Forensic Accounting: Professional regulation of a multi-disciplinary field

By J. Van Akkren, S. Buckby, J. Tarr1

ABSTRACT

The regulatory environment in which accountants operate is reasonably complex. The field of forensic accounting, which is the focus of this article, elevates that complexity to a heightened level as practitioners in this field now regularly advise across a broad range of fraud, commercial disputes and analytics areas. Persons discharging these roles are drawn from the accounting and non-accounting professions and this multi-disciplinary composition and the implications that flow from this are at the heart of this study.

This article examines how the overlapping of diverse occupational jurisdictions influences the professionalisation process of forensic accounting practice in Australia and how self-interest and public interest considerations impact the pursuit of independent professional status. The article identifies the complexity of the forensic accounting role due to the overlapping of other occupational jurisdictions and the challenges this creates for professional accounting bodies in their attempts to regulate and govern forensic accounting practice.

I. INTRODUCTION

The accounting profession occupies a vital place within any economy and accounting is the concern of not only accountants, but also the government and the public. 2 Not surprisingly, therefore, regulation and oversight over the profession and its various specialisations such as taxation, auditing and financial services is extensive. Maintenance of admission and educational requirements as well as disciplinary responsibility is exercised by the accounting profession’s three main member organisations – the Institute of Public Accountants, CPA Australia and Chartered Accountants Australia and New Zealand (CAANZ)3. These organisations collectively represent the vast majority of Australia’s accountants (but notably not all) and provide industry-wide benchmarking for admission,

1 School of Business, Queensland University of Technology2 See for example Flanigan, M.A., Tondkar, R.H. and Coffman, E.N. (1994), “The Comparative Development of The Accounting Profession in England, The United States and Australia: A Sociological Interpretation”, Advances in International Accounting, Vol. 6, p. 295-316; Willmott, H. (1986), “Organising the profession: A theoretical and historical examination of the development of the major accountancy bodies in the UK”, Accounting, Organisations and Society, Vol. 11, No.6, pp.555-580.

3Formally the Institute of Chartered Accountants Australia (ICAA).

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standards and conduct. Further the pivotal roles discharged by accountants in specialist areas, for example, has generated a significant volume of direct statutory intervention in areas like taxation, auditing, financial services and superannuation.

Legislative incursions are often the direct consequence of perceived market failures and/or high profile corporate scandals such as Enron, WorldCom Inc. and Arthur Andersen. These serve to propel corporate financial reporting into the global spot light and produce significant regulatory responses, such as the United States’ 2002 Sarbannes -Oxley Act. Parallel experiences in Australia in relation to companies such as HIH, One.Tel and Harris Scarf played their part in the subsequent passage of the Australia’s Corporate Law Economic Reform Program Act 2004 (Cth).

Accordingly the regulatory environment in which accountants operate is reasonably complex. The field of forensic accounting, which is the focus of this article, elevates that complexity to a heightened level as practitioners in this field now regularly advise across a broad range of fraud, commercial disputes and analytics areas. Persons discharging these roles are drawn from the accounting and non-accounting professions and this multi-disciplinary composition and the implications that flow from this are at the heart of this study. At present active debate exists – although no consensus has emerged - around whether a more formal unified regulation of forensic accounting or forensic services practice is needed4. The influx of non-accounting based specialists into forensic services firms5, their associated diversity of skills and competing disciplinary requirements make for a complicated regulatory mixture.

A central focus of this article, therefore, is to investigate how the merging of diverse occupational jurisdictions impacts on the professionalisation process of forensic accounting practice in Australia paying particular attention to current professional accounting body self-regulation and governance . Key themes include how merging diverse disciplines complicates the accounting profession’s ability to regulate and govern forensic accounting practitioners; and whether self-interested or altruistic motives are behind the pursuit of professional status.

Attention to these matters is increasingly important given the growth in forensic accounting and forensic accounting services. A recent report6 suggests that in the United States alone revenue from forensic accounting services provided by accounting firms has grown on average by 8.7% per year in the five years to 2013 with continued growth projected to rise at 6.7% annually over the next five years. This growth rate outstrips that for other accounting services twice over.

As former High Court of Australia Justice, Michael Kirby7 commented :

4 See for example Williams, J.W. (2005), “Governability matters: The private policing of economic crime and the challenge of democratic governance”, Policing and Society, Vol.15, No.2, pp.187 – 211; Williams, J.W. (2006), “Private legal orders: Professional markets and the commodification of financial governance”, Social and Legal Studies, Vol.15, No.2, pp.209-235;Huber, W.D. (2012), “Is forensic accounting in the United States becoming a profession”?, Journal of Forensic and Investigative Accounting, Vol. 4, No. 1, pp. 255-84; Seda, M., Kramer, B. and Peterson, K. (2008), "The emergence of forensic accounting programs in higher education." Management Quarterly, Vol. 9, No. 3, pp. 15-24.

