Forensic Accounting and Corporate Governance

Definition And History

The issues of poor corporate governance in organizations have pushed for the functions of forensic accounting. Organizations value forensic accounting in the current world as intangible assets that trace to the vital role of effective corporate governance. In its definition, corporate governance is a system of regulations, rules, and accepted practices that define the way an organization is controlled and directed. It aims at balancing stakeholders’ interests to achieve a balance of interests and attainment of the corporate objectives and performance measures. Forensic accounting includes the investigative and accounting techniques used by organizations to identify instances of financial crime (Ocansey, 2017). It entails identifying assets, conducting due diligence to recover lost assets, and tracing funds that have been illegally assigned to diverse segments, some of which end up being pocketed by the corporate leaders and employees. Forensic accounting, including auditing and accounting practices,is used to examine how finances are utilized by business holders and individual operators. The analysis helps in legal proceedings, especially when there is embezzlement or fraud involved.

Forensic accounting dates back to ancient times in Egypt, where the pharaohs used scribes to help them in tracking valuable items like grain and gold. They could record independent transactions, an aspect that included internal control checks, and thorough record-keeping, which helped them to solve disputes regarding financial damages. Such accounts were merely informal, until 1817 when the first case of forensic accounting was documented. In the case of Meyer vs Sefton, the case of bankruptcy required them to identify the estate’s value. The court issued an order for accountants to examine the accounts before testifying. The process of identifying litigation matters required expertise in accounting for the involved parties to identify flaws in the case and present their findings before courts.

Smith (2015) explains that based on the accounting standards, the renowned superhero forensic accountant is Frank Wilson, who was used to identify theft patterns and bring down Al Capone, a notorious gangster. Al Capone had been documented as a criminal with a history of organized crimes, and there were several attempts to prosecute him that had failed. Capone could buy his freedom by issuing threats to witnesses and bribing officials. When the US government decided to build a case of tax evasion in 1930 against Capone, Frank Wilson took the responsibility to investigate his tax evasion claims and extravagant lifestyle. Wilson worked with other members to trace Capone’s incomes, yet he had claimed he did not have a source of income. He was eventually arrested, convicted, and prosecuted for the crime of tax evasion, leading to his eleven years in prison.

The incidents of white-collar crimes relating to the embezzlement of funds led to the rise of forensic accounting. The fraud triangle, a concept developed in the 1950s by criminologist Donald Cressey, introduced three aspects of fraudsters’ motives to steal; rationalization, motivation, and opportunity. Donald established findings that helped in forensic accounting, including how fraud is conducted and ways to detect and prevent its occurrence. For instance, Donald claims that a business can have little control over rational elements or motives in the fraud triangle. However, they need to hold internal control systems to help in tracking and eliminating possible opportunities that spur fraud. The 20^th century has seen financial complexities and accounting rules evolve (Gray & Moussalli, 2006). In the same way, there was a growing demand for forensic accountants due to the increasing accounting scandals. One of the known cases is that of Enron, which took place in 2001. When the firm was declared bankruptcy, the firm’s auditor, Arthur Andersen, passed on. Other scandals emerged, including WorldCom’s bankruptcy. The discoveries included manipulated financial statements amounting to millions of funds. This resulted in regulations to enhance financial reporting and transparency among firms. The Sarbanes-Oxley Act was developed to enhance the role of forensic accounting for all publicly traded firms. Forensic accountants have since become essential for investors and corporations that want to avoid financial scandals relating to fraud and embezzlement (Yadav & Yadav, 2013). As the number of accounting crimes continues to increase, organizations are relying on forensic accountants to track illegal transactions, manipulate financial statements, and other motives and opportunities for fraudulent activities.