Diffusion and Implementation of Forensic Accounting in Countries of Business Opacity

Introduction

The increasing awareness of financial crimes is growing the demand for forensic accountants to help detect illegal financial activity by companies, individuals, and organized crime rings. No matter how much fraud activities increase, there must always be an anti-fraud scheme to shield against it. To provide availability of balance and protection from illegal business acts is the main reason why Forensic Accounting (FA) exists.

With the pressing need for Forensic Accounting as a tool to fight fraud, this article studies its applicability in countries of opaque business practices, probes the accessible means that would help in introducing it to the culture, and spots the areas where it is radically needed especially in the countries of financial cloudiness and opacity. The results are based on quantitative and qualitative studies in Lebanon for being perceived as an opaque country, sharing the same characteristics that define nations with fraudulent financial behaviour suffering from a high level of financial corruption such as money laundering, lack of transparency or adequate financial disclosures as well as corruption at the level of management, supervisory boards and even governments themselves.

The results of the studies reveal that Forensic Accounting is perceived as a means to overcome fraudulent behaviour. Most of the respondents either agreed or strongly agreed on the need to incorporate it in order to prevent fraud and for detection purposes as a primary need. However, the respondents considered this to be new in Lebanon with a highest percentage of people (56.36%) reporting that it wasn’t used by Lebanese companies due to the lack of awareness, privacy issues, the nature and type of businesses (family businesses and SMEs), lack of guidance concerning the standards (local or international) that should be applied and lack for proper regulations. Yet respondents showed a positive attitude towards the implementation in Lebanon as financially corrupted country. Thus with such an encouraging perception amongst respondents, the issue remains in the introduction and diffusion of Forensic Accounting.

The outcomes of the studies also supported the idea of setting a law that mandates all sectors to submit a Forensic Accounting report. The idea of setting a law that enforces companies to file such a report was embraced by the majority of respondents who also considered that the best means of introducing this system in a country of opaque business country is through the educational curriculum via the graduate programs. DIFA (Diploma in Investigative & Forensic Accounting) as well as the CPA (Certified Public Accountant) were recommended as the certifications that should be granted in the corrupted countries as in the case of Lebanon.

Research Question and Hypotheses

The discussion of the study results are based on the research questions that investigated “To what extent is Forensic Accounting applicable? And how could it be introduced?” In order to answer these questions, there is a need to identify if such a scheme is known at any levels and sectors or if it is used or applied as a procedure by financially corrupted companies or governmental institutions.

The suggested hypotheses are analysed and evaluated according to the findings.

Hypothesis 1: Countries with Opaque Business Practices Need Forensic Accounting as a Tool to Fight Fraud and Corruption.

This study revealed that there is an eagerness to have Forensic Accounting in financially fraudulent countries due to the extensive corruptive acts that are committed and still are without any observation and punishment because the fraudster always gets away with it due to the absence the adequate and proper tool to identify and discover these acts. Hereby the urgent need to introduce it in countries with opaque business practices and to create awareness about this procedure in different fields and sectors mainly in the financial fields and governmental sectors.

This anti-fraud scheme was regarded as an appropriate tool to fight corruption since it has the legal accessibility and techniques needed to reveal fraud. An additional point is the positive perception towards it and the high acceptance to implement it in financially opaque countries, with a lot of encouragement to use it in institutions or companies.

Hypothesis 2: Forensic Accounting is Not a Common Practice at Present.

The findings indicate that Forensic Accounting is known in the countries of business opacity such as Lebanon, by practitioner accountants, educators, and auditing & accounting firms. Despite that the survey and interviews’ results proved that this practice is known, it is not commonly used or practiced by audit firms since it is not frequently requested.

On the educational level, there is no emphasis on the subject in the educational systems. FA is not given as a course or as part of a course in universities’ curriculum. Moreover, there are no certifications specialized in this field such as DIFA, but there are other well-known accounting certifications, such as CPA.

Therefore, what can be concluded is that there are no auditors or accountants, who are expert in this anti-fraud field in the countries where fraudulent business practices prevail. These countries lack the skills that could be acquired from the educational background and from the experience gained from working in this field.

The governmental and legal sectors suffer from a total absence of Forensic Accounting. That being the case, there is no regulation that imposes its use in solving financial issues or in evaluating financial statements, and there is no law that distinguishes the testimony of Forensic accountants from the testimony of any other audit. Forensic accountant in financially corrupted countries has no privilege on the credibility level inside courts, he/she is not used as an expert or reference inside courts.

