Perhaps the greatest financial scandals in history is that of Enron Corporation in 2001 which not only led to the bankruptcy of the said billion dollar company, but as well as the dissolution of Arthur Andersen LLP, one of the largest auditing firms in the world then. The main issues which resulted to the collapse of such giant companies are the improper accounting practices used to conceal financial struggles of Enron and the breach of its auditor’s independence, assisting with the former’s unethical practices.
Because of this scandal, a number of new regulations have been implemented to ensure accuracy of financial reporting for publicly traded companies. Among those is the Sarbanes-Oxley Act which imposed heavy penalties for the destruction, alteration, or fabrication financial records. The act also prohibited auditing firms from doing any concurrent consulting business for the same clients.
This financial manipulation by Enron was exposed because some analysts began to dig into the details of the company’s publicly released financial statements. The irregularities discovered attracted more investigations until eventually the pieces were put together and its auditor and consultant were dragged into the controversy. This intense scrutiny of financial transactions and records to uncover fraud is what forensic accounting is about.
Forensic accounting is conducted by professionals trained for the matter such as Certified Public Accountants, Chartered Financial Analysts, Financial Risk Manager and others. The type of investigation they apply vary on the kind of malpractice or legal proceeding being tackled, whether criminal or civil. Some common examples are theft (internal or external), tax evasions, money laundering and divorce proceedings.
Forensic accounting is not really new. It was first defined in the 1940s after a CPA of the US Internal Revenue Service in the name of Frank Wilson discovered the tax fraud committed by the infamous gangster Al Capone. Recent financial scandals such as that of Enron, however, highlighted the importance of forensic accounting hence its employment within some companies.
While forensic accounting has proven helpful in resolving financial fraud and other illegal activities, prevention is still better than cure. It is best that an organization keeps good internal controls as well as applies appropriate accounting policies that are in line with the standards so as not to have to use forensic accounting and end up like the tragedy of Enron.
As a minimum, custody of resources, approval of transactions and recording thereof must be segregated in every organization. One of the popular ways to achieve is by outsourcing accounting process to an independent firm. CRESCO Accounting, as an example, is a team of financial professionals who can help make sure your business systems are fraud-proof. We have established our Seychelles office in 2018 and have continued to provide quality service amidst the pandemic through their advanced IT infrastructure.