This paper focuses on what constitutes “an attitude that includes a questioning mind and a

critical assessment of audit evidence”, namely professional scepticism. It also briefly

considers factors and reasons contributory to the ever increasing use of (and the need for)

professionals who exercise professional scepticism – that is an attitude that includes a

questioning mind and a critical assessment of audit evidence

Ojo, Mariane.B.

English

Covenant University Repository

Electronic copy available at: http://ssrn.com/abstract=2026071ABSTRACTThis paper focuses on what constitutes “an attitude that includes a questioning mind and a critical assessment of audit evidence”, namely professional scepticism. It also briefly considers factors and reasons contributory to the ever increasing use of (and the need for) professionals who exercise professional scepticism – that is an attitude that includes a questioning mind and a critical assessment of audit evidence.Electronic copy available at: http://ssrn.com/abstract=2026071TABLE OF CONTENTSA. INTRODUCTIONB. FORENSIC ACCOUNTING AND AUDIT PLANNINGC. ANALYSIS AND CRITICAL ASSESSMENT OF AUDIT EVIDENCE: THE CONDUCTION OF INTERVIEWS AS AN AUDIT TOOLD. CONCLUSIONE. THE FORENSIC ACCOUNTANT IN THE CAPACITY OF AN EXPERT WITNESSF. REFERENCESForensic Accounting and the Law: The Forensic Accountant in the Capacity of an Expert WitnessMarianne Ojo1A. IntroductionIn Re Kingston Cotton Mills (No 2),2 LJ Lopes of the Appeal Court stated that the auditor was a watchdog but not a bloodhound. This remark underlines the fact that the auditor’s primary role is not the detection of fraud.Professional Scepticism- Statements of Auditing Standards (SAS) 1 states that, in exercising professional scepticism, an auditor “neither assumes that management is dishonest nor assumes unquestioned honesty.” In practice, maintaining this attitude of professional scepticism can be difficult because, despite some recent high profile examples of fraudulent financial statements, material frauds are infrequent compared to the number of audits of financial statements conducted annually. SAS 99 provides guidance to auditors in assessing the risk of fraud – they must maintain a level of professional scepticism when considering a broad set of information, including fraud risk factors to identify and respond to fraud risk.3The level of professional scepticism required by an auditor could be considered to be lower than that required by forensic accountants. Even though professional scepticism embraces an attitude which includes a questioning mind and a critical assessment of audit evidence, auditors can be said to have a less questioning attitude and assess audit evidence with a less critical approach than is the case with forensic accountants.Forensic accountants consider the real and economic values attributed to records or figures. They do not just accept such figures at their face value. In this sense, they are able to detect instances where practices associated with “creative accounting” appear to be in operation.                                                             1  MB Ojo, Department of Accounting, College of Development Studies, Covenant University, Ota, Nigeria2 Re Kingston Cotton Mill Co (No 2), [1896] 2 Ch 279 at 288 CA3 See D Mukoro et al, Forensic Accounting and Fraud Management Perspective: An Integrated Approach First Edition 2011 at page 27 Hence forensic accountants take a more “sceptical and proactive” approach in exposing fraud – rather than merely verifying statements (as is the case with auditors).The utilization of statistics to determine the probability that material errors will or will not be ascertained is of concern since statistical sampling is involved (with just a sample of events being evaluated) – such practice being synonymous with traditional accounting and auditing techniques.Forensic accountants not only use:- Physical evidence- Testimonial evidence- Documentary evidence- Demonstrative evidence,As aids in the identification of suspects, but also investigate and interpret financial statements and testify in court.4  Forensic Accounting embodies two particular areas, namely:- Litigation Support- Investigative Accounting or Fraud AuditingWhilst litigation support involves the provision of assistance of an accounting nature in matters involving existing or pending litigation, and deals primarily with issues related to the quantification of economic damages, investigative/fraud accounting places emphasis on two particular areas, namely:- Seeking out evidence of criminal conduct- Dispelling or support of damages.5This paper focuses on what constitutes “an attitude that includes a questioning mind and a critical assessment of audit evidence”, namely professional scepticism. It also briefly considers factors and reasons contributory to the ever increasing use of (and the need for) professionals who exercise professional scepticism – that is an attitude that includes a questioning mind and a critical assessment of audit evidence.                                                            4 OS Faboyede, “Forensic Accounting and the Law: Two Sides of a Coin” (2009)5 IbidB. Forensic Accounting and Audit PlanningAccording to Mukoro et al,6 during audit planning, the need to maintain a questioning mind must be discussed by the engagement team throughout the audit in identifying fraud risks and critically evaluating audit evidence. Furthermore, they argue that, in maintaining a questioning mind, auditors should set aside any prior beliefs about management’s integrity and honesty and should consider the potential for management override of controls, given that fraud is possible in any audit.- The integration of accounting, auditing and investigative skills generates the speciality known as Forensic Accounting. Forensic implies belonging to, used in or suitable to courts of judicature or to public discussion and debate. Forensic Accounting provides an analysis of accounting information that is suitable to the court – which will constitute the basis for discussion, debate, and ultimately dispute resolution.”7In this sense auditing will be linked to forensic accounting through its investigative aspect –as well as its critical assessment of audit evidence. As highlighted under the introductory section, forensic accounting embodies litigation support, as well as investigative or fraud auditing. For the purposes of this paper, greater focus will be dedicated to investigative or fraud auditing.Even though forensic accountants engage in many other capacities in the litigation support and investigative accounting processes – such capacities including:- The analysis of accounting information – as a means of “identifying misappropriations, asset recovery analysis, the reconstruction of financial documents, solvency analysis, transactional tracing” (investigative accounting capacities)8                                                            6 D Mukoro et al, Forensic Accounting and Fraud Management Perspective: An Integrated Approach First Edition 2011 at page 277 See “What is Forensic Accounting” <http://www.forensicaccounting.com/one.htm>8 Sobel CPA, “Forensic Accounting _Litigation Support” <http://www.sobel-cpa.com/services/forensic-accounting-litigation-support>- Consultation on legal strategies involving the securities market regulator, corporate governance, accounting and auditing matters, consultations involving “class matter suits”, statutes, witness preparation (litigation support capacities)9   Their capacities also extend toward the area of computer forensics.Owing to the nature and sophistication of fraudulent crimes in recent years, it has become increasingly important to adopt a more robust means and approach to the documentation of evidence in Forensic Accounting. Perpetrators of fraud appear to be not only cleverer and creative in covering their trails but also have been aided in doing so as a result of the ease with which computer data could easily be eliminated.Consequently, forensic experts who are specialised in computer forensics are also able to retrieve such easily eliminative computer data in certain circumstances which include: Provided expert has the right training and adequate experience in his field; provided that the lapse of time does not make certain information or data irretrievable; provided that the person who tried to eliminate or delete such data is not so skilfully trained as to cover his fraudulent acts effectively.According to Mukoro et al,10 tools used in investigation are referred to as the three ¨Is¨,namely: Information Interrogation InstrumentationC. Analysis and Critical Assessment of Audit Evidence: The Conduction of Interviews as an Audit Tool“Auditors should thoroughly probe the issues, acquire additional evidence as necessary, and consult with other team members rather than rationalize or dismiss information or other conditions that indicate a material misstatement due to fraud may have occurred. “11¨Fraud and forensic investigations usually involve collection of evidence, a review of previous statements and further interviews. Depending on allegations, some types of evidence which may be useful for interviewing purposes may include whistle blower complaints, emails, books and records of the business. Another type of evidence that may be useful for                                                             9 ibid10 D Mukoro et al, Forensic Accounting and Fraud Management Perspective: An Integrated Approach, 2011 at     page 18211 ibid at page 28the forensic accountant, and that should never be overlooked is the existence of previous statements made by persons.