The formal and published description of JJCCJ’s Forensic Accounting Certificate Program reads as follows: “Forensic accounting is the application of general theories and methodologies of accounting for purpose of resolving financial issues in a legal setting. The Forensic Accounting Certificate provides in-depth learning opportunities to advance students’ knowledge of fraud examination and to develop skills in the use of investigative and analytical techniques to resolve allegations of fraud and other potential white-collar and financial crimes. The certificate provides comprehensive coverage of all types of financial crimes, but concentrates on fraud prevention, fraud detection, fraud investigation and remediation. The types of fraud schemes studied include corruption schemes, asset misappropriation, and fraudulent financial statements.”
The Program provides educational preparation, which is different from experiential learning and on-the-job training, to address the problems attendant to financial crimes, especially fraud. These problems include unjust enrichment; i.e., individuals (and artificial persons) economically and financially benefit from illicit and unethical schemes that deceive victims and obtain their assets without informed consent (cf. extortion). Broadly, accounting is a methodology (quantitative and qualitative) used both to accomplish the wrongful scheme and to prevent / detect / remedy it. Importantly, accounting is a collaborative activity; i.e., there are many individuals involved in doing it (e.g., review and approvals within organizations, inspection and oversight from outside organizations), as well as collective action in setting up the ground rules (e.g., development of generally accepted accounting principles “GAAP”).
There are at least three layers subject to the forensic accounting methodology of inquiry and discovery:
- The negotiations, agreements, understandings, intentions, caveats, etc. between the party and counterparty (there may be many counterparties): This is economic reality – a construct evidenced by records, recollections, and other data reflective of the preservation of transaction history. In brief, economic reality may be lost, misplaced, or otherwise uncreated (e.g., there are limits to budgets and schedules dedicated to such preparations). A current (alleged) illustration of the divergence between economic reality and represented reality under layer no. 2 below is that suggested under the Panama Papers, where the economic substance of a given set of transactions may be to evade taxation and public exposure of corruption under the false cover of actually conducting meaningful business activities in offshore venues and under offshore jurisdictions. This layer may be buried to protect individuals’ privacy, but it is far from dead (even where the individuals are).
- The accepted interpretations reported by the party and counterparty: These tend to be mirrored reflections of each other; e.g., one party’s expense is another party’s revenue. However, there are important exceptions (e.g., fair value accounting that allows the reporting of unrealized gains / losses without accompaniment by an actual transaction with a counterparty). Public filings to the SEC are common examples of these interpretations, which are submitted under the overarching guideline of avoiding stating anything materially misleading or omitting something that renders the submission materially misleading. This layer is official reality, which may or may not reflect economic reality under layer no. 1 above. For example, ‘accounting facts’ such as Enron’s earnings per share in a given period may not be factual; these may be later restated as information about improper financial engineering overwhelms the outdated ‘official reality’ of ‘accounting facts.’
- The reinterpretation performed by the forensic accounting team (there may be many reinterpretations, especially in litigation, which often features battles of experts): A common misperception about forensic accounting is that it depends entirely or even primarily on the actions of accountants. In practice, specialists from other disciplines are helpful, even necessary. For example, consider submission of a medical expense claim by an insured patient. Under layer no. 1 there may be voluminous records and discussions among the individuals responsible for developing the welfare / health care plan. Specialists’ language would be used to distinguish coverable procedures from those not covered. Lawyers, doctors, hospital, pharmaceutical, and insurance administrators, pharmacy benefit managers, actuaries, etc. would contribute to the development of the plan. The result as exchanged among interested parties under layer no. 2 is the plan with its terms and conditions. To many parties, especially patients / claimants without sophisticated legal, medical, and insurance knowledge (read: an overwhelming majority of us), the outcome of whether a procedure is covered and for how much (e.g., reasonable, necessary, customary, etc.) is usually accepted, perhaps grudgingly, notwithstanding the inherent biases in the system (e.g., insurers have a financial interest in limiting losses, medical providers have a financial interest in maximizing revenues, plan sponsors have a financial interest in preserving the assets of the plan, designated claims review team constituents have their own divergent personal and professional financial interests, etc.) that may distort and prejudice the financial interest of the patient / claimant. In brief, inspection and oversight (i.e., checks and balances) within the system may be inadequate in any given case / claim.
Effective inspection and oversight depends on the funding of impartial and competent forensic accounting teams. Independence is neither sufficient nor necessary. Where impartiality is lacking, independence may function as a misleading amplifier of voices that should be countered – not raised. Where competency is lacking, well – don’t need to go there.