Hypothesis 3: Different Means to Introduce Forensic Accounting in Countries with Opaque Business Practices

Respondents, as the results show, were very positive regarding introducing Forensic Accounting in countries with opaque business practices and they suggested many ways to be effectively executed in order to provide a good implementation of this new tool.

The suggested means involved many solutions and targeted different sectors. It even targeted the psychological factor, which was developed by cultural and social aspects, and which could play a major role in making the change to fight corruption and fraud in the financially corrupted countries.

Results and Discussion

Main changes should be performed to introduce Forensic Accounting in countries with opaque business practices. These changes must target four basic elements that would contribute in creating a solid ground and positive perception, the strategic plan includes:

I. Cultural & Sociological Changes:

“There Must Be a Change in the Culture of People in the Countries with Opaque Business Practices.”

The results of the conducted in-depth interviews showed that many respondents drew attention about the fact that the mentality of people in the countries with opaque business practices should be changed in order to increase the level of acceptance and consequently increase the commitment in applying Forensic Accounting.

The participants stressed on the importance to modify the culture of financially disrupted countries because they believe that having someone to look into their internal operations is a violation to their privacy. Besides, they don’t trust someone outside the company or institution to come and scrutinize their financials.

Another problem that exists in the mentality of people in the countries with opaque business practices is that the employees, managers or business owners feel unfairly paid and are stolen all the times by the government. For that reason, they believe that they have the right to steal back having the permissible excuse to commit fraud.

These facts that were expressed by the interviewees are also compatible with the findings of previous researches indicating that the cultural and sociological factors provide a solid platform for fraudulent activities, which created an acceptance for the corruptive acts that are considered as norms and justified practices in the societies of financially corrupted countries (Brownsberger, 1983; Adra, 2006; UN, 2001).

II. Changes in Educational Systems:

“Forensic Accounting Should Be Introduced in the Educational Sector.”

Almost all respondents conferred a high degree of importance for introducing Forensic Accounting in the educational sector in financially corrupted countries. Almost all respondents believed that it should be taught in universities as a course or a graduate major or as case studies in an audit related course. Suggestions also included considering it as a specialty in educational institutions that grant CPA or any other certifications related to auditing or accounting.

Respondents and interviewees also suggested introducing Forensic Accounting through workshops and seminars with the assistance of experts and skillful forensic accountants.

They also showed an acceptance for the online educational programs since DIFA is not available in most financially corrupted countries while it is available in USA. Therefore online education could shorten the distance to people who cannot leave work and are interested to be specialized in this field.

The participants also recommended that employees and managers who are responsible for the financials of the company should be educated and submitted to an intensive training to develop their skills to enable them to detect fraudulent activities within the company.

III. Changes in Governmental System:

“Forensic Accounting Should Be Introduced in the Governmental Sector.”

The National Integrity System Study, published by LTA in 2011, shows that corruption governs all sectors and all branches of financially corrupted governments. But in order to expose corruption and fraud there must be a tool or a law that could help to point out where these activities are occurring and a legal path to assure that this tool is effective.

Most of the participants in the study thought that it is important to introduce Forensic Accounting to governmental sector where the latter should give more attention and care about this subject, even though they didn’t give an importance to the governmental role in the introduction process.

They also recommended that the ministry of finance should launch an awareness campaign about the subject through media, road panels, and social media.

More importance is granted to the syndicate of accounting, whereby the participants believe that training sessions, workshops, and seminars should be set in order to train skillful forensic accountants who could practice Forensic Accounting, when it is requested. It is the role of the syndicate to spread awareness since it has the power, the knowledge, and the interest.

IV. Changes in Legal System:

“Forensic Accounting Should Be Introduced in the Legal Sectors.”

Respondents believe that Forensic Accounting should be introduced in the legal systems since the testimony of the forensic accountant is acknowledged in courts in other countries.

LTA (2011) highlighted on the importance to ensure that the current laws are sufficiently robust to prosecute even presidents and ministers when corruptive acts are revealed. There should be a law that acknowledge it is a legislative tool to fight corruption.

The participants also emphasized on the need of having court experts in this domain in the legal system since the fraudster is able to get away with his/her acts due to the difficulty to reveal the manipulation that happened, the associates, or the level of involvement in the fraudulent activities. The interviewees also stressed on the importance of changing the law to ensure a real punishment for the fraudster.