¨12During an investigation, the immediate collection and analysis of evidence is considered to be vital. Whilst it is important to make copies of documents immediately (as later access mightprove impossible), the marking of originals is strongly discouraged13 – this being attributable to the need ¨to identify if marks on documents were made by victim of fraud, friend, another accountant, or the perpetrator.¨An information inventory is also encouraged right from the beginning of the examination.¨Correspondence, junk mail, trash, catalogues and mailed items¨ should not be discounted aspotential items of evidence and special stamps could also serve as labels in the identification of documents14 – rather than marking these documents. An information inventory could alsobe aided with the use of time lines and ease of storing such information via the use ofspreadsheets.As highlighted previously, the immediate collection and analysis of evidence is very vital.The initial steps implemented following the initial discovery of suspected fraud are critical. Whilst forensic accountants may wish to advise their clients to secure data, documents and information before initiating the interview process, any delay in securing electronic and documentary evidence may result in the alteration, destruction or deletion of documents orcomputer data – once it is known that an investigation may be under way.¨15A distinction is drawn by Krstic16 between internal and external auditors’ contribution to the area of forensic accounting: “In all cases of suspected fraud which cannot be solved by forensic accountants, they cooperate with an internal auditor. Reason being that an internal auditor is better acquainted with the enterprise, ongoing transactions etc than a forensic accountant.....Then for a forensic accountant, insight provided by an external auditor in respect of types of risk, business transactions, documentation, etc is of special importance.”                                                            12 AICPA, ¨Conducting Effective Interviews¨ www.aicpa.org/..../10834-378 (not dated)13 L Saunders, ¨Financial Exploitation of Elders¨ 200114 ibid15 AICPA, ¨Conducting Effective Interviews¨ www.aicpa.org/..../10834-37816 J Krstic, The Role of Forensic Accountants in Detecting Frauds in Financial Statements , Economics and Organization Vol. 6, No 3, 2009 at page 301D. The Forensic Accountant in the Capacity of an Expert WitnessExpert opinions provided by the forensic accountant has resulted in compelling businesses to restructure – as well as in huge payouts (in the region of millions) in damages. Expert testimonies are accorded the same weight as that of other witnesses – such testimonies being determined by the trier of fact on a “case-by-case-basis.”Expert witnesses often “assist in professional negligence claims where they assess and comment on the work of other professionals.”In certain common law jurisdictions like the United States, certain standards for Expert Testimony must be satisfied before such testimony is considered to be admissible.The “proposed” testimony must be adjudged by the court to be sufficiently reliable and relevant.17Reliable in the sense that it constitutes  “valid scientific knowledge” in cases involving scientific evidence, and relevant in the sense that it will “assist the trier of fact to understand the evidence or to determine a fact in issue.”Factors used by the Supreme Court in the case of Daubert,18 in determining the reliability and relevance of an expert testimony include:- Whether the theory or technique at issue can be, or has been tested- Whether the theory or technique has been subjected to peer review and publication- The extent to which the theory or technique at issue has attained “general acceptance” in the relevant field.The principle derived from Daubert  is namely, “to make certain that an expert, whether basing testimony upon professional studies or personal experience, employs in the courtroom, the same level of intellectual rigor that characterizes the practice of an expert in the relevant field.”19According to the rules of evidence,20 an expert is a person qualified by knowledge, skill, experience, training or education.                                                            17 See M Vouras et al, “Examination of Expert Witnesses” (2000) at page 2 of 11418 Ibid; Also see Daubert v Merrell Dow Pharms Inc19 “In assessing the reliability of an expert’s proposed testimony, a trial court is afforded considerate level of discretion. In relation to the direct examination of an expert witness, and with particular respect to qualifications, an expert is not considered in a narrow sense.”20 Ibid; See Federal Rules of Evidence 702Expert testimonies are not only required to assume the form of opinions (under certain laws), but would also prove to be inadmissible if members of the jury are competent to draw their own conclusions. An expert testimony is admissible if it “will assist the trier of fact to understand the evidence or to determine a fact in issue.”E. CONCLUSIONAccording to accounting literature, the traditional role of the audit was primarily the detection and prevention of fraud and error. Evidence has been provided to support the fact that the auditor’s role has changed over the years (particularly during the nineties) from that reminiscent of watchdog to a less vigilant and scrutinising role. The move to a less vigilant role is attributed to growing investment in the railway, insurance and banking sectors and increased dispersed ownership/holdings in these industries.   Evidence provided to support the fact that the auditor’s role has changed over the years (particularly during the nineties) from that reminiscent of watchdog to a less vigilant and scrutinising role include:- The widening scope of audit firm services beyond the audit function – which has resulted in relationships which affect audit firms’ independence.- Increase in accounting irregularities during the 1990s – in the form of widespread premature revenue recognition and other forms of creative accounting.The continual emphasis on audit independence not only results from “creative accounting” but justifies many calls that auditors audit internal controls over financial reporting. The role of the forensic accountant therefore becomes even more significant. By providing greater checks and more rigorous scrutiny of accounting figures, the forensic accountant not only serves as a deterrent to “creative accounting” practices, but also consolidates efforts aimed at bolstering accountability.According to Vouras et al, the single most important obligation of an expert witness is to approach every question with independence and objectivity. Further, it is vital to ensure that a sharp distinction is maintained between the roles of lawyers who work closely with expert witnesses – this being particularly the case where experts are inclined to consider the expert as another member of the litigation team and because there are lawyers who will attempt to “influence the content of an expert’s testimony.”REFERENCESAICPA, Statements on Auditing Standards, http://www.aicpa.org/Research/Standards/AuditAttest/Pages/SAS.aspxFaboyede, OS. 2009. Forensic Accounting and the Law: Two Sides of a Coinhttp://www.businessdayonline.com/ARCHIVE/index.php?option=com_content&view=article&id=5424:forensic-accounting-and-the-law-two-sides-of-a-coin&catid=133:legal-indignity&Itemid=557Krstic, J. 2009. The Role of Forensic Accountants in Detecting Frauds in Financial Statements Economics and Organization Vol. 6, No 3, 2009, pp. 295 – 302Mukoro, D et al. 2011 Forensic Accounting and Fraud Management Perspective: An Integrated Approach First Edition Re Kingston Cotton Mill Co (No 2), [1896] 2 Ch 279 at 288 CASaunders, L. 2001. ¨Financial Exploitation of Elders¨ July/August 2001 http://www.fraud-magazine.com/article.aspx?id=4294968377Sobel, CPA. Forensic Accounting _Litigation Support http://www.sobel-cpa.com/services/forensic-accounting-litigation-supportVouras M, et al. 2000. Examination of Expert Witnesses“What is Forensic Accounting” <http://www.forensicaccounting.com/one.htm>

