FORENSIC ACCOUNTING:
Exploring the Dark Side and Strengtehing the Bright Side of Accounting
Note from Brawijaya
Accounting Fair 2008
Note form I Gusti
Agung Rai (The Board Member of BPK-RI)
Indonesia is in high ranking position for the most corrupted
countries. Corruption has penetrated
into all sectors and activites. To
combating the corruption, we need knowledge and experience in Forensic
Accounting (FA). FA is a good tool to
overcome and disclose the impact of accounting fraud.
What is the Forensic Accounting and Accounting Fraud
Merriam Webster’s Collegiate Dictionary 10th
Edition define that “forensic (1) used in or suitable to court or judicature or
to public dicussion and debate; (2) argumentative or rhetorical; (3) relating or dealing with
the application of scientific knowledge to legal problems. So, forensic covers the application of
various knowledge and science into legal problems. In fact, there are already many examples of
the uses of forensic in other disciplines such as forensic anthropoloist,
forensic chemist, and forensic dentist.
Forensic accounting in another example of the use of forensic that
relates to accounting discipline.
Regarding the forensic in accounting discipline, D.L.
Crumbley (Editor in Chief of Journal of Forensic Accounting) has written:
“Simply put, forensic accounting is legally accurate accounting. That is, accounting that is sustainable in
some adversarial legal proceeding or within some judicial of administrative
review.” He used more general terms like
legal proceeding and judicial or administrative review to describe the use of
forensic in accounting discipline. As
such, Forensic Accounting involve three discipline like The Accountancy, The
Law, and The Audit.
There are other terms that relate to be percieved to have
the same meaning with Forensic Accounting like Fraud Auditing, Investigative
Accounting, Ligitation Support, and Valuation Analysis. However, there are no clear definintions
regarding to these terms yet.
Bologna & Lindquist () explained tha some traditional
accountants differentiated Forensic Accounting to Fraud Auditing. According to
traditional group, The Forensic Auditing relates to the proactive methods and
approach to investigate fraud. The
purpose of the Fraud Auditing is to obtain evidence to proof that fraud has
happened. Then, the Forensic Accountant
will be called when evidence already gathered, or when the suspicions become
allegations, complaints, or discovery.
The Associaon of Certified Fraud Examiners (ACFE) identified
some differences between traditional Audit and Frauyd Examination (Forensic
Accounting).
|
Issue
|
Auditing
|
Fraud Examination
|
|
Timing
|
Recurring:
Audit are conducted on a regular recurring basis.
|
Non Recurring:
Fraud examinations are non recurring.
They are conducted only with sufficient predication.
|
|
Scope
|
General:
The scope of the audit is a general examination of financial data.
|
Specific:
The fraud examination is conducted to resolve specific allegations.
|
|
Objective
|
Opinion:
An audit is generally conducted for the purpose of expressing an
opinion on the financial statement or related information.
|
Affix Blame:
The fraud examination’s goal is to determine whether fraud has/is
occuring and to determine who is responsible.
|
|
Relationship
|
No Adversial:
The audit process is non adversial in nature
|
Adversial:
Fraud examinations, because they involve efforts to affix blame are
adversial in nature.
|
|
Methodology
|
Audit techniques:
Audits are conducted primanly by examining financial data.
|
Fraud Examination:
Fraud examinations are condusted
by (1) document examination; (2) review of outside data such as public
records; and (3) interviews.
|
|
Presumption
|
Professional Skepticism:
Auditors are required to apporach audits with professional
skepticism.
|
Proof:
Fraud examiners approach the resolution of a fraud by attempting to
establish sufficient proof to support of refure an allegation of fraud.
|
Source: ACFE
In Indonesia, the development of forensic accounting got its
momentum when we experienced financial crisis in 1998—1999. During this period,
many forensic accountings have been undertaken as part of the loan
provisions. This development then
accelerated when new elected government created Corruption Eradication
Commission (Komisi Pemberantasan Korupsi).
In public sector, the pracitice forensic aacounting usually
carried out by govermental institutions dealing with legal matter, such as the
Police, the Attorney General, PPATK, and KPK.