The necessity to track financial information and overcome opaque business practices is becoming a pressing need. Financial crimes are prevailing in different sectors in a single country and are committed by different parties. Another important point demonstrated in this study is that countries of opaque business practices tend to share similar characteristics that make them a magnet for fraudulent activities such as money laundering, tax avoidance/evasion and related corrupt workings are the products of some distant regimes and countries titles as tax havens.

Opaque business countries tend to have secrecy laws, poor regulations, artificial taxes, lack of public accountability and poor corporate governance in countries such as Luxembourg, Austria, Singapore, Switzerland and many others that in return facilitate economic uncertainty, instability, crime, flight of capital and damage to citizen-state contracts all over the world of course not to mention the damaging the social well-fare of the countries. Fraud has its roots in different government and companies mainly in managerial positions such as CEOs.

Conclusion

Financial crimes and fraudulent behavior is not new and citizens, though are aware of the disadvantages of the such practices, are not well informed about the counter measures that might otherwise put an end to these practices. This in turn highlights the importance of forensic accounting as a means to stop fraudulent practices. However, the adoption and implementation is not an easy process that can happen immediately. An understanding of the techniques can assist forensic accountants in identifying fraudulent behavior. It is “the application of accounting knowledge and investigative skills to identify and resolve legal issues. It is the science of using accounting as a tool to identify and develop proof of money flow. These tools and techniques can be invaluable for fraud and forensic accounting investigators” (Houck et al., 2006). Houck (2006) also talked about two major components, “litigation services that recognize the role of an accountant as an expert consultant, and investigative services that use a forensic accountant’s skills and may require possible courtroom testimony.” According to the definition developed by the AICPA’s Forensic and Litigation Services Committee, “forensic accounting may involve the application of special skills in accounting, auditing, finance, quantitative methods, the law, and research. It also requires investigative skills to collect, analyse, and evaluate financial evidence, as well as the ability to interpret and communicate findings.” In other words, it includes the different areas of litigation support, investigation, and dispute resolution and, therefore, is the intersection between accounting, investigation, and the law.

Fraud detection is a methodology and process to resolve the different types of fraud from embezzlement to money laundry, disposition, obtaining evidence, writing report and testifying. Therefore, forensic accountants who can apply such a process professionally and are able to detect, investigate and thus prevent fraud occurrence are needed.

However, the introduction and diffusion process requires work at the macro level via culture and the government and legislations (the primary facilitator) and at the micro level via educational institutions and management. It is the work of the entire community.

At first, the culture must be altered to create a higher level of awareness regarding Forensic Accounting. As the results of the quantitative research proved, people might be aware of it however they are unaware of the different practices, the required diplomas, or even the characteristics that make a person an eligible forensic accountant. The qualitative research also assures the results of the quantitative one regarding, but not limited to the need of having a law that requires companies to submit a Forensic Accounting report. Thus the need to change culture implies acquiring new knowledge, hence a change in values, norms, and practices. This concept implies that if a change is made in cultures of financially corrupted and opaque business practices, it will result in changes in the people’s practices, norms, and values, hence their behaviors; at the end, it will create an awareness and knowledge about fraud and how to fight it and the tools that could be used to inhibit it.

Governments should also strictly organize and control financial practices and set a law that mandates the submission of an FA report. It is worth mentioning, that according to the results of both quantitative and qualitative research, interviewees tend to view governments as the sector with the highest percentage of fraud. Educational institutions can have a great impact in the adoption and implementation process.

Interviewees viewed forensic accounting education as being relevant and beneficial to accounting students, the business community, the accounting profession, and accounting programs. It is not only restricted to university programs, there is also a specialized certificate that is concerned in this field, which is the Diploma in Investigative & Forensic Accounting (DIFA) program. DIFA is designed to provide a broad range of knowledge and skills to carry out financial investigations. Employee and management fraud, theft, embezzlement, and other financial crimes are increasing, therefore accounting and auditing personnel must have training and skills to recognize those crimes. In addition, high-visibility corporate scandals, such as Enron and WorldCom, demonstrate the need to better prepare entry-level accounting graduates and practicing CPAs in the areas of fraud prevention, deterrence, detection, investigation, and remediation (Houck et al., 2006).

Managements should also apply their own internal controls and to have a well-implemented corporate governance to control the falsified reporting. This, in addition to the mentioned law that requires the submission of a report to the government will definitely put an end to any fraud committed. For instance, terrorists of the September 11 attacks used the international banking system to fund their activities, transfer money, and hide their finances (Houck et al., 2006). This highlights the need to for investigators to understand how financial information can provide clues as to future threats. Due to these fraudulent practices, public awareness of fraud and forensic accounting came to highlight the need for financial professionals demonstrating the necessary training and skills to sense and act at any important evidence generated from financial information.

