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Defining the South African Forensic Accountant
Various terms are often used to describe the individual responsible for performing commercial crime investigations pertaining to a financial nature. These terms may include fraud examiner, fraud auditor, forensic auditor, fraud accountant, financial crime investigator, etc.
Public perception as to the work performed by a forensic accountant could have been influenced during the conviction of businessman, Shabir Shaik. Professor Johan van der Walt of KPMG was tasked with performing the investigation into the affairs and subsequently testifying in: The State versus Schabir Shaik & 11 Others (Case No CC27/04). In his judgment, the honorable Mr. Justice Squires stated the following regarding Van der Walt's testimony:
“Van der Walt was plainly an impartial witness who simply described chapter and verse, in extraordinary detail, the evidence that he culled from the mass of documents given to him to investigate. In the one or two respects that he expressed an opinion, there was nothing amiss about so doing, but we have not relied on any of those.”
Van der Walt acted as an expert witness in his capacity as forensic accountant. According to the honorable judge, it is obvious that Van der Walt collected (culled), investigated and presented his findings and rendered his opinion in one or two aspects, herewith providing to a large extent some definition for the work performed by a forensic accountant.
In defining the term “South African Forensic Accountant”, one has to take cognizance of various aspects including definitions of the following:
• Forensic
The Concise Oxford Dictionary (1996, 530) describes “forensic” as: “1 of or used in connection with courts of law, esp. in relation to crime detection (forensic evidence) 2 of or employing forensic science.”
The word “forensic” also refer to the Latin word “forum”, implying presentation to a forum. The performing of an investigation in gathering and presenting findings in a forum, which could include anything from a court of law, disciplinary committee, etc., appears to be distinguished as part of the definition.
Longman (1991, 403) refers to forensic as related to or used in the law and tracking of criminals. Du Plessis (2001, 4-6) supplies the following definition of forensic and investigative accounting: “It is the application of financial skills and investigative mentality to unresolved issues, conducted within the rules of evidence. As a discipline it encompasses financial expertise, fraud knowledge and a strong knowledge and understanding of business reality and the working of the legal system.”
Forensic therefore, pertains to the presentation of findings, subsequent to an investigation of a financial nature taking into account legal aspects, in a commercial environment.
• External auditor and ISA 240 R
As outlined earlier, the term “forensic auditor” is also referred to in describing a forensic accountant. In South Africa, the use of the word external auditor (also known as the registered auditor) is regulated by the Auditing Profession Act 2005 (Act 26 of 2005), and more specific in section 41 where a person who is not registered under this act is prohibited from being called a registered auditor. Furthermore, the main duty of a registered auditor is emphasized in section 44 of the act as being the expression of an opinion of whether the financial statements fairly present in all material respects, the financial position of the entity and the results of its operations and cash flow in all material respects in accordance with the basis of an accounting and financial reporting framework. The registered auditor's duty is therefore an expression of an opinion on the financial statements of an entity, subsequent to the performance of an audit.
ISA 240 R describes the registered auditor's responsibility to consider fraud in an audit of financial statements, and it is perhaps here where the roles of forensic accountants and those of registered auditors are contrasted. Paragraph 21 of the statement states that the registered auditor should obtain reasonable assurance that the financial statements are free from material misstatement caused by fraud or error and that the auditor is not supposed to obtain absolute assurance as a result of the inherent limitations of internal control, the use of testing, the use of judgment, and the fact that audit evidence is persuasive rather than conclusive. Paragraph 67 of the statement explains a further distinction between a forensic expert and that of the registered auditor by stating: “For example, the auditor may respond to identified risks of material misstatement due to fraud by assigning additional individuals with specialised skill and knowledge, such as forensic and IT experts...”
Golden, Skalak and Clayton (2006, 243-248) explains when and why to call in forensic accounting investigators. It motivates these scenarios by elaborating on the definition of auditors to explain that:
- Auditors are not forensic accounting investigators based on curriculum contents of training as well as requirements for legal and investigative knowledge,
- Auditors are not authenticators as they possess little to no knowledge of altered or forged documents;
- Auditors have limited exposure to fraud and their focus is not that of fraud investigation and the conduct of thorough interviewing; and
- That historically, audits may have been predictable.
According to Golden, Skalak and Clayton (2006, 20-46), the main differences between a forensic accounting investigation and a statutory audit are outlined in terms of the objective, purpose, value, sources of evidence and sufficiency of evidence. The forensic accounting investigation should determine the likelihood and/or magnitude of fraud occurring, whilst the objective of a statutory audit is to form an opinion on the overall financial statements. The sufficiency of evidence for the audit is reasonable assurance whilst the forensic accounting investigation establishes facts to support or refute suspicions or accusations. The analogy of a patrolman which has to maintain law and order in a neighborhood versus that of a detective focusing on a specific crime scene is used to describe the difference between an auditor (the patrolman) and the forensic accounting investigator (the detective). It further re-emphasizes the basic shortcomings of an audit in the identification and detection of commercial crime and fraud.
