detail oriented and organised critical thinkers, excellent listeners and communicators (Dellaportas, 2013). This can be conducted by either accountants or non-accountants and refer to antifraud matters. Fraud examiner conducts an investigation documenting the one who, what, when, where, and how of financial transactions. During the investigations, source documents of all kinds may be reviewed including bank statements, checks, tax returns, payroll records, general ledgers and documents produced by third parties. Fraud examiners also interview people in order to get better understanding of the possible impropriety being investigated. Forensic accountant According to Baker, Cohanier & Leo (2016), forensic accountants are also referred to as forensic auditors and they give expert evidence at the eventual trial. All larger or medium sized companies have specialists' forensic accounting departments. Forensic accountant FORENSIC ACCOUNTING 6 utilize understanding of business information and financial reporting systems, accounting and auditing standards and procedures. Forensic accountants are increasingly playing more proactive risk reduction roles through designing and performing extended procedures as part of statutory audit, acting as advisers to audit committees, fraud deterrence engagements and assisting in investment analyst research. There are varied paths to become a forensic accountant but the vast majority have at least a bachelor degree in accounting, finance, economics or business. Conclusion To conclude, forensic accountant are tasked with piercing together the financial puzzle after the fallout of scandals. Forensic accountants are also involved in rebuilding financial systems, trace funds, uncover financial statement fraud and discover hidden assets. The financial scandals that have occurred have given general public a glimpse into just one of many areas of forensic accounting. Forensic accountants use fraud triangle to identify weak points in an organization that can lead to possible frauds. Once these points are identified, it becomes easier for them to identify where the possible fraud maybe. FORENSIC ACCOUNTING 7 References Baker, C. R., Cohanier, B., & Leo, N. J. (2016). Considerations Beyond the Fraud Triangle in the Fraud at Socit Gnrale. Journal of Forensic & Investigative Accounting, 8(3). Dellaportas, S. (2013). Conversations with inmate accountants: Motivation, opportunity and the fraud triangle. In Accounting Forum (Vol. 37, No. 1, pp. 29-39). Elsevier. Gbegi, D. O., & Adebisi, J. F. (2014). Forensic accounting skills and techniques in fraud investigation in the Nigerian public sector. Mediterranean Journal of Social Sciences, 5(3), 243. Matson, D. M. (2016). Independent Studies in Forensic Accounting: Some Practical Ideas. Journal of Forensic & Investigative Accounting, 8(2), 218-240. Trompeter, G. M., Carpenter, T. D., Jones, K. L., & Riley Jr, R. A. (2014). Insights for research and practice: What we learn about fraud from other disciplines. Accounting Horizons, 28(4), 769-804. Williams, J. W. (2014). The private eyes of corporate culture: the forensic accounting and corporate investigation industry and the production of corporate financial security. In Corporate Security in the 21st Century (pp. 56-77). Palgrave Macmillan UK