Forensic Audit Practices to Reduce Financial Frauds

Background

Although it is prevalent nowadays, forensic auditing is not a new discipline. It is a known fact that in 3000 B.C., people in Egypt, whom we may call the pioneers of the accounting profession, used their specialty to audit fraud in stocks (D'Ath, 2008). The first documented forensic auditing case took place in Canada in 1817 when an expert accounting was assigned to audit the insolvent's properties and was summoned to court as a witness for evaluating Meyer's insolvent properties v. Sefton case (Crumbley, 2001). From the early 1980s, due to the change of needs in the auditing profession with an altered economic environment in many developed countries, forensic auditing has begun to improve (D’ath, 2008). In the same period, Joe Wells founded the Association of Certified Fraud Examiners (ACFE), which trains expert fraud auditors and carries out fraud detection practices. In the 1990s, AICPA made significant progress in their field of application by founding the “Forensic and Litigation Services Committee” with Peter Frank, one of Price Waterhouse's partners. The American College of Forensic Examiners International (ACFEI) was founded in 1992, and awareness of forensic auditing activities increased. The most significant milestone in forensic auditing's professional development came in 2002 with adopting the Sarbanes Oxley (SOX) Act following scandals in global companies. Another necessary evolvement is publishing the report titled “Incorporating Forensic Procedures in an Audit Environment,” which emphasized the effect of forensic auditing techniques on the whole audit process by AICPA's Litigation and Dispute Resolution Services Subcommittee in 2003 (Minniti, 2011). As a result of these regulations, it was pointed out that several services provided by auditing firms fell within forensic services; hence they should be provided by a forensic auditor. Therefore, the importance placed on forensic auditing rose to a superior level, and most auditing firms extended their practices to include forensic auditing applications.