Kathie Cooper
Associate Professor, University of Wollongong, Australia.The Fusion of Criminology and
Financial Reporting:
The Evolution of the Forensic Accountant
The responsibility of the external auditor to detect, investigate and
report suspicions of fraud in a financial statement audit was the subject
of debate since the late 19th century. One hundred years later, audit
standards issued by the professional accounting bodies confirmed this
responsibility. This development saw the auditor’s required area of
expertise extended to incorporate the field of criminology. While the
audit standards do not say so specifically, the factors indicative of
financial misstatement due to fraud are drawn explicitly from the
concept of the fraud triangle. The triangle has been used in the practice
of criminology to identify personal and environmental characteristics
symptomatic of white collar crime, especially embezzlement, since the
1950s. These characteristics fall under three headings: opportunity,
motivation and rationalisation.
Opportunity relates to features of an entity or the environment in
which it operates such as weak internal controls or regulatory
weaknesses as well as the mind-set of the individual that allows them
to identify and act upon an opportunity. In other words, many of us
might perceive an opportunity but will not necessarily take advantage
of it. Motivation is more of a personal trait such as a perceived lack of
equity in the work place, a financial difficulty or simply a matter of ego
- because I can. Finally, rationalisation is the way in which a person
convinces themselves that what they are doing is not wrong. It could
be that embezzlement or theft is seen as a loan that an employee will
repay or they are entitled to take corporate assets because of inequitable
pay or conditions or because everyone is doing it. These characteristics
are not restricted to individual perpetrators. Earnings management is
often engaged in by management and directors for similar reasons.
In general, accountants are not well versed in the fraud triangle or
its application to accounting records and reports or internal controls.
As a consequence, a new discipline, forensic accounting, has evolved
but in an ad hoc fashion. There is a need for a concerted and unified
approach to forensic accounting education and training to ensure the
integrity and utility of this evolving discipline.