Forensic Accounting and the Law: The Forensic Accountant in the

Capacity of an Expert Witness

Marianne Ojo

Crossref

SSRN Electronic Journal

Forensic Accounting and the Law: The Forensic Accountant in the Capacity of an Expert Witness

This paper focuses on what constitutes “an attitude that includes a questioning mind and a critical assessment of audit evidence”, namely professional scepticism. 


This paper also focuses on factors and reasons contributory to the ever increasing use of (and the need for) forensic accountants – particularly in courts. It also addresses various standards which must be taken into consideration before testimonies provided by expert witnesses are considered to be admissible

Ojo, Marianne

Munich RePEc Personal Archive

MPRAMunich Personal RePEc ArchiveForensic accounting and the law: Theforensic accountant in the capacity of anexpert witnessMarianne OjoCovenant University18. April 2012Online at http://mpra.ub.uni-muenchen.de/38180/MPRA Paper No. 38180, posted 18. April 2012 12:48 UTCABSTRACTThis paper focuses on what constitutes “an attitude that includes a questioning mind and a critical assessment of audit evidence”, namely professional scepticism. It also briefly considers factors and reasons contributory to the ever increasing use of (and the need for) professionals who exercise professional scepticism – that is an attitude that includes a questioning mind and a critical assessment of audit evidence.TABLE OF CONTENTSA. INTRODUCTIONB. FORENSIC ACCOUNTING AND AUDIT PLANNINGC. ANALYSIS AND CRITICAL ASSESSMENT OF AUDIT EVIDENCE: THE CONDUCTION OF INTERVIEWS AS AN AUDIT TOOLD. CONCLUSIONE. THE FORENSIC ACCOUNTANT IN THE CAPACITY OF AN EXPERT WITNESSF. REFERENCESForensic Accounting and the Law: The Forensic Accountant in the Capacity of an Expert WitnessMarianne Ojo1A. IntroductionIn Re Kingston Cotton Mills (No 2),2 LJ Lopes of the Appeal Court stated that the auditor was a watchdog but not a bloodhound. This remark underlines the fact that the auditor’s primary role is not the detection of fraud.Professional Scepticism- Statements of Auditing Standards (SAS) 1 states that, in exercising professional scepticism, an auditor “neither assumes that management is dishonest nor assumes unquestioned honesty.” In practice, maintaining this attitude of professional scepticism can be difficult because, despite some recent high profile examples of fraudulent financial statements, material frauds are infrequent compared to the number of audits of financial statements conducted annually. SAS 99 provides guidance to auditors in assessing the risk of fraud – they must maintain a level of professional scepticism when considering a broad set of information, including fraud risk factors to identify and respond to fraud risk.3The level of professional scepticism required by an auditor could be considered to be lower than that required by forensic accountants. Even though professional scepticism embraces an attitude which includes a questioning mind and a critical assessment of audit evidence, auditors can be said to have a less questioning attitude and assess audit evidence with a less critical approach than is the case with forensic accountants.Forensic accountants consider the real and economic values attributed to records or figures. They do not just accept such figures at their face value. In this sense, they are able to detect instances where practices associated with “creative accounting” appear to be in operation.                                                             1  MB Ojo, Department of Accounting, College of Development Studies, Covenant University, Ota, Nigeria2 Re Kingston Cotton Mill Co (No 2), [1896] 2 Ch 279 at 288 CA3 See D Mukoro et al, Forensic Accounting and Fraud Management Perspective: An Integrated Approach First Edition 2011 at page 27 Hence forensic accountants take a more “sceptical and proactive” approach in exposing fraud – rather than merely verifying statements (as is the case with auditors).The utilization of statistics to determine the probability that material errors will or will not be ascertained is of concern since statistical sampling is involved (with just a sample of events being evaluated) – such practice being synonymous with traditional accounting and auditing techniques.Forensic accountants not only use:- Physical evidence- Testimonial evidence- Documentary evidence- Demonstrative evidence,As aids in the identification of suspects, but also investigate and interpret financial statements and testify in court.4  Forensic Accounting embodies two particular areas, namely:- Litigation Support- Investigative Accounting or Fraud AuditingWhilst litigation support involves the provision of assistance of an accounting nature in matters involving existing or pending litigation, and deals primarily with issues related to the quantification of economic damages, investigative/fraud accounting places emphasis on two particular areas, namely:- Seeking out evidence of criminal conduct- Dispelling or support of damages.5This paper focuses on what constitutes “an attitude that includes a questioning mind and a critical assessment of audit evidence”, namely professional scepticism. It also briefly considers factors and reasons contributory to the ever increasing use of (and the need for) professionals who exercise professional scepticism – that is an attitude that includes a questioning mind and a critical assessment of audit evidence.                                                            4 OS Faboyede, “Forensic Accounting and the Law: Two Sides of a Coin” (2009)5 IbidB. Forensic Accounting and Audit PlanningAccording to Mukoro et al,6 during audit planning, the need to maintain a questioning mind must be discussed by the engagement team throughout the audit in identifying fraud risks and critically evaluating audit evidence. Furthermore, they argue that, in maintaining a questioning mind, auditors should set aside any prior beliefs about management’s integrity and honesty and should consider the potential for management override of controls, given that fraud is possible in any audit.