The following summarizes the results of the surveys done revealing the age group of the Lebanese respondents, their work experience, educational background, whether or not they heard about it and whether they consider it as vital in Lebanon being a country of business opacity. Also summarized is what respondents consider as the best way to introduce and implement Forensic Accounting in Lebanon.

Most respondents were Lebanese, aged between 18 and 30 years old, held a Master degree and worked in Finance with 6 years of experience and more. Most respondents also heard and read about forensic accounting but didn’t know if Lebanese companies use it, however, agreed on the importance of using it in Lebanon benefiting all the work fields, especially financial institutions. They also agreed about its positive advantages in providing better future, positive impact on business, and safer business.

Moreover, most respondents supported the idea of having a law that requires all sectors to submit an FA report. It’s important to mention that 75% of the respondents who didn’t encourage this action worked in the field of finance.

Furthermore, educational programs were considered as the best way to introduce Forensic Accounting (few have given a role to governmental efforts) believing in its ability to maintain its integrity, but not in all sectors. Respondents also agreed on the importance of the DIFA certification and that DIFA diploma should be included in Lebanese universities’ programs. Finally, most respondents thought the best means to acquire FA is to outsource audit firms that perform such services.

References

[1] Adra, J. (2006). Discussions About Corruption in Lebanon, personal communication.

[2] Brownsberger, W. N. (1983). Development and Governmental Corruption, the Journal of Modern African Studies, 21, 215-233.

[3] Houck, M., Kranacher, M., Morris, B., Riley Jr, R., Robertson, J., & Wells, J. (2006). Forensic accounting as an investigative tool. CPA Journal. Aug2006, Vol. 76 Issue 8, p68-70. 3p,

[4] The Lebanese Transparency Association (2009). Campaign Finance Monitoring from monitoring to reform.

[5] UN (2001). Corruption Assessment Report on Lebanon. United Nations Center for International Crime Prevention.

Two Sides of the Law: Rights Vs Privileges

Did you know… that there are two sides of the law? There is ‘the public side’ which is the one you are most likely operating in which subjects you to federal mandates, incessant regulations, fines, fees, penalties, jail and even death.

‘The Private Side’ is available to everyone and provides an escape from ‘public law’. However, nobody will talk about it because it’s deemed a ‘threat’ to the ‘system’. The mafia doesn’t like competition you know!

OK here’s a little tidbit for you to ponder… A ‘license’ or ‘permit’ is a limited permission to do that which is otherwise illegal.

Question #1… when did it become ‘illegal’ to get married? Don’t you need a ‘license’?

Question #2… when did it become illegal to repair your own home? Don’t you need a ‘permit’?

… and why to I need to pay someone else for their permission to manage my own affairs and my own property?

We (Americans) don’t get rights ‘from’ the constitution as so many people mistakenly say. The constitution was created to ‘protect’ our naturally endowed God given rights and to bind down the hands of mischievous men in power so that they could NOT infringe upon those rights that are bestowed upon us by God.

So the last question of the day is: “So then why are our public servants and elected representatives ignoring those limitations and creating civil strife against the people (their masters) with constant harassment and police powers?” The answer is as clear as black and white and you will be surprised. It’s not ‘them’ that are in error. It’s you!

Let me set up the scenario so we can understand this a little better. Let’s say I have a little private island in the middle of the ocean and I want to do business. But there are no customers. I see a cruise ship going by every day. I want those people to be my customers, and not just for a ‘day visit’, but forever. So, to get the men interested, I offer plenty of cute island girls and free beer. To get the women interested, I offer free spa and beauty treatments and unlimited free shoes of all kinds!

So word gets out and the cruise clients demand that the ship stop along the way which it soon does to keep their cruise business going and their customers happy. As people enter the island we have immigration checkpoint of course. To get on the island, I have everyone sign a contract which basically says that they give up all natural rights at the shoreline, and on the island they must abide by all commercial regulations on the island. And when the people leave the island, the terms of the contract say that ‘the person’ must abide by the same rules henceforth, wherever they go.