In addition to the institutions, the BPK also has authority to perform
and has performed forensic accounting for several years. This authority stipulated in Law 15/2004 and
Law 15/2006. According to these laws,
BPK has a mandate to conduct three types of audit: Financial Audit, Performance
Audit, and Special Purpose Audit. The forensic accounting comes under the
definition of Special Purpose Audit.
Similar to general practices, the practicie of forensic
accounting in public sector deal with the fraud. The already well known type of fraud is
corruption. There many examples of
corruption that will be elaborated further in the following sessions.
What is Accounting Fraud
Our understanding about the nature of accounting is the
services activities, which provide quantitative information regarding business
or economic activities. The objective of
accounting is to provide management with financial-related information that
will be used in decision making. The
information is provided through a set of financial reports, which are the
output of series procedures to record, summarize, and report economic
transactions and activities. We might
never imagine that such well-developed process of recording and reporting
transactions could be used as a tool to commit fraud.
Simply defined, fraud is a violation of the laww, planned
deceit, and dishonesty. Its consists of various
types of white collar crime, including embezzlement, larcerny, concealment of
informataion, concealment of liabilities, concealment of facts, engineering of
facts, and corruption (Rezaea, 2002). In
termes of business, frauds related to financial accounting sometimes referred
to as occupational fraud and abuse. The
ACFE defined this type of raud as “The use of one’s occupation for personal
enrichment through the deliberate misuse or misapplication of the employing
organization’s resources or assets.”
Three major types of occupational fraud are corruption, asset
misappropition, and fraudelents statements (which include financial statement
schemes).
There are many theories explaining why people commit
fraud. One of them is agency problem
that derived from the agency theory. The
agency theory, firstly intriduced by Jensen & Mackling (1976). Explained the principal – agent relationship,
relationship between management and the owners.
Referrinng to this theory, fraud happens becuase managements (the agents)
behave not in the interest of the owners, but for his/her individual interest
as opportunistic behaviors.
Another theory is called asymmtric information. This theory is based upon the asymmetric
access to information between the principals (owners) and the agents
(management). This differences generate
two types of agent’s behaviors like hidden action and hidden information. By hiddening some actions and/or information,
managements could commit fraudulent activities for their benefit.
Cressey (Fraud Examiners Manuals, 2006) identified three
common causes that trigger fraud. He
depicted the causes in a triangle, which then is known as the fraud
triangel. First, there is pressure
engage in fraud, such as economical needs.
Second, there is opportunity that allows individual to commit fraud or
to causal dishonest act. Third, the
ability to justify an act and to exploit legal loopholes to cover up/conceal
fraud.
More over, ACFE has identified types of fraud and presented
in a chart that is called fraud tree.
The Relation between Forensic Accounting and Accounting Fraud
Referrig to above explanations, we could see that forensic
accounting is carried out to investigate financial statement related fraud, by
using some investigative audit techniques.
Several traditional audit techniques can be used to perform
investigative audit, such as physical examination, documentation review,
reperformance, an inquiries.
With the increase in importance and demand, the forensic
accounting and invesitigative audit har emerged to be a profession. Being a certified fraud investigator, which
is called Certified Fraud Examiner (CFE), give the accountants/auditors
credentials that highly valued by business society. However, to be a good fraud auditors/forensic
accountants need additional skills and knowledge. Davia (2010) advised five rules that should
be followed when performing forensic accountants/audit:
1)
Avoid becoming premturely entangled in
developing endless facts and circumtances of a case of fraud, to the exclusion
of identifying a perpetrator or perpetrators, and providing their involement.
2)
Fraud auditors must constantly strive to prove
perpetrator’s intent to commit fraud.
3)
Be creative, think like perpetrator, do not
predictable.
4)
Fraud auditing detecting procedures must take
into account that much fraud involves conspiracy.
5)
Proactive fraud detection strategy must consider
that fraud may appear accounting records as distinct entries or hosted entries,
and in some instances may not appear in the records at all.
Frauds In Indonesia
Let’s see where Indonesia in Global Corruption Index. One of the indicators of corruption index
widely used is Corruption Perception Index (CPI). This index is developed by Transparency
Intenational 9TI), a Non Govermental Organization (NGO) concerned with the
fighting against corruption in the world.