- The integration of accounting, auditing and investigative skills generates the speciality known as Forensic Accounting. Forensic implies belonging to, used in or suitable to courts of judicature or to public discussion and debate. Forensic Accounting provides an analysis of accounting information that is suitable to the court – which will constitute the basis for discussion, debate, and ultimately dispute resolution.”7In this sense auditing will be linked to forensic accounting through its investigative aspect –as well as its critical assessment of audit evidence. As highlighted under the introductory section, forensic accounting embodies litigation support, as well as investigative or fraud auditing. For the purposes of this paper, greater focus will be dedicated to investigative or fraud auditing.Even though forensic accountants engage in many other capacities in the litigation support and investigative accounting processes – such capacities including:- The analysis of accounting information – as a means of “identifying misappropriations, asset recovery analysis, the reconstruction of financial documents, solvency analysis, transactional tracing” (investigative accounting capacities)8                                                            6 D Mukoro et al, Forensic Accounting and Fraud Management Perspective: An Integrated Approach First Edition 2011 at page 277 See “What is Forensic Accounting” <http://www.forensicaccounting.com/one.htm>8 Sobel CPA, “Forensic Accounting _Litigation Support” <http://www.sobel-cpa.com/services/forensic-accounting-litigation-support>- Consultation on legal strategies involving the securities market regulator, corporate governance, accounting and auditing matters, consultations involving “class matter suits”, statutes, witness preparation (litigation support capacities)9   Their capacities also extend toward the area of computer forensics.Owing to the nature and sophistication of fraudulent crimes in recent years, it has become increasingly important to adopt a more robust means and approach to the documentation of evidence in Forensic Accounting. Perpetrators of fraud appear to be not only cleverer and creative in covering their trails but also have been aided in doing so as a result of the ease with which computer data could easily be eliminated.Consequently, forensic experts who are specialised in computer forensics are also able to retrieve such easily eliminative computer data in certain circumstances which include: Provided expert has the right training and adequate experience in his field; provided that the lapse of time does not make certain information or data irretrievable; provided that the person who tried to eliminate or delete such data is not so skilfully trained as to cover his fraudulent acts effectively.According to Mukoro et al,10 tools used in investigation are referred to as the three ¨Is¨,namely: Information Interrogation InstrumentationC. Analysis and Critical Assessment of Audit Evidence: The Conduction of Interviews as an Audit Tool“Auditors should thoroughly probe the issues, acquire additional evidence as necessary, and consult with other team members rather than rationalize or dismiss information or other conditions that indicate a material misstatement due to fraud may have occurred. “11¨Fraud and forensic investigations usually involve collection of evidence, a review of previous statements and further interviews. Depending on allegations, some types of evidence which may be useful for interviewing purposes may include whistle blower complaints, emails, books and records of the business. Another type of evidence that may be useful for                                                             9 ibid10 D Mukoro et al, Forensic Accounting and Fraud Management Perspective: An Integrated Approach, 2011 at     page 18211 ibid at page 28the forensic accountant, and that should never be overlooked is the existence of previous statements made by persons.¨12During an investigation, the immediate collection and analysis of evidence is considered to be vital. Whilst it is important to make copies of documents immediately (as later access mightprove impossible), the marking of originals is strongly discouraged13 – this being attributable to the need ¨to identify if marks on documents were made by victim of fraud, friend, another accountant, or the perpetrator.¨An information inventory is also encouraged right from the beginning of the examination.¨Correspondence, junk mail, trash, catalogues and mailed items¨ should not be discounted aspotential items of evidence and special stamps could also serve as labels in the identification of documents14 – rather than marking these documents. An information inventory could alsobe aided with the use of time lines and ease of storing such information via the use ofspreadsheets.As highlighted previously, the immediate collection and analysis of evidence is very vital.The initial steps implemented following the initial discovery of suspected fraud are critical. Whilst forensic accountants may wish to advise their clients to secure data, documents and information before initiating the interview process, any delay in securing electronic and documentary evidence may result in the alteration, destruction or deletion of documents orcomputer data – once it is known that an investigation may be under way.¨15A distinction is drawn by Krstic16 between internal and external auditors’ contribution to the area of forensic accounting: “In all cases of suspected fraud which cannot be solved by forensic accountants, they cooperate with an internal auditor. Reason being that an internal auditor is better acquainted with the enterprise, ongoing transactions etc than a forensic accountant.....Then for a forensic accountant, insight provided by an external auditor in respect of types of risk, business transactions, documentation, etc is of special importance.”                                                            