Cascario and Van Esch (2005, 275-285) refer to the term forensic auditing as: “the methodology for resolving fraud allegations from inception to disposition, with sufficient proof to prove or disprove allegations of fraud”. It further states that a predication for fraud forms the basis for the investigation with goals of the forensic auditor being defined as the obtaining of a legal confession and proving all the elements constituting fraud.
The role and function of the external auditor as compared to that of the forensic accountant appears to be two separate areas of specialisation, although both areas concern itself with financial statements and accounting records.
• Fraud Examiner
According to Snyman (2006, 523), fraud is: “the unlawful, intentional, making of a misrepresentation which leads to prejudice or potential prejudice to another”
The US-based Association of Certified Fraud Examiners' (ACFE) focus pertains more to the investigation of fraud. They define fraud examination as: “a methodology for resolving fraud allegations from inception to disposition. It includes obtaining evidence and taking statements, writing reports, testifying to findings and assisting in the detection and prevention of fraud”. Crumbley and Apostolou (2005, 39-43) explain the need to obtain the help of forensic accountants when fraud is suspected, as the roles of the auditor and that of the forensic accountant differs. According to them, auditors determine compliance with auditing standards and consider the possibility of fraud, whilst the forensic accountants have a “single-minded” focus on the detection and deterrence of fraud and involves an exhaustive, detailed effort to “penetrate concealment tactics”. They conclude that forensic accounting specialists are going to be in continued demand to “supplement the efforts of auditors”.
• Canadian Institute of Forensic Investigative Accountants (CICA)
CICA offer separate exams to Canadian chartered accountants to qualify as Investigative Forensic Accountants (IFA), thereby recognising the additional requirements necessary for chartered accountants to become forensic accountants. The CICA defines investigative forensic accounting engagements as those engagements which require the application of accounting skills, investigative skills and an investigative mindset to be utilised in disputes or where there are risks, concerns or allegations of fraud or illegal or unethical conduct.
• Definition of a forensic accountant
Van Rooyen (2004,1-5) divides the South African investigative environment into the following spheres:
- Police investigators,
- Statutory investigative bodies like the special investigating unit, Commissions of inquiries, etc,
- Private investigators with their own businesses,
- Departmental investigators in government departments like home affairs, education, etc,
- Corporate investigators in private companies like Eskom, Mining Industry and Banks, and
- Forensic investigations of independent private companies like KPMG.
He (Van Rooyen) continues to provide a definition for forensic investigation as usually being associated with the investigation of computer related crimes which also include corruption, fraud, embezzlement and other white collar crimes, whilst forensic is explained as pertaining to law, juristic or court as well as including the function of examination or analysing.
Van Rooyen (2004, 7) continues to provide a definition for forensic auditor as a person who examines financial documents as well as the compliance of policies and procedures with the goal of detection and investigation of crime and/or company losses.
Van der Walt (2005, 6-7) provides a view of the South African investigative environment when he compares skills of both legal and forensic accounting specialists within a national forensic practice. He explains that forensic services comprise a much more comprehensive outline than mere investigations of fraud. Examples mentioned include:
- loss or profit determinations,
- claim verifications,
- quantum of damages,
- asset tracing, freezing and forfeiture,
- corporate intelligence,
- intellectual property violations,
- fraud hotlines,
- fraud risk management,
- fraud policies and response plans, and
- the measurement of ethical climate.
He concludes that both the legal and accounting specialist, forming part of multi-disciplinary team are important and that the scope of the assignment will determine their application. This does of course not justify the argument that a forensic accountant does not need to be familiar with legal aspects, although the legal specialist will ultimately have to determine the legal course of the assignment, as will the forensic accountant with the financial matters.
According to Powell (2006, 23-24), it is completely clear that effective forensic teams require a combination of lawyers, accountants, information technology experts and investigators, but that the debate, according to him, is not about who is better as forensic work, but rather whether the forensic unit should be situated as part of a law or audit firm. He further motivates the situation of a “forensic unit” as part of a law firm. Powell might be describing the current South African situation, accepting the fact that forensic investigations will be conducted as part of a team of traditional disciplines, i.e. auditors/accountants, investigators and lawyers, which indeed might to certain instances be the case.
Literature however indicates clearly the differences between normal accountants, external auditors, internal auditors versus that of forensic accountants. So, for example, states Pope, (2007, 64-66) on the strategies for forming an effective forensic accounting team, that an auditing background may serve as basis but is not in itself a replacement for a forensic accountant as additional skills might be needed. Nevertheless, is the formation of a “forensic team” depending on various factors which are further explained by Pope.