5 The term ‘Forensic Services’ is used in this article to describe large, mid-tier and boutique organisations that offer various forensic accounting, forensic investigation, computer forensic and expert witness services.6 IBISWorld, 2013.7 Kirby, M. (Hon., AC, CMG) (2011) Forensic Accounting – New Rules and Opportunities, Business Valuation and Forensic Accounting Special Interest Groups Conference, Sydney, at http://www.michaelkirby.com.au/images/stories/speeches/2000s/2011/2525-FORENSIC-ACCOUNTING-CONF-MARCH-2011.pdf ( Accessed on January 30, 2013), at p.4.

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To adapt the prognostications of academics who observe, and participate in, the development of forensic accounting, the field is growing exponentially.

Matching the expansion in forensic accounting practice is a growing body of literature around the complexity of the forensic accounting role and the environment in which it operates. 8 Little attention has however been paid in accounting literature to the professional status, governance and regulation of forensic accounting practice. This is particularly significant given the industry’s emergence as a multi-disciplinary field encompassing accounting, law, computing and policing/investigation sciences and with each imputing distinct arrays of skills, knowledge, regulations and ethical codes. How combining multi-disciplinary codes and practices will impact the professionalization process this young field is currently navigating is not yet clear. Whether this unplanned overlapping of occupational groups will enable or inhibit regulation and governance of practice for the accounting profession in particular equally remains an open question.

Australia’s accounting bodies’ have a complex interaction with the emergence and growth of forensic accounting. Clearly there is an obvious incentive for professional bodies to promote the interests of their members in the forensic accounting field and may be willing to deploy their established status to support their members over non-members in the jurisdiction of forensic accounting. Conversely there would be very little (if any) reason for professional bodies to push the emergence of ‘forensic accounting’ as an autonomous field, as opposed to it becoming or remaining a branch of accounting. Accordingly the distinction between ‘forensic accounting’ as a ‘specialisation’ or ‘branch’ of accounting/accountancy or an autonomous profession/industry is important whenever considering the approach taken, or resolution sought, in relation to professionalization issues by accounting bodies and other stakeholders in this article. “Bad” forensic accounting has the potential to impact the reputation of the accountancy profession as a whole – this dictates that professional accountancy bodies have to pay close attention to the appropriate matrix of knowledge, skills, regulation and industry oversight to protect the accountancy profession and their members’ interests as a whole. Separately there will be members seeking to secure advantage over non-members in the forensic accounting space. Balancing these dynamics is challenging.

8 See Williams, J.W. (2005), “Governability matters: The private policing of economic crime and the challenge of democratic governance”, Policing and Society, Vol.15, No.2, pp.187 – 211; Williams, J.W. (2006), “Private legal orders: Professional markets and the commodification of financial governance”, Social and Legal Studies, Vol.15, No.2, pp.209-235; Smith, G.S. and Crumbley, L. (2009), “Defining a forensic audit”, Journal of Digital Forensics, Security and Law, Vol. 4 No. 1, pp. 61-79; DiGabriele, J.A. (2010), “An Empirical View of the Transparent Objectivity of Forensic Accounting Expert Witnesses”. Available at: http://ssrn.com/abstract=1534705 (accessed on 20 March 2011); Hopwood, W.S., Leiner, J. and Young, G.R. (2008), Forensic Accounting. Boston : McGraw-Hill; Van Akkeren, J., Buckby, S. and MacKenzie, K. (2013), “The metamorphosis of the traditional accountant: An insight into forensic accounting services in Australia”, Pacific Accounting Review, Vol. 25, No. 2, pp. 188 – 216.

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II. FORENSIC SERVICES: EMERGENT SKILLS, GROWTH AND DEMAND

Forensic accountants in historical accounting contexts were originally employed to apply accounting expertise to the investigation and analysis of financial documents and transactions9 with the expectation that they would uncover and verify the facts in a case and quantify disputed financial issues. However, over time, particularly during the 1990s and in the wake of regulatory reforms surround the Global Financial Crisis (GFC), Australian forensic services firms expanded and diversified into a number of different areas going well beyond just the examination of financial documents and involvement in financial litigation disputes. Globalisation and technology have further expanded industry challenges and opportunities resulting in a far more diverse range of roles and skill requirements.

Forensic accounting literature defines forensic accounting in a number of different ways, demonstrating in itself the complex nature of this practice. Providing an industry-based description, the APESB10 identify forensic accounting as encompassing expert and lay witness services, consulting expert services, investigation and business valuation. APES 215 provides another view, identifying a forensic accountant as someone who undertakes professional activities requiring accountancy or related skills, including auditing, taxation, management consulting, and financial management. Smith and Crumbley11 reference potential areas of forensic accounting expertise including those of criminology, computer forensic investigations, economic loss calculations, litigation services and support, expert witness, business valuation and auditing investigative services. These divergent but overlapping definitions reflect the perspective of different stakeholders; for example is forensic accounting the emergence of a new specialisation or branch of accountancy or alternatively an autonomous profession/industry?