In 2007, Indonesia is number 143 from 179 countries in the world. Very
low position, it’s mean corruption in Indonesia is very high.
Prof. Dr. Soemitro once estimated that the fraud procurement
process in Indonesia could involve as much as 30% of procurement budget. However, some procurement fraud cases bring
into the court indicated that the amount of money involved could be much
larger.
One of the largest fraud incdence is the distribution Bank
Indonesia’s Liquidity Supports (BLBI) during and after crisis of 1997. This fraud involved as large money as RP650
Trillion and spread over 10 years. The
natures od BLBI which involving large amount of money but lacking strong
controls is good conditions for fraud to happen.
There are many other examples how fraud has penetrated
deeply into sectors and segments in governement suc as (1) laws; (20 defence;
(3) banking system; (4) local governemnets; (5) state owned enterprises; and
(6) parlement.
How is the Forensic Accountant Disclose the Accounting Fraud
Every perpetrator always tries to find ways to commit fraud
succesfully. The scheme he/she used
ussually follows the cycle of accountancy.
This cycle can be divided into three phases: input – process – output.
In the input phases, where transaction document are prepared
and captures, the fraud scheme invlove such activities as forging documents,
enginering fictitious documents, creating corroborating documents, and omitting
illegal transactions. In the process
phases, ussualy committed by exploting the weakness in the internal control
systems, issuing internal policies to justify committed planned fraud changing
or manipulating financial records, and misapplication of accounting
principles. In the output phases, when
the financial reports are produced, the fraud ussually committed by disclosing
inadequately and by exploiting the loopholes in the Financial Accounting
Standards.
For the govermental sector, the incidence of fraud also
follows the same process. It happens in
all phases of budgeting cycle. Some
examples of fraud in govermental sector are (1) reallocating between
expenditures account; (2) not recording revenue transactions; (3) recording
fake transactions; (4) overlauing assets; and (5) inadequate disclosure.
The fundamental principle that has proven to be effective in
conducting forensic accounting, that is follow the money. One example of the application of this
principes is in the Bank Bali Case.
How he Forensic Accounting Deal With Acccounting Fraud
The objective of the forensic accounting is to proof whether
the incidence of fraud happened or not.
As such at the end of the audit, the forensic acccountant/investigative
auditors should be able to provide adequate, sufficient, and reliable evidence
o answer the audit objective. If the
auditors concluded that there is a incidence of fraud, the evidence obtained
during the audit could be used for litigation.
In general, the process of identifying and the proofing the
incidence of fraud is as follow (ACFE).
1)
Develope fraud theory.
(1)
Who migh be involved?
(2)
What might have happened?
(3)
Where are the possible concealmnet places or
methods?
(4)
When did this take place (past, present, or
future)?
(5)
How is the fraud being perpetrated?
2)
Determine where the evidence is likely to be.
(1)
On book versus off book.
(2)
Direct or circumstantial.
(3)
Identify potential witness.
3)
What evidence is necessary to prove intent?
(1)
Number of occurences.
(2)
Other areas of impropnery.
(3)
Witneess.
4)
Revise fraud theory
5)
Prepare chart linking people and evidence
6)
Determine defense to allegation
7)
Is evidence sufficient to proceed? Yes!
(1)
Complete the investigation through interviews, document
examination, observations.
Article 14 of Law 15/2004 stated, that should during the audit
BPK found the indication of fraud, the BPK should report in appropiate time such
incidences to the legal institutions authorized by law to deal with such incidences.
References
The
Associaon of Certified Fraud Examiners (ACFE). (2006). Fraud
Examiners Manual.
Bologna,
G.J. & Lindquist, R.J. (). Fraud
Auditing and Forensic Accounting: New Tools and Technique.
Davia, H.D.
(2010). Fraud 101: Techniques and Stategies for Detection. John Wiley &
Sons.
Jensen,
M.C. & Meckling, W.H. (1976). Theory of the Firm: Managerial Behavior,
Agency Costs and Ownership Structure. Journal of Financial Economics. No. 3.
Merriam
Webster’s Collegiate Dictionary 10th Edition
Zabihollah,
R. (2002). Financial Statement Fraud
Prevention and Detection. Canada:
John Wiley & Sons Inc.
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