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Auditing Principles

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The Past, Present, and Future of Forensic Accounting
G. Stevenson Smith, PhD, CPA, CMA
The CPA Journal
Vol. 85 (LXXXV)/No. 3
March 2015 pp. 16-21

Today’s business society, including many large corporations as well as small and medium-sized businesses, has been part of the rapid technological advances the world is facing. Nowadays every business is operating via Internet as we are facing constant technological improvements throughout the past couple of decades. That being said, the potential of cybercrimes being committed drastically increased, as the cyber criminals have been able to break into the companies’ systems and manipulate and extract crucial data sets. This article is focusing on chronological development of the new area of accounting, forensic accounting. Forensic accounting is primarily focused on fraud protection, investigation of the security breaches and any other malicious activities against a company and its confidential data.
At the very beginning of the twentieth century forensic accounting was not recognized as a separate practice area from auditing. As the passage of time, forensic accounting became a more distinct practice area. The development of computers and the internet caused forensic accounting to expand and become a separate field which deals with investigating activities and fraud protection rather than stating an opinion on whether or not the financial statements are in accordance with GAAP. Continually, auditors are focusing on the fair representation of financial statements and giving an opinion without an intent to search for detecting fraudulent activities.
Forensic accounting as a part of the accounting profession was mentioned for the first time in early 1900’s. During its early phase it was believed that the auditor’s responsibility was to detect and prevent fraud. Since the very beginning, forensic accounting has been subject to constant changes as both accountants as well as the public tried to come up with defining the auditing profession. As the large corporations and many other businesses expanded and became more complicated to deal with, it became clearer that auditors would not be able to monitor the fraudulent activities as was initially planned. Therefore, forensic accounting started to expand and depart from auditing as the separate accounting field which started to face more challenges. By the passage of the Securities Act of 1933 and the Securities and Exchange Act of 1934, the profession created a more rigorous set of standards and regulations that needed to be followed. During the 1950’s it was emphasized that auditing procedure started to pay less attention on to the detection of fraudulent activities. Responsibility for detecting fraud was rejected by the auditors as they had legal protection and limited liability in case fraud was not discovered during audit performances. In the 1970’s fraudulent events era, the same topics were questioned repetitively. How to protect businesses, since there has been a weakening of businesses moral values. The AICPA in 1974, stated that the auditors should be responsible for detecting the material fraud by using due professional care. From the auditors’ point of view, their initial job is to form an opinion on whether or not the financial statements present fairly the financial standing of a company with accordance to GAAP, not to directly uncover the unintentional or intentional misrepresentations of the financial statements. The issue of the scope of auditor’s responsibilities has been debated for many decades. The overall conclusion is that auditors are not necessarily focusing on detecting and investigating whether or not there are suspicious and malicious activities within the company being audited. This does not exclude the fact that auditor has an obligation to report any suspicious activities if those arise from reviewing of the financial records of the company.
Previously mentioned, the biggest challenges forensic accounting is facing in recent years are technological improvements. Today’s definition of a forensic accounting is much broader than it used to be solely because of these innovations. Most of the attention is drawn towards the cybercrimes and development of the practices which will prevent these activities. Statistical data showed that most of today’s fraudulent activities possess an electronic element. Therefore, future forensic practice assignments should be focusing more on computer forensics. One of the ways of detecting fraud and checking the vulnerability of the company’s network is by performing a penetration testing against a client’s network, which is basically a cyber-attack performed by forensic accountants in order to check how truly reliable the system is. The idea of future forensic practice is to monitor a company’s network 24 hours a day in order to identify potential hazardous activities, whether it was committed internally, by the top management, or externally, by cyber criminals who try to extract the confidential information. By monitoring company’s systems, forensic accountants will be able to identify locations and identities of those individuals who tried to commit fraud.
The forensic practice has been developing for many decades, especially due to an increased number of cybercrimes committed in the past couple of years. There is an open path for continuous improvement and development of this particular accounting field, which should be followed by adoption of new, innovative techniques of preventing fraud. This field is especially interesting to be traced, since it will be able to help create new jobs in federal regulations sectors. Recent events, such as the case with Target, whose system was breached, and millions of customer’s credit card and personal information was exposed to cyber criminals, could be prevented in the future only if there is more interest in evolving forensic accounting to a brand new level. As improvements in the information and technology sector will continue to occur in the future, the need for a forensic accounting will be in higher demand as well. Therefore, one thing is left to be concluded – the accounting profession needs to continue developing and expanding this crucial field, as I am sure it will be of much greater importance in the years to come.…...

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