Adding to this, a recent survey of Australia’s forensic accounting industry 12 identified the top eight most commonly provided services by Australia’s forensic accounting firms as fraud investigation, expert witness services, commercial litigation and dispute services, valuation and calculation of damages, technology services, risk management, corporate misconduct and business analytics. Twinned with this, the survey also identified a broad range of knowledge-based skills and personal attributes frequently drawn upon in service. Knowledge-based skills include strong communication skills (oral and written), critical thinking, and interpersonal and technical accounting skills. Personal attributes identified in this respect included interpersonal skills, being analytical, inquisitive, intuitive, confident and resilient. It is noteworthy that many of these skills are also required in other accounting specialisations. However, the major distinction between forensic accountants and other accounting specialisations are expert-witness services, the investigation and preparation of evidence-based reports and interviewing techniques.

The expansion of forensic services is due in significant part to the formation of independent forensic accounting or forensic services units in Big 4 accounting firms such as Price Waterhouse Coopers,

9 Williams, J.W. (2006), “Private legal orders: Professional markets and the commodification of financial governance”, Social and Legal Studies, Vol.15, No.2, pp.209-23510 The Accounting Professional & Ethical Standards Board (APESB) is an independent, national body that sets the code of ethics and professional standards by which members of Australia’s three professional accounting bodies must abide. (APESB, 2008)11 Smith, G.S. and Crumbley, L. (2009), “Defining a forensic audit”, Journal of Digital Forensics, Security and Law, Vol. 4 No. 1, pp. 61-79.

12 Van Akkeren, J., Buckby, S. and MacKenzie, K. (2013), “The metamorphosis of the traditional accountant: An insight into forensic accounting services in Australia”, Pacific Accounting Review, Vol. 25, No. 2, pp. 188 – 216.

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KPMG, Deloitte and Ernst and Young. As Cooper & Robson13state, these are important sites where accounting practices emerge, become standardized and regulated, where accounting rules and standards are translated into practice, and where professional identities are mediated, formed and transformed. Through the recruitment of other occupational disciplines, these organisations catalysed not only growth but the field’s expansion beyond financial analysis and reporting expertise to include investigative, legal, computing and business analytics14. This included lawyers and retired police officers/detectives to provide the specialised legal knowledge accountants may not possess, particularly in relation to investigative techniques, rules of evidence and various court jurisdictions and rules. Information technology analysts/computer experts similarly brought the technological expertise to capture digital data in a form required by the courts, follow and document digital trails, uncover digital evidence of fraud and other misconduct, undertake computer-based business intelligence and analytics and provide general IT support for forensic accounting investigations.

An increase in the number of mid-tier and ‘boutique’ forensic services firms over the past two decades has further consolidated the range of forensic investigative, analytical and advisory services on offer and an upswing in public and government demand for assistance with the investigation and prevention of fraud and corporate misconduct has sustained this growth.

III. THE IMPACT OF COMPETING ‘PROFESSIONAL JURISDICTIONS’

Sitting outside the discipline - or jurisdiction - of professional accounting bodies are the three occupations that work closely with forensic accountants: legal, investigative and computing personnel. This multi-disciplinary mix comprising forensic services creates particular challenges in regard to standard setting, governance and regulation. As the Chartered Accountants Australia and New Zealand (CAANZ) web site posits: “A forensic accountant is part detective, part lawyer, part accountant” 15and at any given time, a practicing forensic accountant may be required to demonstrate expertise in one or more of those areas. Although expertise in non-accounting aspects of forensic services would be expected to sit more comfortably with law professionals, investigative specialists or computer experts, this is not always the case, and, consequently, knowledge of these various occupations, as well as compliance with relevant rules and laws forms part of the challenge for the forensic services industry, associated professional bodies, and the public and is examined in more depth in the following sections.

The complexities the CAANZ’s ‘hybridised’ practitioner is being called upon to address has, not surprisingly, raised several issues in the legal context. Although the capacity to collaborate with legal experts across all stages of practice remains, far greater emphasis upon literacy around legal concepts and sensitivity to their use in practice is now expected of accountants and other forensic services professionals16. Handling statutes, regulations, rules, codes and guidelines competently constitute base line knowledge forensic accounting practitioners require. Investigative processes and evidence collection undertaken must, for example, accord with court admissibility standards. 13 Cooper, D.J. and Robson, K. (2005) Accounting, professions and regulation: Locating the sites of professionalism, Accounting, Organizations and Society, Vol. 31, No. 4-5, pp. 415-444; at 414.

14 Williams, J.W. (2006), “Private legal orders: Professional markets and the commodification of financial governance”, Social and Legal Studies, Vol.15, No.2, pp.209-23515 ICAA, 201216 See Kirby, M. (Hon., AC, CMG) (2011) Forensic Accounting – New Rules and Opportunities, Business Valuation and Forensic Accounting Special Interest Groups Conference, Sydney, at http://www.michaelkirby.com.au/images/stories/speeches/2000s/2011/2525-FORENSIC-ACCOUNTING-CONF-MARCH-2011.pdf ( Accessed on January 30, 2013).

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Working with court rules and procedures pose additional challenges as procedurals requirements may vary across States, Territories and Federal courts. Similarly introduction of pre-trial expert witness conferences for narrowing issues of agreement and disagreement and/or movement towards use in hearings of concurrent evidence panels (commonly, if not more colourfully, known as ‘hot tubbing’) in lieu of individual testimony reflect just two departures from traditional testimony practices.

