Discus the development of the fraud examiner/forensic accounting profession since the 2001 Enron fraud. Discuss applicable standards and the core foundation of the profession. Solution Forensic accounting has been pivotal in the corporate agenda after the financial reporting problems which took place in some companies around the world like Enron. These scandals resulted in the loss of public trust and huge amounts of money. In order to avoid fraud and theft, and to restore the badly needed public confidence, several companies took the step to improve the infrastructure of their internal control and accounting systems drastically. It was this development which increased the importance of accountants who have chosen to specialize in forensic accounting and who are consequently referred as “forensic accountants.” Forensic accounting relies on the fraud triangle to identify weak points in the business systems and find possible suspects in cases of fraud. It consists of three core concepts which together create a situation ripe for fraud: incentive, opportunity, and rationalization. People must have the incentive and opportunity to commit financial fraud, as well as the ability to justify it. Recent analysis has suggested adding a fourth concept to make a diamond—capability. Just because someone has the opportunity or incentive to steal does not necessarily mean that they have the capability to do so. For example, if someone does not understand how to make journal or ledger entries in the books of accounts, they would not know how to manipulate numbers no matter what the incentive or opportunity is. The accounting scandals involving Enron, WorldCom, Global Crossing, and other companies have put accountants in the public spotlight as never before in their history. After these accounting scandals, public confidence in the accounting profession has been seriously undermined. However, the scandals have created business for forensic accountants and developed opportunities for forensic and investigative accounting. Forensic accountants have been conducting these activities for quite some time in a quiet professional manner. New laws and regulations resulting from these scandals will make the role of forensic accountants more important than ever before in the business world. Forensic accountants, also referred to as forensic auditors or investigative auditors, often have to give expert evidence at the eventual trial. All of the larger accounting firms as well as many medium-sized and boutique firms have specialist forensic accounting departments. Forensic accountants utilize an understanding of business information and financial reporting systems, accounting and auditing standards and procedures, evidence gathering and investigative techniques, and litigation processes and procedures to perform their work. Forensic accountants are also increasingly playing more proactive risk reduction roles by designing and performing extended procedures as part of stat.

1. Discus the development of the fraud examiner/forensic accounting profession since the 2001
Enron fraud. Discuss applicable standards and the core foundation of the profession.
Solution
Forensic accounting has been pivotal in the corporate agenda after the financial reporting
problems which took place in some companies around the world like Enron. These scandals
resulted in the loss of public trust and huge amounts of money. In order to avoid fraud and theft,
and to restore the badly needed public confidence, several companies took the step to improve
the infrastructure of their internal control and accounting systems drastically. It was this
development which increased the importance of accountants who have chosen to specialize in
forensic accounting and who are consequently referred as “forensic accountants.”
Forensic accounting relies on the fraud triangle to identify weak points in the business systems
and find possible suspects in cases of fraud. It consists of three core concepts which together
create a situation ripe for fraud: incentive, opportunity, and rationalization. People must have the
incentive and opportunity to commit financial fraud, as well as the ability to justify it. Recent
analysis has suggested adding a fourth concept to make a diamond—capability. Just because
someone has the opportunity or incentive to steal does not necessarily mean that they have the
capability to do so. For example, if someone does not understand how to make journal or ledger
entries in the books of accounts, they would not know how to manipulate numbers no matter
what the incentive or opportunity is.
The accounting scandals involving Enron, WorldCom, Global Crossing, and other companies
have put accountants in the public spotlight as never before in their history. After these
accounting scandals, public confidence in the accounting profession has been seriously
undermined. However, the scandals have created business for forensic accountants and
developed opportunities for forensic and investigative accounting. Forensic accountants have
been conducting these activities for quite some time in a quiet professional manner. New laws
and regulations resulting from these scandals will make the role of forensic accountants more
important than ever before in the business world.
Forensic accountants, also referred to as forensic auditors or investigative auditors, often have to
give expert evidence at the eventual trial. All of the larger accounting firms as well as many
medium-sized and boutique firms have specialist forensic accounting departments. Forensic
accountants utilize an understanding of business information and financial reporting systems,
accounting and auditing standards and procedures, evidence gathering and investigative
techniques, and litigation processes and procedures to perform their work. Forensic accountants

2. are also increasingly playing more proactive risk reduction roles by designing and performing
extended procedures as part of statutory audit, acting as advisers to audit committees, fraud
deterrence engagements, and assisting in investment analyst research. The skeptical mindset is
something that has long been inherent in forensic accountants and other internal investigators
when looking for evidence of fraud. The investigator historically has asked a set of questions
different from those of conventional auditor, who is monitoring the financial statements to see
whether they are in compliance with generally accepted accounting principles (GAAP) and
thereby fairly represent the financial conditions of the company. Fraud auditing, forensic
accounting, and/or fraud investigation (i.e., forensic accounting) put things together rather than
take them apart, as is the case in financial classical auditing or modern method of systems
analysis. The process of forensic accounting is also sometimes more intuitive than deductive,
although both intuition and deduction play important parts.
Forensic accounting profession has some requirements. Certified fraud examiner (CFE) is a
designation awarded by the ACFE. The ACFE is a 41,000 member-based global association
dedicated to providing antifraud education and training. In order to become a CFE, one must
meet the following requirements:
• Be an associate member of the ACFE in good standing
• Meet minimum academic and professional requirements
• Be of high moral character
• Agree to abide by laws and code of professional ethics of the ACFE
Professional Requirements
At the time of certification, at least 2 years of professional experience in a field either directly or
indirectly related to the detection or deterrence of fraud is required. The ACFE recognizes the
following areas as qualified professional experience:
• Accounting and auditing
• Criminology and sociology (sociology is acceptable only if it relates to fraud)
• Fraud investigation
• Loss prevention (experience as a security guard or equivalent is not acceptable)
• Law relating to fraud
SOX
On 30 July 2002, the landmark legislation known as the Sarbanes-Oxley Act (SOX Law) was
enacted into the United States Law. The Act was named after its principal authors, Senator Paul
D. Sarbanes (D-Md) and Rep. Michael G Oxley. The Act seeks to restore investor confidence in
the US financial markets, corporate governance, and financial reporting. The Sarbanes-Oxley
Act was passed by the US legislature in the wake of accounting scandals such as Enron. Through
strictly United States legislation and its impact is far reaching on the accounting and financial