Now, of course law doesn’t normally work this way as there are jurisdictional issues. To get around this, I know I can’t control John Smith when he goes home to Kentucky. So, I’ll get John Smith to admit that he is JOHN SMITH, which by operation of law is another ‘legal person’. And as long as John Smith, thinks he’s JOHN SMITH, he’ll have to send me money whenever I send JOHN SMITH a bill because it’s in the contract and he agreed to it.

The people don’t care, and they don’t understand anyway at first. They just want island girls, free beer and free shoes! They say ‘yeah, yeah, whatever… ‘ and sign the contract to get on the island to get their benefits. Knowing that ‘no law can abrogate the rights of contract’, I’m feeling pretty good that I’m getting shiploads of new customers every day who are committing to me for life, by contract.

My fees, taxes and other business I take in more than pays for the beer and shoes I give away and now with this business model, I can show investors a steady stream of incoming new customers. With my accounting books and cash flow I can now borrow huge amounts of money to build my empire, enforce my contracts, and grow, grow grow! My little island business is a HUGE success!

So then, in reality, my little ‘island business’ is only 10 miles square in area and surrounded by Virginia and Maryland. Yep, the UNITED STATES government, which is not to be confused with the republic of the united ‘States of America’. It’s spelled this way with small ‘u’ because the word ‘united’ here is used as an ‘adjective’, not part of the name. It describes the noun which is the governmental unit for the ‘States of America’, which are supreme on the ‘Private Side’ of the law.

This is a not so small and very important distinction. The ‘republic’ is the de jure, or ‘lawful’ government where the private side of the law i.e. your God given rights and constitutional limitations on government, are operational.

The UNITED STATES is a corporate entity governed by corporate bylaws i.e. legislation for its corporate members and all those who volunteer into its jurisdiction by way of contract!

In the old days of the republic, when babies were born, the permanent record of birth was made in the family bible, the name listed as John Smith, and it was witnessed by those present for authentication. Under the new system, people apply for the BIRTH CERTIFICATE which creates our legal, juristic person: JOHN SMITH in place of John Smith and immediately, as a baby there are two people born. The living breathing person, and the fictitious ‘trust’ entity (legal person) which will serve ‘my island business’.

Now, since 1933, when House Joint Resolution 192 removed ‘lawful money’ from circulation and there was no more money to ‘pay’ for things (i.e. gold and silver) a whole new system emerged. At that time, the medium of exchange became ‘credit’ or ‘promises to pay’ (i.e. Federal Reserve Note). All we get are ‘promises to pay’ which never get paid (at law) and so by operation of law, this ‘benefit’ which is the privilege of ‘discharging’ the liability of a debt (not actually paying for it by law) brings us under the purview of ‘the laws of commerce’ in all that we do. Commerce of course is regulated. THE UNITED STATES then makes everything a ‘commercial activity’ for JOHN SMITH which allows it to regulate JOHN SMITH from cradle to grave and JOHN SMITH pays fees, registrations, fines, taxes and incurs potential criminal penalties if he doesn’t follow the corporate by laws i.e. Federal regs.

So now are you starting to see the lines of distinction between the ‘Private’ side of the law and the ‘Public’ side?

And so now let’s go back to the benefits. They tell us, “You need the birth certificate in order to enroll your child in school, and to get a job, and to enroll in Social security, and, and, and… ” Before you know it, you have so many ‘adhesion contracts’ (non-negotiable) with the island business, you are completely wrapped up and can never claim your God given right’s because they are superseded by your ‘voluntary agreement’ when you applied for benefits and entered into ‘contract’ with THE UNITED STATES.

This is why ‘the constitution’ no longer applies to most people. Just like Esau gave up his inheritance for a bowl of porridge in the book of Genesis, most of us have done the same thing. Nearly all courts in the UNITED STATES are courts of ‘Admiralty’ jurisdiction. They are administrative tribunals administering the bankruptcy of THE UNITED STATES (bankrupt since they removed the ‘lawful money’ in HJR 192). The courts are there only to administer the contract under bankruptcy laws. They are NOT there to protect your rights. They have no jurisdiction or authority over that. It’s not that the judge is ‘bad’, he or she is only following the rules of the court in Admiralty. So if you demand constitutional rights in a contract court of Admiralty, then ‘you’ are the one who is out of order!

We’ve only scratched the surface on this subject but I hope I’ve gotten your attention. Everyone should understand this and what the remedies are. Demanding rights and putting hope in the political process are folly and a complete waste of time (on the national level) until you and your sheriff understand the operation of law and whether you are on the PUBLIC SIDE or the Private side.

How To Take Advantage of Foreclosure Homes Sales

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