Substantively, increased recognition of judicial requirements around expert witness testimony standards including those around unbiased reporting and fiduciary duties to the Court or the capacity to differentiate specialist discipline facts from which expert opinions are formed from those held more generically attract litigation and regulatory comment.17 Difficulties inherent in experts meeting legal requirements to show exactly what constitutes the ‘field of specialised knowledge’ in this multi-disciplinary and young field have also occasioned debate. For a number of commentators, recognition that an ‘expert’ put forward in forensic accounting may, under Court Rules, do so on grounds of ‘experience’ alone - as contrasted with formal training qualification or professional body certification - has caused concern both in relation to quality and tarnishing of industry reputation 18.

Finally, emphasis on professional reports has similarly raised challenges. As Kirby19 observes, adhering to evidence requirements and providing legally acceptable reports (verbal and written) are skills usually outside traditional accounting specialisations. Introduction of expert reports and forensic accounting evidence into alternative dispute resolution forums where procedures may not involve legal experts familiar with the extra duties of care that such reports may involve, further tests forensic accountants’ competency requirements. Succinctly put:

“In all [areas], forensic accounting is critical. …Equally important is the provision of reports that, today, are used in negotiations conducted under the aegis of skilled mediators or which are referred, by consent, to experienced arbitrators whom the parties accept as decision-maker, in preference to the uncertainties of the judicial roster. [Alternative dispute resolution] has not reduced the role and importance of skilled forensic accountants. It has simply shifted the priorities (substantially to written reports) and the venues (out of courtrooms to private negotiation or arbitration)”20.

Forensic services firms may also require specialised skills when investigating various disputes and fraudulent activities. In Australia, there are a number of options for obtaining an investigative licence from private and public providers such as the Australian Security Academy, the Australian School of Security and Investigations, the Australian Defence Force and State and Federal Police. For

17 See, for example, Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; Dasreef Pty Ltd v Hawchar [2011] HCA 21; NSW Law Reform Commission Report 109 – Expert Witnesses (2005), Accessed on April 9, 2013 at www.lawlink.nsw.gov.au/lawlink/lrc/ll_lrc.nsf/vwFiles/.../r109.pdf

18 Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305, at [32].

19 Kirby, M. (Hon., AC, CMG) (2011) Forensic Accounting – New Rules and Opportunities, Business Valuation and Forensic Accounting Special Interest Groups Conference, Sydney, at http://www.michaelkirby.com.au/images/stories/speeches/2000s/2011/2525-FORENSIC-ACCOUNTING-CONF-MARCH-2011.pdf ( Accessed on January 30, 2013), at p.4.

20 Ibid., at p10.

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government department investigations (e.g., Australian Tax Office, CentreLink), holding a licence is a mandated requirement and investigators (including forensic accountants) must complete a Certificate IV in Government – Fraud Control, and/or the Certificate IV in Government – Investigations to undertake such work. In the context of regulation and professionalisation of forensic accounting, this raises a number of concerns. For example, if each certification body offering investigative licences has variations in examination/training requirements, in the nature and content of the certification, and/or in its codes of conduct, can consistency be assured across forensic accounting investigations?

Additionally in the forensic accounting sphere where investigation has moved dramatically beyond physical interviews and tracking, globalisation and technology have mandated not only a new arsenal of investigatory techniques and knowledge but also one that require significant ongoing training and up skilling. As discussed below, the explosion of online data bases and information tracing capacities make design of effective protocols to ensure training keeps pace with emergent technology uniquely challenging.

Twinned with investigation skills, computer-based business intelligence and analytics have been highlighted as critical forensic accounting skills for the future21. Thus Australian forensic accountants may be required to sift through sometimes enormous amounts of digital data to create dashboards, graphs, charts and complex written business intelligence and business analytics reports based on financial data, all of which require a level of computer expertise and advanced written communication skills.

Concerns about computer network security and risk management, intellectual property theft, and fraudulent or improper accounting practices have brought computer expertise into the forensic services industry. Although specialised computer forensic experts in firms are not new, forensic accountants have not necessarily needed to possess some modicum of computer expertise themselves. Nevertheless it is argued that an understanding of how funds from corporate wrongdoings can be transferred internationally and how sophisticated accounting systems can be set up to disguise internal misconduct are core skills.22 Access and control over systems by forensic accountants enables them to isolate electronic files to prevent deletion or contamination by wrongdoers in critical time windows, to not contaminate digital evidence therein for future use purposes, and to create effective admissible reports.

Again, a wide range of computer forensic certifications and degree courses are offered throughout Australia. Examples include the Computer Hacking Forensic Investigator Certification offered by private provider Lyonswood Investigations and Forensic Group; the Certified Computer Examiner (CCE) designation offered by Australian Forensic Services; and a number of University degrees (e.g., Bachelors of Forensic Science, Technology Innovation, Criminology and Forensic Science).

