Forensic Accounting, also called judicial accounting and investigative accounting, and Fraud Examination is two different activities although the accounting discipline is the common denominator in both activities. The competencies of the incumbents in such activities differ.
First: Forensic Accounting
Considering the constant development of the accounting discipline to serve relevant disciplines, including the correlation between accounting and law disciplines to satisfy the judiciary’s needs for accounting information, forensic accounting has become a branch of accounting offered in colleges of commerce.
Forensic accounting can be defined as the application of accounting principles, theories, controls, facts, or assumptions to a legal dispute.
Based on the above definition, forensic accounting helps judges conclude just and sound adjudication when examining financial disputes and lawsuits under scrutiny by providing information and reports assisting them in this respect.
In forensic accounting practice, in lawsuits where the subject matter is a commercial dispute requiring accounting research for passing a judgment, the judge transfers the lawsuit to a forensic accountant, in Kuwait, called an accounting expert,
to scrutinize the same and ultimately presents a report containing the final conclusion with a detailed explanation of facts and interpretations thereof based on the accounting conceptual framework and documentary evidence reviewed.
Second: Fraud Examination
Definition of Fraud and its Types
Fraud is a deliberate deceitful act intended to enable the fraudster to get illicit gains or deny the victim’s rights. A fraudulent act is committed by one or more individuals or a business entity. Fraud is often considered a white-collar crime.
Fraudsters are smart persons as they circumvent laws, rules, regulations, policies, and procedures. That’s why traditional audits can only detect a small part of fraud taking place.
Fraud takes several forms such as tax fraud, credit card fraud, internet fraud, securities fraud, and bankruptcy fraud. Experts agree that fraud in all business entities has reached epidemic levels.
The role of competent authorities in fighting fraud is increasingly becoming critical due to scandals hitting businesses and associated media attention.
Fraud Examiners
Auditors verify the accuracy of financial statements and do not necessarily look for fraud. This is the point where the role of fraud examiners emerges.
They design procedures to actively search for fraud within an entity, and when detected, they perform deep-dive audits to find all proofs and file cases against the criminals.
Fraud Detection
Fraud examinations commence after suspecting or detecting a fraud incident. While some fraudulent transactions are routinely detected through internal controls or internal audits, the majority of frauds are reported by whistleblowers. Fraud examiners are only engaged after detecting the crime.
The emergence of a professional association of certified fraud examiners
In 1988, the Association of Certified Fraud Examiners, a professional association comprising fraud examiners, was established in Austin, Texas, USA by Joseph T. Wells. ACFE provides training, tools, and exchange of experience to certified fraud examiners around the world. ACFE has about 90,000 members worldwide as per the 2020 ACFE Annual Report.
2008 Global Financial Crisis and Emergence of Anti-fraud Legislation
Scandals like Enron and WorldCom etc. led to a huge amount of media coverage, which resulted in enacting new legislation intended to deter fraud and/or enhance the ability to early, but not late, detain fraudsters.
The most important legislation is Sarbanes-Oxley (SOX) Act, often referred to as SOX. Such legislation introduced major changes to requirements imposed on publicly traded (listed) companies with respect to internal controls, reporting to the Securities and Exchange Commission, and governance.
It also introduced significant changes to the audit industry in connection with control and the scope of services that may be rendered to a single client.
While SOX Act represents some improvement to the regulatory environment related to anti-fraud and protection of public interest, frauds can not be prevented by legislation alone.
The differences between forensic accounting and fraud examination and their applications in the State of Kuwait are as follows:
| S. | Description | Forensic Accounting | Fraud Examination |
|---|---|---|---|
| 1 | Jurisdiction | Ministry of Justice, Accounting Experts Department | Ministry of Interior, Public Prosecution, Kuwait Financial Intelligence Unit |
| 2 | Parties to dispute | Partners, companies against companies, employees against companies, companies against employees | The Government, as the overseer of public order, against fraud suspects including individuals or companies |
| 3 | Evidence | To be provided by the parties to the dispute | To be gathered by Prosecution or Kuwait Financial Intelligence Unit |
| 4 | End of assignment | Submission of a technical report containing the research findings to the court judge | Submission of a report on the absence of crime or existence of crime to the competent judge |
Further, the differences between competencies of forensic accountants and fraud examiners are presented below:
| S. | Description | Forensic Accountant | Fraud Examiner |
|---|---|---|---|
| 1 | Employer | Ministry of Justice, Accounting Experts Department | Ministry of Interior, Public Prosecution, Kuwait Financial Intelligence Unit |
| 2 | Job Roles |
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| 3 | Education | B.Sc. in accounting, major in forensic accounting | B.Sc. in Accounting |
| 4 | Professional Certifications | Certified Public Accountant Certification | Certified Fraud Examiner Certification |
| 5 | Technical Knowledge | Accounting discipline, audit, Commerce Law, Companies Law, Private Sector Labor Law, information technology | Fraud examiners should have extensive knowledge of accounting principles, financial markets, financial data analysis, governmental regulations, law, economy, corporate governance, AML-CFT Law, and internal bylaws of corporate |
| 6 | Soft skills |
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| 7 | Experience | Five years of experience in financial accounting or audit | Five years of experience in financial accounting, audit, internal audit, or compliance |
| 8 | Training | Maintaining up-to-date knowledge of licensed business activities, fundamentals of doing business, and disputes that may arise from the same | Maintaining up-to-date knowledge of licensed business activities, fundamentals of doing business, and disputes that may arise from the same |
Role of Independent Audit Firms
Independent audit firms prepare independent reports in areas of forensic accounting or fraud examination.
In forensic accounting, a party to dispute before a forensic accountant to provide accounting explanations supported by proofs and documents to substantiate their viewpoint,
which the forensic accountant may not consider. However, when such reports are presented, the forensic accountant may consider forming their opinion.
In the case of fraud examination, the role of independent audit firms starts when any indications of fraud suspicion or doubt arise but are not sufficient to file a court case.
Therefore, business entities engage an independent audit firm to examine the alleged fraud, form the relevant evidence and submit a report that may serve as the basis for filing a case that can be criminally investigated.