12 AICPA, ¨Conducting Effective Interviews¨ www.aicpa.org/..../10834-378 (not dated)13 L Saunders, ¨Financial Exploitation of Elders¨ 200114 ibid15 AICPA, ¨Conducting Effective Interviews¨ www.aicpa.org/..../10834-37816 J Krstic, The Role of Forensic Accountants in Detecting Frauds in Financial Statements , Economics and Organization Vol. 6, No 3, 2009 at page 301D. The Forensic Accountant in the Capacity of an Expert WitnessExpert opinions provided by the forensic accountant has resulted in compelling businesses to restructure – as well as in huge payouts (in the region of millions) in damages. Expert testimonies are accorded the same weight as that of other witnesses – such testimonies being determined by the trier of fact on a “case-by-case-basis.”Expert witnesses often “assist in professional negligence claims where they assess and comment on the work of other professionals.”In certain common law jurisdictions like the United States, certain standards for Expert Testimony must be satisfied before such testimony is considered to be admissible.The “proposed” testimony must be adjudged by the court to be sufficiently reliable and relevant.17Reliable in the sense that it constitutes  “valid scientific knowledge” in cases involving scientific evidence, and relevant in the sense that it will “assist the trier of fact to understand the evidence or to determine a fact in issue.”Factors used by the Supreme Court in the case of Daubert,18 in determining the reliability and relevance of an expert testimony include:- Whether the theory or technique at issue can be, or has been tested- Whether the theory or technique has been subjected to peer review and publication- The extent to which the theory or technique at issue has attained “general acceptance” in the relevant field.The principle derived from Daubert  is namely, “to make certain that an expert, whether basing testimony upon professional studies or personal experience, employs in the courtroom, the same level of intellectual rigor that characterizes the practice of an expert in the relevant field.”19According to the rules of evidence,20 an expert is a person qualified by knowledge, skill, experience, training or education.                                                            17 See M Vouras et al, “Examination of Expert Witnesses” (2000) at page 2 of 11418 Ibid; Also see Daubert v Merrell Dow Pharms Inc19 “In assessing the reliability of an expert’s proposed testimony, a trial court is afforded considerate level of discretion. In relation to the direct examination of an expert witness, and with particular respect to qualifications, an expert is not considered in a narrow sense.”20 Ibid; See Federal Rules of Evidence 702Expert testimonies are not only required to assume the form of opinions (under certain laws), but would also prove to be inadmissible if members of the jury are competent to draw their own conclusions. An expert testimony is admissible if it “will assist the trier of fact to understand the evidence or to determine a fact in issue.”E. CONCLUSIONAccording to accounting literature, the traditional role of the audit was primarily the detection and prevention of fraud and error. Evidence has been provided to support the fact that the auditor’s role has changed over the years (particularly during the nineties) from that reminiscent of watchdog to a less vigilant and scrutinising role. The move to a less vigilant role is attributed to growing investment in the railway, insurance and banking sectors and increased dispersed ownership/holdings in these industries.   Evidence provided to support the fact that the auditor’s role has changed over the years (particularly during the nineties) from that reminiscent of watchdog to a less vigilant and scrutinising role include:- The widening scope of audit firm services beyond the audit function – which has resulted in relationships which affect audit firms’ independence.- Increase in accounting irregularities during the 1990s – in the form of widespread premature revenue recognition and other forms of creative accounting.The continual emphasis on audit independence not only results from “creative accounting” but justifies many calls that auditors audit internal controls over financial reporting. The role of the forensic accountant therefore becomes even more significant. By providing greater checks and more rigorous scrutiny of accounting figures, the forensic accountant not only serves as a deterrent to “creative accounting” practices, but also consolidates efforts aimed at bolstering accountability.According to Vouras et al, the single most important obligation of an expert witness is to approach every question with independence and objectivity. Further, it is vital to ensure that a sharp distinction is maintained between the roles of lawyers who work closely with expert witnesses – this being particularly the case where experts are inclined to consider the expert as another member of the litigation team and because there are lawyers who will attempt to “influence the content of an expert’s testimony.”REFERENCESAICPA, Statements on Auditing Standards, http://www.aicpa.org/Research/Standards/AuditAttest/Pages/SAS.aspxFaboyede, OS. 2009. Forensic Accounting and the Law: Two Sides of a Coinhttp://www.businessdayonline.com/ARCHIVE/index.php?option=com_content&view=article&id=5424:forensic-accounting-and-the-law-two-sides-of-a-coin&catid=133:legal-indignity&Itemid=557Krstic, J. 2009. The Role of Forensic Accountants in Detecting Frauds in Financial Statements Economics and Organization Vol. 6, No 3, 2009, pp. 295 – 302Mukoro, D et al. 2011 Forensic Accounting and Fraud Management Perspective: An Integrated Approach First Edition Re Kingston Cotton Mill Co (No 2), [1896] 2 Ch 279 at 288 CASaunders, L. 2001. ¨Financial Exploitation of Elders¨ July/August 2001 http://www.fraud-magazine.com/article.aspx?id=4294968377Sobel, CPA. Forensic Accounting _Litigation Support http://www.sobel-cpa.com/services/forensic-accounting-litigation-supportVouras M, et al. 2000. Examination of Expert Witnesses“What is Forensic Accounting” <http://www.forensicaccounting.com/one.htm>