21 Van Akkeren, J., Buckby, S. and MacKenzie, K. (2013), “The metamorphosis of the traditional accountant: An insight into forensic accounting services in Australia”, Pacific Accounting Review, Vol. 25, No. 2, pp. 188 – 216. PwC Global Economic Crime Survey (2014), Accessed on 8 May, 2014 at http://www.pwc.com/gx/en/economic-crime-survey/

22 McCallum, J. (2010), “Forensic Investigation”, National Accountant (February/March 2010).

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In summary, the confluence of accounting, law, investigations and computing forensic services is enabling firms to offer specialist services as well as discharge broad ranging requirements around forensic accounting investigations, business litigation, business intelligence and risk management. These skills are, of course, not necessarily unique to those required to discharge other accounting specialisations – accordingly for many accounting professionals these attributes are already well developed. However, how professional accounting bodies alongside their equivalents in other professions demonstrate to society that their members are capable of performing this complex role effectively and with due accord to the protection of public interest is more elusive. The following section presents work by Abbott (1988) and Larson (1977), plus more recent accounting research informed by their work, demonstrating how jurisdictional disputes, environmental contexts and conflict amongst powerful third parties can define the emergence of a profession.

IV. FINDINGS AND DISCUSSION

The analysis in this article is informed by interviews with 32 forensic accounting industry stakeholders (forensic accountants, forensic investigators, computer forensic specialists, firm partners and directors). It is supplemented by analysis of government, legal, media and professional accounting body documentation, statutes and policy. Secondary data sources include documents from professional accounting bodies23 the New South Wales Law Reform Commission (NSWLRC)24 report on forensic accounting expert witnesses, the green paper from the CAANZ/FASIG 25 in response to the NSWLRC, other relevant law-related and miscellaneous documents as well as primary sources such as case precedent and legislation.

Findings from interviews and secondary data sources are discussed below in relation to four areas:

Legal context Investigation Computer expertise Self Interest, Public Interest and the Common Good

Legal Context

Forensic accounting activities by definition take place against the backdrop of potential legal proceedings. Knowing what information to look for, how to find and extract it, how to conduct an investigation so that the chain of evidence is supportable in a court of law, how to produce reports and deliver testimony that will withstand aggressive scrutiny in court and how to work with other experts constructively throughout these processes are baseline challenges.

Mounting case law and regulatory reform agendas echo concerns by other stakeholders regarding complexities and potential pitfalls. Surveys conducted through the Australian Institute of Judicial Administration26 reveal the extent of judicial unease with accounting data. In the context of all expert witness areas, respondents ranked accounting as the most difficult discipline to evaluate 23 APES 110, 215 and 225.24 NSW Law Reform Commission Report 109 – Expert Witnesses (2005), Accessed on April 9, 2013 at www.lawlink.nsw.gov.au/lawlink/lrc/ll_lrc.nsf/vwFiles/.../r109.pdf

25 Forensic Accounting Special Interest Group of the Institute of Chartered Accountants in Australia (FASIG) (2005), “Green Paper on Accreditation of Forensic Accountants, The Institute of Chartered Accountants in Australia”, in National Forensic Accounting Conference proceedings 2005, pp.1 – 8.

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adequately (19.4%); and nominated ‘complex and conflicting accounting evidence’27 as the expert evidence field they would be most likely to recommend withholding from jurors, particularly in relation to ‘corporate and commercial transactions, corporate structures and planning’28.

Broader regulatory concern has also been evidenced by law reform inquiries in Australia (New South Wales Law Reform Commission, 2005) and the United Kingdom (The Woolf Report, 1995). In 2005, after receiving nearly 100 submissions from professional bodies including the CAANZ and Professions Australia29 and conducting a wide range of interviews with the judiciary, the legal fraternity and the public, the New South Wales Law Reform Commission issued its 230 page report on Expert Witnesses.

In the forensic accounting context, the report highlighted ethical issues arising around inadequate understanding of the fiduciary duties experts had to the court as opposed to their clients. This included the impact participation in earlier data gathering and case advising capacities roles could potentially carry on colouring an expert’s opinion, the ramifications client allegiance including payment arrangements may have (such as no win, no fee agreements), and lack of recognition or adequate understanding of fiduciary relationships Court reports and testimony necessitate.

Considerable stakeholder discussion focussed on the extent to which formal uniform certification requirements should be required of experts and how best professional expertise could be evaluated. Unsurprisingly, for a multi-disciplined field where formal membership of any particular regulatory body, including the CAANZ and Certified Practicing Accountants (CPA) Australia, is not at this time required, this is a potentially vexing issue. The responsibility for providing the court with sufficient criteria to allow the court to assess the admission and value of expert testimony rests on the expert. The most referenced consideration of this standard appears in Makita (Australia) Pty Ltd v Sprowles30, as per Heydon J :

In short, if evidence tendered as expert opinion evidence is to be admissible, it must be agreed or demonstrated that there is a field of "specialised knowledge"; there must be an identified aspect of that field in which the witness demonstrates that by reason of specified training, study or experience, the witness has become an expert; the opinion proffered must be "wholly or substantially based on the witness's expert knowledge".(underlining added)

These criteria to the extent they appear in s. 79 of the Evidence Act 1995 (Cth) have, in the 2011 High Court case of Dasreef Pty Ltd v Hawchar31, been affirmed as the touchstone for admissibility of expert evidence although Makita, itself, has now been overruled by the Dascreef case.32

For forensic accountants in the context of an emerging – and merging – field, ambiguity may exist around how to demonstrate the first and second criteria in the absence of more traditional formal accreditation, such as those held by members of established and self- regulated or co-regulated professional bodies such as CAANZ, CPA Australia, State Law Societies or State Medical Associations.