3. markets. The Act applies to all Securities and Exchange Commission (SEC)-listed companies,
and so extends to subsidiary and associated entities of SEC-listed companies outside the USA.
The impact of the requirements of Sarbanes-Oxley is that forensic practices must seek work
outside such traditional sources as existing audit clients, although this potentially opens up
avenues into other clients. In turn, clients may lose benefits of 2 Fraud Detection and Forensic
Accounting 35 the inherent in-house knowledge and experience obtained from the audit
engagement, but they may also benefit from a different expert, as perspective. However, in so far
as the nature and performance of the audit engagement were seen to threaten the forensic
accountant as independence, the Sarbanes-Oxley provisions go some way to enforcing and
promoting objectivity and restoring the accounting professions’ reputation.
In the USA, forensic accountants have been employed by the Federal Bureau of Investigation
(FBI), Central Intelligence Agency (CIA), Internal Revenue Service (IRS), Federal Trade
Commission (FTC), Homeland Security, Bureau of Alcohol, Tobacco and Firearms,
Governmental Accountability Office (GAO), and other government agencies. The focus is on
what is referred to as white-collar crime, notably fraud. This is why financial and other skills are
required. Outside of government employment, big employers of forensic accountants include
financial intermediaries such as banks and insurance organizations plus divorce attorneys.
Forensic accountants often testify in civil and criminal court hearings. In this capacity, they serve
as expert witnesses. They do not testify as to whether fraud has occurred. This is the court’s
decision. The expert witness presents evidence.
Conclusion-
In recent years, corruption in the US companies has attracted the attention on fraud in many US
organizations. Detection and prevention of corruption have given rise to the profession of
forensic accounting. Forensic accounting, which has been growing rapidly as a profession in the
world and has been accepted as a profession in countries such as Canada, Australia, the USA,
and the UK, is beginning to gain the importance that it deserves.
The traditional auditor was following a reactive approach during the audit process. Now we see
that proactive approaches have begun to replace the reactive solutions. Once the loss has
occurred, neither detection nor investigation could compensate the loss. In fact, these procedures
would also cost business a large sum of money. Due to this fact, the most important thing
companies have to do with regard to fraud is to prevent the crime from being committed. To
prevent the crime, two concepts move to the top of the corporate agenda: deterrence and
motivation. Rules, regulations, and legislation play deterrence role, while motivation is provided
with education and training. The landmark legislation Sarbanes-Oxley Law has significantly
contributed and consolidated the effectiveness of the code of ethics and moral standards in the
organizations. Countries enact and adopt new regulations as the need arises as a result of

4. corruptions, fraud, and bankruptcies due to unethical applications on the part of corporate
entities.
Applicable standards and core foundation of the profession:-
Standards of professional conduct
Integrity and Objectivity- Certified Fraud Examiners shall conduct themselves with integrity,
knowing that public trust is founded on integrity. CFEs shall not sacrifice integrity to serve the
client, their employer or the public interest.
Professional Competence- Certified Fraud Examiners shall be competent and shall not accept
assignments where competence is lacking. In some circumstances, it may be possible to meet the
requirement for professional competence by use of consultation or referral.
Due Professional Care - Certified Fraud Examiners shall exercise due professional care in the
performance of their services. Due professional care requires diligence, critical analysis and
professional skepticism in discharging professional responsibilities.
Understanding with Client or Employer - At the beginning of a fraud examination, Certified
Fraud Examiners shall reach an understanding with those retaining them (client or employer)
about the scope and limitations of the fraud examination and the responsibilities of all parties
involved.
Communication with Client or Employer - Certified Fraud Examiners shall communicate to
those who retained them (client or employer) significant findings made during the normal course
of the fraud examination.
Standards of Examination
Fraud Examinations- Fraud examinations shall be conducted in a legal, professional and
thorough manner. The Certified Fraud Examiner's objective shall be to obtain evidence and
information that is complete, reliable and relevant. Certified Fraud Examiners shall establish
predication and scope priorities at the outset of a fraud examination and continuously reevaluate
them as the examination proceeds. CFEs shall strive for efficiency in their examination. Certified
Fraud Examiners shall be alert to the possibility of conjecture, unsubstantiated opinion and bias
of witnesses and others. CFEs shall consider both exculpatory and inculpatory evidence.
Standards of Reporting