In conclusion, the following main areas of expertise will be required in order to enable the forensic accountant to perform his/her duties:
- Accounting, business and auditing knowledge, as it is financial records that will be examined;
- Investigative skills, including the performance of successful interviews and people skills;
- Legal knowledge, both criminal and civil aspects, as findings of the forensic accountant should support subsequent legal proceedings;
- Application of information technology; and
- The ability to provide expert testimony in a court of law.
Taking all of the above into account, the South African forensic accountant should therefore be an individual possessing sufficient legal, accounting, auditing, investigative and interviewing skills to perform investigations in a commercial environment, perform agreed-upon procedures, provide litigation support, act as expert witness and provide accounting and auditing skills to specific business scenarios. The forensic accountant's skills can thus be summarised by means of a Venn-diagram within a commercial environment as follows and illustrated in diagram 1 below.
The overlapping of the three main disciplines of accounting/auditing, investigations and the legal environment is clearly illustrated. It is further evident that the forensic accountant's main area of focus relates to accounting/auditing knowledge and application, supported by legal and investigative skills.
The distinction between training of forensic accountants and forensic accounting training as part of other curricula is vital. The fact that the South African forensic environment is still largely unregulated, contributes to the uncertainty as to who can call himself a “forensic accountant”, as currently, professionals have to rely on accreditation offered by existing professions, which in itself, do not necessarily cater for the South African forensic accountant.
The training of forensic accountants appears to be a matter of supply catching up with demand. Various South African tertiary institutions are currently offering qualifications relating to what appears to be commercial crime investigations, and at this stage, nothing regulates these institutions from doing so, as is the case with SAICA and CAs(SA) for example. The question might however be asked as to who or what are they training and where does it end? No formal practical experience as part of a recognised training programme also exists, as is normally dictated by professional bodies, like for example, the IFA programme of the CICA. These questions remain to be answered as to whether the South African forensic accountant will at some stage be affiliated to SAICA or perhaps that the forensic profession at large needs to be standardised, possibly with career paths for both the legal-, accounting-, investigative- and perhaps IT, forensic specialists.
It can be recommended that in training South African forensic accountants, emphasis needs to be placed on what the cornerstones of the skills requirements of the South African forensic accountant are and whether proposed courses and degrees meet these needs.
REFERENCES
CASCARIO, R. & VAN ESCH, S. 2005. Internal Auditing: An integrated approach. Juta.
CANADIAN INSTITUTE OF CHARTERED ACCOUNTANTS COD (The Concise Oxford Dictionary) 1996. Oxford : Oxford University Press. 1673 p.
CICA. See CANADIAN INSTITUTE OF CHARTERED ACCOUNTANTS.
CONCISE OXFORD DICTIONARY. 1996. Oxford : Oxford University Press. 1673 p.
users.ox.ac.uk/~ctitext2/resguide/resources/c215.html - 4k –[Date of access: 1 May 2007]
DU PLESSIS, D. 2001. A growing concern: forensic accounting. Accountancy SA, 11/7:4-6.
GOLDEN, T.W., SKALAK, S.L. & CLAYTON, M.M. 2006. A guide to Forensic Accounting Investigation. New Jersey: John Wiley & Sons. 554p.
ISA 240R. See International Standard on Auditing 240.
International Standard on Auditing 240. 2003. The auditor's responsibility to consider fraud in an audit of financial statements. IFAC. http://www.hkicpa.org.hk/professionaltechnical /assurance/exposuredraft/isa240.pdf. [Date of access: 12 January 2008].
LONGMAN. 1991. Longman Dictionary of Contemporary English. England: Longman. 829p.
POWELL, S. 2006. So, who's better at forensics? Without prejudice, 6(10):23-24,Nov.
POPE, K.R. & ONG, B. 2007. Strategies for forming an effective forensic accounting team. CPA Journal, 64-66, Apr.
SNYMAN, C.R. 2006. Strafreg. Vyfde uitgawe. Durban: Lexisnexis Butterworths.
SQUIRES, J. 2005. The State versus Schabir Shaik & 11 others (Case No CC 27/04). www.ipocafrica.org/cases/armsdeal/shaik/shaiksentencejun05.pdf [Date of access: 1 May 2007].
VAN DER WALT, J. 2005. Who is best at forensic investigations. Without prejudice: South Africa's corporate legal magazine, 5(10):6-7, Feb.
VAN ROOYEN, H.J.N. 2004. The A – Z Guide for forensic private and corporate investigators. Crime Solve. 290p.
VAN ROMBURGH, J.D. 2008. The training of a forensic accountant in South Africa . Masters mini-dissertation. Potchefstroom.
Jan van Romburgh is the Senior lecturer in the School of Accounting Sciences at the North West University, Potchefstroom Campus.
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