26 Freckelton, I., Reddy, P. and Selby H, 1999, “Australian Judicial Perspectives on Expert Evidence: An Empirical Study”, Australian Institute of Judicial Administration Inc., Melbourne.27 Ibid., at p.151.28 Ibid., at p. 65.29Professions Australia is a national organisation of professional associations, being the business name of the Australian Council of Professions. Its members include CPA Australia and the Institute of Chartered Accountants of Australia (ICAA).30 [2001] NSWCA 305, at [85].31 [2011] HCA 21, at [30] –[37].32 Ibid, at [37].

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Interestingly, while the NSWLRC report eventually recommended retention of the ‘or experience’ criterion - at the expense of requiring formal training or certification - it unusually singled out submissions and issues around the field of forensic accounting.33 Although this recommendation reflected the Commission’s eventual determination of the need for a uniform rule across all disciplines, it acknowledged with strong approval the value of the CAANZ’s Forensic Accounting Special Interest Group (FASIG), its forensic accounting knowledge and skills training programs, its continuing education, and, in conjunction with CPA Australia and the APESB, the formulation of a Statement of Forensic Accounting Standards and (non-mandatory) practical guidelines.34 The CAANZ’s capacity to handle disciplinary proceedings against members breaching professional standards was also noted, as was its lack of uniform application to experts who were not CAANZ/CPA Australia members.35

FASIG’s36 submission supported non-accreditation but for somewhat different reasons. Although in favour of industry membership evidencing recognition of expertise, it contended:

How could an accreditation scheme be designed that could accredit at the same time – and in such a way that it would satisfy the needs of the Courts - the technical skills of, for example, a suburban accountant offering tax and general financial advice to small businesses, or an accountant offering financial planning services to doctors, or an accountant specializing in the international taxation of insurance companies, or an accountant specializing in the valuation of shares and businesses, or an accountant specializing in the audit of banks and financial institutions.

It is interesting to note that most of the examples provided in the above quote are regulated specialisations with examination, certification and membership to a specialised group.

FASIG further argued that the only way to evaluate the suitability of a forensic accountant as an expert witness was to assess the quality of their training, experience and reputation in light of the dispute requiring their services.

The Commission’s final position while unambiguous stressed that a properly run scheme of accreditation, especially those involving forensic accounting accreditation “have considerable potential to assist the system of justice by educating potential expert witnesses in their responsibilities, and helping them understand and work effectively within the justice system.”37

A second issue canvassed by the New South Wales Law Reform Commission is that of the broader conflict of interest dynamic that may arise as practitioners ‘change hats’ from initial commercial or business advising roles – such as gathering evidence and advising clients on best strategic approaches – to providing expert evidence and/or reports in judicial proceedings. The requirement, in short, distinguishes between work undertaken as an advisor who provides expert assistance to clients as opposed to an independent expert who provides expert evidence and owes a fiduciary duty to the courts. 33 s. 9.50, p. 153.34 APES 215.35APES215 (Forensic Accounting Services) and APES225 (Business Valuation), along with APES110 (Code of Ethics for Professional Accountants) provide mandatory professional and ethical requirements for ICAA, CPA Australia and IPA members in relation to the conduct and performance of professional services. Both APES 215 and 225 were released after the publication of the NSWLRC report on Expert Witnesses.36 FASIG Green Paper, 2005, p.6. FASIG (a special interest group of the ICAA) has been replaced by the National Forensic Accounting Committee, comprising of five (5) forensic accounting specialists who advise members on various matters related to the forensic services industry.

37 NSWLRC, Page 157, S9.59).

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Even for the judiciary, drawing a line in complex litigation contexts between an admissible opinion and that which crosses this line is problematic not infrequently resulting in additional litigation and judicial review. As seen in the high profile case of Australian Securities and Investments Commission(ASIC) v Rich38 expert evidence may be found inadmissible in circumstances where the expert has failed to appreciate the need to fully articulate the factual basis for his or her opinions, particularly in circumstances where that expert had served in an earlier advisory capacity prior to being engaged to deliver expert testimony.

As ASIC discovered to its detriment, use of a forensic accountant as an advisor in early stages of investigations into One.Tel and then engaging him as a court expert resulted in a lengthy judicial discussion as to whether it was more likely than not that the expert did not exclude information he acquired during the investigative states when forming the opinions set out in his expert’s report. The Court did not, however, simply determine that the expert’s testimony involved intentional reference to this information. Rather it focussed on assessing whether the risk this may have happened was sufficiently substantial, even if done most likely unconsciously, that the excluded materials could have sufficiently influenced the expert’s thoughts resulting in his inability to fully articulate the factual basis on which he formed his opinions and his reasoning process. This in turn meant that the report produced potentially lacked the capability to satisfy statutory requirements of the Evidence Act 1995 (NSW).