Forensic accounting and the law: The forensic accountant in the capacity of an expert witness

Munich Personal RePEc Archive

MPRA
Munich Personal RePEc Archive
Forensic accounting and the law: The
forensic accountant in the capacity of an
expert witness
Marianne Ojo
Covenant University
18. April 2012
Online at https://mpra.ub.uni-muenchen.de/38180/
MPRA Paper No. 38180, posted 18. April 2012 12:48 UTC
ABSTRACT
This paper focuses on what constitutes “an attitude that includes a questioning mind and a 
critical assessment of audit evidence”, namely professional scepticism. It also briefly 
considers factors and reasons contributory to the ever increasing use of (and the need for) 
professionals who exercise professional scepticism – that is an attitude that includes a 
questioning mind and a critical assessment of audit evidence.
TABLE OF CONTENTS
A. INTRODUCTION
B. FORENSIC ACCOUNTING AND AUDIT PLANNING
C. ANALYSIS AND CRITICAL ASSESSMENT OF AUDIT EVIDENCE: THE 
CONDUCTION OF INTERVIEWS AS AN AUDIT TOOL
D. CONCLUSION
E. THE FORENSIC ACCOUNTANT IN THE CAPACITY OF AN EXPERT 
WITNESS
F. REFERENCES
Forensic Accounting and the Law: The Forensic Accountant in the 
Capacity of an Expert Witness
Marianne Ojo1
A. Introduction
In Re Kingston Cotton Mills (No 2),2 LJ Lopes of the Appeal Court stated that the auditor 
was a watchdog but not a bloodhound. This remark underlines the fact that the auditor’s 
primary role is not the detection of fraud.
Professional Scepticism
- Statements of Auditing Standards (SAS) 1 states that, in exercising professional 
scepticism, an auditor “neither assumes that management is dishonest nor assumes 
unquestioned honesty.” In practice, maintaining this attitude of professional 
scepticism can be difficult because, despite some recent high profile examples of 
fraudulent financial statements, material frauds are infrequent compared to the 
number of audits of financial statements conducted annually. SAS 99 provides 
guidance to auditors in assessing the risk of fraud – they must maintain a level of 
professional scepticism when considering a broad set of information, including fraud 
risk factors to identify and respond to fraud risk.3
The level of professional scepticism required by an auditor could be considered to be lower 
than that required by forensic accountants. Even though professional scepticism embraces an 
attitude which includes a questioning mind and a critical assessment of audit evidence, 
auditors can be said to have a less questioning attitude and assess audit evidence with a less 
critical approach than is the case with forensic accountants.
Forensic accountants consider the real and economic values attributed to records or figures. 
They do not just accept such figures at their face value. In this sense, they are able to detect 
instances where practices associated with “creative accounting” appear to be in operation. 
                                                            
1  MB Ojo, Department of Accounting, College of Development Studies, Covenant University, Ota, Nigeria
2 Re Kingston Cotton Mill Co (No 2), [1896] 2 Ch 279 at 288 CA
3 See D Mukoro et al, Forensic Accounting and Fraud Management Perspective: An Integrated Approach First 
Edition 2011 at page 27 
Hence forensic accountants take a more “sceptical and proactive” approach in exposing fraud 
– rather than merely verifying statements (as is the case with auditors).
The utilization of statistics to determine the probability that material errors will or will not be 
ascertained is of concern since statistical sampling is involved (with just a sample of events 
being evaluated) – such practice being synonymous with traditional accounting and auditing 
techniques.
Forensic accountants not only use:
- Physical evidence
- Testimonial evidence
- Documentary evidence
- Demonstrative evidence,
As aids in the identification of suspects, but also investigate and interpret financial statements 
and testify in court.4  Forensic Accounting embodies two particular areas, namely:
- Litigation Support
- Investigative Accounting or Fraud Auditing
Whilst litigation support involves the provision of assistance of an accounting nature in 
matters involving existing or pending litigation, and deals primarily with issues related to the 
quantification of economic damages, investigative/fraud accounting places emphasis on two 
particular areas, namely:
- Seeking out evidence of criminal conduct
- Dispelling or support of damages.5
This paper focuses on what constitutes “an attitude that includes a questioning mind and a 
critical assessment of audit evidence”, namely professional scepticism. It also briefly 
considers factors and reasons contributory to the ever increasing use of (and the need for) 
professionals who exercise professional scepticism – that is an attitude that includes a 
questioning mind and a critical assessment of audit evidence.
                                                            