This is not to say these roles cannot be (and indeed frequently are) effectively combined – a desirable outcome from a cost perspective for clients who otherwise would face overlapping preparation costs for preparation of the same file. This is not unique to forensic accounting experts although the level of client advisory work in initial stages is probably substantially heightened against that of other accounting specialisations and non-multi-disciplinary fields. Navigating this line for those unfamiliar – or arguably less ethically bound – through lack of professional membership affiliation requirements and/or adequate training remains a clear thread in judicial discussion, and in the NSWLRC Report. For this reason, Court Rules were amended in 2011 to reflect a fully ‘informed consent’ approach to ensuring appropriate awareness of which ‘hat’ must be donned. As part of formal submissions, all experts are now required to swear not just that they have been informed by legal counsel of their duty to the Court but also, to independently have apprised themselves of all its surrounding implications. Those who are subsequently determined to have failed to meet this standard, therefore face punitive actions including potential contempt of court and fraud.

Investigation

A number of forensic accountants are also forensic investigators and/or computer forensic specialists39 and in some instances, expertise demonstrated through certification/licensure is required within those occupational jurisdictions. Beginning with forensic investigations, a number of training options were identified for those seeking formal forensic investigative licencing and/or accreditation as outlined earlier in the article. Forensic accountants interviewed pointed to their need for greater investigative knowledge and skills with the greatest concern relating to evidence collection, interviewing and the protection of people’s rights.

Certification requirements for individuals conducting certain investigations fall under the Commonwealth Fraud Control Guidelines, which established the policy framework and articulates

38 [2009] NSWSC 122939 Van Akkeren, J., Buckby, S. and MacKenzie, K. (2013), “The metamorphosis of the traditional accountant: An insight into forensic accounting services in Australia”, Pacific Accounting Review, Vol. 25, No. 2, pp. 188 – 216.

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the Government's expectations for effective fraud control for all agencies subject to the Financial Management and Accountability (FMA) Act 1997, meeting requirements of the Legislative Instruments Act 2003. Falling under the Tax Administration Act or Income Tax Act, the Australian Tax Practitioners Board has their own Certificate IV in Civil Investigations (not recognised outside of the ATO).

Computer Expertise

In computer forensics there are three main areas of expertise: e-discovery, computer investigative skills and general IT skills including business intelligence and analytics40. The vast majority of computer forensic experts do not hold an accounting qualification, although there are a small number who had both accounting and computing qualifications and/or certifications. Views of industry participants varied on the type and level of computer skills forensic accountants should possess with some arguing that it should be left to the IT people, and others suggesting on-the-job training in certain analysis software was sufficient.

Concerns about the quality of digital investigations were raised by some participants suggesting that during investigations, evidence was sometimes lost or rendered inadmissible in court. This led to the view that it may be desirable for professional accounting bodies to include either: some level of digital investigative skills in a forensic accounting education/training; or, computer forensic training for IT experts. The issues raised generally relate to concerns for courts and clients (the public interest), as well as concerns over the reputation of the forensic services profession (self-interest).

Self-interest, public interest and the common good

There were two major themes forensic accountants identified as impacting on the reputation of the forensic services industry and concerns about protecting the public interest: first, unaffiliated forensic accountants; and, second, complexity of practice related to the merging of a number of occupational jurisdictions.

Providing some background, the accounting profession’s three main member organisations - the Institute of Public Accountants (IPA), CPA Australia (CPA) and Chartered Accountants Australia and New Zealand (CAANZ)41 – retain oversight and disciplinary responsibility for members’ professional indemnity certificates, conduct and discipline, education and skills qualifications, and continuing professional education. Membership comprises broad industry recognisable standards of admission and is the primary gateway for ongoing professional education requirements. These organisations, which collectively represent the vast majority of Australia’s accountants, are active advocates and advisors regarding regulation of the profession and liaise closely with independent government bodies. However, providing arguments on the need for greater regulation of forensic accounting was the issue identified by participants that “anyone can call themselves a forensic accountant”. A number of industry participants suggested that this issue alone provided a compelling reason for developing a specialisation, findings that align with Larson42, that setting standards of practice, educational admission and entry/exit requirements are a key attribute of a profession. Similarly it is

40 Van Akkeren, J., Buckby, S. and MacKenzie, K. (2013), “The metamorphosis of the traditional accountant: An insight into forensic accounting services in Australia”, Pacific Accounting Review, Vol. 25, No. 2, pp. 188 – 216.

41 Formally the Institute of Chartered Accountants Australia (ICAA)42 Larson, M.S. (1977), The Rise of Professionalism: A sociological Analysis. Berkeley: University of California Press.

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argued that greater regulation of the forensic services industry would improve legitimacy through the raising of standards and through the exclusion of those not properly qualified to practice43.

However, there were mixed views on this issue with some industry participants claiming that holding professional accounting body membership provided sufficient regulation over forensic accounting practice, whilst many others expressed a view that the absence of a specialised body of forensic accounting knowledge and lack of regulation created problems for the forensic services industry and the public, particularly in relation to unaffiliated members. Of most concern were issues relating to malpractice (e.g. investigative techniques and gathering of admissible evidence); credibility (the expert witness role and ease of entry into the forensic accounting profession), and the difficulty in developing suitable content for a forensic accounting designation that encompasses the range of skills that fall outside the accounting role.

The CAANZ and CPA Australia forensic accounting and business valuation special interest groups debated the topic of specialist designations for some years, and many of the arguments for and against can be found in the FASIG Green Paper (2005). In this study, it was found that the mix of ex-detectives and police officers performing an investigative role, as well as lawyers and computer forensic specialists was unique to the forensic services industry and provided much of the expertise required by accountants in the industry. In comparison, other accounting specialisations are regulated by directed statutory legislation; for example, taxation, auditing, financial services and self-managed superannuation fund auditors.

Having unaffiliated members creates the first challenge for standard setting in terms of codes of conduct and professional legitimacy, with some forensic accountants already governed in terms of standards and accountability through their professional accounting body membership, and others not. Very real self-interested concerns from industry participants arise in relation to persons marketing themselves as forensic accountants who may not have formal accounting qualifications or an adequate level of forensic accounting knowledge and skills. This raises a concern in relation to reputational damage to forensic accounting generally.Whether affiliated with a professional accounting body or not, many Australian forensic accounting practitioners had sought additional accreditation from international providers such as [inter alia]the US Association of Certified Fraud Examiners (ACFE), the Association of Certified Forensic Investigators (ACFI), and the Institute of Certified Forensic Accountants designation CPFAcct – all industry-based organisations. Professional accounting bodies in Canada, the US and UK also offer various forensic and investigative designations. For example, the Canadian Institute of Chartered Accountants (CICA) offers an Investigative and Forensic Accounting designation (CA.IFA); the US-based American Institute of CPAs (AICPA) offer the Certified in Financial Forensics (CFF) and Accredited in Business Valuation (ABV) designations; and, in the UK the ICAEW offer the Forensic Accountant Accreditation (FAA), and the Accredited Accountant Expert Witnesses (AAEW) in partnership with the TAE44.

International certifications in forensic accounting and business valuation offered by professional accounting bodies require formal accounting qualifications and/or experience in the field and those applying must pass examinations and undertake continuing education programs. However, those offered internationally by private providers do not have stringent entry-level requirements and therefore, are accessible to any person wanting to become a forensic accountant and/or fraud

43 Williams, J.W. (2006), “Private legal orders: Professional markets and the commodification of financial governance”, Social and Legal Studies, Vol.15, No.2, pp.209-235.

44The Academy of Experts (TAE) and ICAEW formed a partnership after the expert witness element was removed from the FAA designation.

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investigator regardless of their background. Moreover having multiple and overlapping professional identities results in variations in professional status, certification and codes of conduct, which make it difficult to develop universally applicable professional standards or “best practices” for the industry, and more importantly, for the public.

V. CONCLUSION

It is clear that the mix of diverse occupational jurisdictions within the forensic services industry creates problems and challenges for professional accounting bodies in their attempts to regulate forensic accounting practice. The complexity surrounding forensic accounting coupled with the mix of occupational jurisdictions creates issues professional accounting bodies find very difficult to overcome, for example, as noted in the FASIC Green Paper response to the New South Wales Law Reform Commission and as seen more broadly around subsequent difficulties in producing formal certification programs in relation to developing forensic accounting certification.

This article highlights problems associated with the law-related and investigative contexts of forensic accounting practice, and how legal requirements and government expectations place pressure on professional accounting bodies to regulate the quality of forensic accounting services. Issues relating to breaches in following rules of evidence, interviewing techniques, the quality of expert witnesses and problems associated with different legal jurisdictions between states and territories emerged as areas of the most concern, and ones where greater levels of regulation and governance were argued as being of most benefit should they be developed. These problems necessarily twin with the challenges that computer experts and information technologists necessarily face in the tracing, capture, analysis and delivery of data and in working effectively with the complexities around the accounting frameworks. These issues highlight the polycentric nature merging of occupational jurisdictions within forensic accounting practice create and demonstrate why professional accounting bodies are under increasing pressure to regulate and govern their members.

A preponderance of industry participants acknowledge the need for a formalised body of knowledge and certification. This demand is based upon ‘self-interest’ and upon ‘altruism’. Which measure was most important depended upon the respondent but it should be noted that these elements are not necessarily incompatible. A strong desire to raise standards to protect the public does have the flow on effect, if consummated, of enhancing the status and economic well-being of the adherents. The pursuit of a viable forensic accounting designation may continue to be considered particularly in relation to concerns raised by many participants on forensic accounting “cowboys” whom they see as a threat to their professional reputation. However, the ability to develop a universally applicable set of credentials, knowledge-base and skills for such a complex role presents a challenge for Australian professional accounting bodies, the courts, and legislators.

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