4 OS Faboyede, “Forensic Accounting and the Law: Two Sides of a Coin” (2009)
5 Ibid
B. Forensic Accounting and Audit Planning
According to Mukoro et al,6 during audit planning, the need to maintain a questioning mind 
must be discussed by the engagement team throughout the audit in identifying fraud risks and 
critically evaluating audit evidence. Furthermore, they argue that, in maintaining a 
questioning mind, auditors should set aside any prior beliefs about management’s integrity 
and honesty and should consider the potential for management override of controls, given 
that fraud is possible in any audit.
- The integration of accounting, auditing and investigative skills generates the 
speciality known as Forensic Accounting. Forensic implies belonging to, used in or 
suitable to courts of judicature or to public discussion and debate. Forensic 
Accounting provides an analysis of accounting information that is suitable to the court 
– which will constitute the basis for discussion, debate, and ultimately dispute 
resolution.”7
In this sense auditing will be linked to forensic accounting through its investigative aspect –
as well as its critical assessment of audit evidence. As highlighted under the introductory 
section, forensic accounting embodies litigation support, as well as investigative or fraud 
auditing. For the purposes of this paper, greater focus will be dedicated to investigative or 
fraud auditing.
Even though forensic accountants engage in many other capacities in the litigation support 
and investigative accounting processes – such capacities including:
- The analysis of accounting information – as a means of “identifying 
misappropriations, asset recovery analysis, the reconstruction of financial documents, 
solvency analysis, transactional tracing” (investigative accounting capacities)8
                                                            
6 D Mukoro et al, Forensic Accounting and Fraud Management Perspective: An Integrated Approach First 
Edition 2011 at page 27
7 See “What is Forensic Accounting” <http://www.forensicaccounting.com/one.htm>
8 Sobel CPA, “Forensic Accounting _Litigation Support” <http://www.sobel-cpa.com/services/forensic-
accounting-litigation-support>
- Consultation on legal strategies involving the securities market regulator, corporate 
governance, accounting and auditing matters, consultations involving “class matter 
suits”, statutes, witness preparation (litigation support capacities)9   
Their capacities also extend toward the area of computer forensics.
Owing to the nature and sophistication of fraudulent crimes in recent years, it has become 
increasingly important to adopt a more robust means and approach to the documentation of 
evidence in Forensic Accounting. Perpetrators of fraud appear to be not only cleverer and 
creative in covering their trails but also have been aided in doing so as a result of the ease 
with which computer data could easily be eliminated.
Consequently, forensic experts who are specialised in computer forensics are also able to 
retrieve such easily eliminative computer data in certain circumstances which include:
 Provided expert has the right training and adequate experience in his field;
 provided that the lapse of time does not make certain information or data irretrievable;
 provided that the person who tried to eliminate or delete such data is not so skilfully trained 
as to cover his fraudulent acts effectively.
According to Mukoro et al,10 tools used in investigation are referred to as the three ¨Is¨,
namely:
 Information
 Interrogation
 Instrumentation
C. Analysis and Critical Assessment of Audit Evidence: The Conduction of 
Interviews as an Audit Tool
“Auditors should thoroughly probe the issues, acquire additional evidence as necessary, and 
consult with other team members rather than rationalize or dismiss information or other 
conditions that indicate a material misstatement due to fraud may have occurred. “11
¨Fraud and forensic investigations usually involve collection of evidence, a review of 
previous statements and further interviews. Depending on allegations, some types of evidence 
which may be useful for interviewing purposes may include whistle blower complaints, 
emails, books and records of the business. Another type of evidence that may be useful for 
                                                            
9 ibid
10 D Mukoro et al, Forensic Accounting and Fraud Management Perspective: An Integrated Approach, 2011 at 
    page 182
11 ibid at page 28
the forensic accountant, and that should never be overlooked is the existence of previous 
statements made by persons.¨12
During an investigation, the immediate collection and analysis of evidence is considered to be 
vital. Whilst it is important to make copies of documents immediately (as later access might
prove impossible), the marking of originals is strongly discouraged13 – this being attributable 
to the need ¨to identify if marks on documents were made by victim of fraud, friend, another 
accountant, or the perpetrator.¨
An information inventory is also encouraged right from the beginning of the examination.
¨Correspondence, junk mail, trash, catalogues and mailed items¨ should not be discounted as
potential items of evidence and special stamps could also serve as labels in the identification 
of documents14 – rather than marking these documents. An information inventory could also
be aided with the use of time lines and ease of storing such information via the use of
spreadsheets.
As highlighted previously, the immediate collection and analysis of evidence is very vital.
The initial steps implemented following the initial discovery of suspected fraud are critical. 
Whilst forensic accountants may wish to advise their clients to secure data, documents and 
information before initiating the interview process, any delay in securing electronic and 
documentary evidence may result in the alteration, destruction or deletion of documents or
computer data – once it is known that an investigation may be under way.¨15
A distinction is drawn by Krstic16 between internal and external auditors’ contribution to the 
area of forensic accounting: “In all cases of suspected fraud which cannot be solved by 
forensic accountants, they cooperate with an internal auditor. Reason being that an internal 
auditor is better acquainted with the enterprise, ongoing transactions etc than a forensic 
accountant.....Then for a forensic accountant, insight provided by an external auditor in 
respect of types of risk, business transactions, documentation, etc is of special importance.”
                                                            
12 AICPA, ¨Conducting Effective Interviews¨ www.aicpa.org/..../10834-378 (not dated)
13 L Saunders, ¨Financial Exploitation of Elders¨ 2001
14 ibid
15 AICPA, ¨Conducting Effective Interviews¨ www.aicpa.org/..../10834-378
16 J Krstic, The Role of Forensic Accountants in Detecting Frauds in Financial Statements , Economics and 
Organization Vol. 6, No 3, 2009 at page 301
D. The Forensic Accountant in the Capacity of an Expert Witness
Expert opinions provided by the forensic accountant has resulted in compelling businesses to 
restructure – as well as in huge payouts (in the region of millions) in damages. Expert 
testimonies are accorded the same weight as that of other witnesses – such testimonies being 
determined by the trier of fact on a “case-by-case-basis.”
Expert witnesses often “assist in professional negligence claims where they assess and 
comment on the work of other professionals.”
In certain common law jurisdictions like the United States, certain standards for Expert 
Testimony must be satisfied before such testimony is considered to be admissible.
The “proposed” testimony must be adjudged by the court to be sufficiently reliable and 
relevant.17
Reliable in the sense that it constitutes  “valid scientific knowledge” in cases involving 
scientific evidence, and relevant in the sense that it will “assist the trier of fact to understand 
the evidence or to determine a fact in issue.”
Factors used by the Supreme Court in the case of Daubert,18 in determining the reliability and 
relevance of an expert testimony include:
- Whether the theory or technique at issue can be, or has been tested
- Whether the theory or technique has been subjected to peer review and publication
- The extent to which the theory or technique at issue has attained “general acceptance” 
in the relevant field.
The principle derived from Daubert  is namely, “to make certain that an expert, whether 
basing testimony upon professional studies or personal experience, employs in the courtroom, 
the same level of intellectual rigor that characterizes the practice of an expert in the relevant 
field.”19
According to the rules of evidence,20 an expert is a person qualified by knowledge, skill, 
experience, training or education.
                                                            
17 See M Vouras et al, “Examination of Expert Witnesses” (2000) at page 2 of 114
18 Ibid; Also see Daubert v Merrell Dow Pharms Inc
19 “In assessing the reliability of an expert’s proposed testimony, a trial court is afforded considerate level of 
discretion. In relation to the direct examination of an expert witness, and with particular respect to 
qualifications, an expert is not considered in a narrow sense.”
20 Ibid; See Federal Rules of Evidence 702
Expert testimonies are not only required to assume the form of opinions (under certain laws), 
but would also prove to be inadmissible if members of the jury are competent to draw their 
own conclusions. An expert testimony is admissible if it “will assist the trier of fact to 
understand the evidence or to determine a fact in issue.”
E. CONCLUSION
According to accounting literature, the traditional role of the audit was primarily the detection 
and prevention of fraud and error. Evidence has been provided to support the fact that the 
auditor’s role has changed over the years (particularly during the nineties) from that 
reminiscent of watchdog to a less vigilant and scrutinising role. The move to a less vigilant 
role is attributed to growing investment in the railway, insurance and banking sectors and 
increased dispersed ownership/holdings in these industries.   
Evidence provided to support the fact that the auditor’s role has changed over the years 
(particularly during the nineties) from that reminiscent of watchdog to a less vigilant and 
scrutinising role include:
- The widening scope of audit firm services beyond the audit function – which has 
resulted in relationships which affect audit firms’ independence.
- Increase in accounting irregularities during the 1990s – in the form of widespread 
premature revenue recognition and other forms of creative accounting.
The continual emphasis on audit independence not only results from “creative accounting” 
but justifies many calls that auditors audit internal controls over financial reporting. The role 
of the forensic accountant therefore becomes even more significant. By providing greater 
checks and more rigorous scrutiny of accounting figures, the forensic accountant not only 
serves as a deterrent to “creative accounting” practices, but also consolidates efforts aimed at 
bolstering accountability.
According to Vouras et al, the single most important obligation of an expert witness is to 
approach every question with independence and objectivity. Further, it is vital to ensure that a 
sharp distinction is maintained between the roles of lawyers who work closely with expert 
witnesses – this being particularly the case where experts are inclined to consider the expert 
as another member of the litigation team and because there are lawyers who will attempt to 
“influence the content of an expert’s testimony.”
REFERENCES
AICPA, Statements on Auditing Standards, 
http://www.aicpa.org/Research/Standards/AuditAttest/Pages/SAS.aspx
Faboyede, OS. 2009. Forensic Accounting and the Law: Two Sides of a Coin
http://www.businessdayonline.com/ARCHIVE/index.php?option=com_content&view=article
&id=5424:forensic-accounting-and-the-law-two-sides-of-a-coin&catid=133:legal-
indignity&Itemid=557
Krstic, J. 2009. The Role of Forensic Accountants in Detecting Frauds in Financial 
Statements Economics and Organization Vol. 6, No 3, 2009, pp. 295 – 302
Mukoro, D et al. 2011 Forensic Accounting and Fraud Management Perspective: An 
Integrated Approach First Edition 
Re Kingston Cotton Mill Co (No 2), [1896] 2 Ch 279 at 288 CA
Saunders, L. 2001. ¨Financial Exploitation of Elders¨ July/August 2001 http://www.fraud-
magazine.com/article.aspx?id=4294968377
Sobel, CPA. Forensic Accounting _Litigation Support http://www.sobel-
cpa.com/services/forensic-accounting-litigation-support
Vouras M, et al. 2000. Examination of Expert Witnesses
“What is Forensic Accounting” <http://www.forensicaccounting.com/one.htm>


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Forensic Accounting and the Law: The Forensic Accountant in the Capacity of an Expert Witness

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