Finiz 2017

CHALLENGES IN MODERN CORPORATE GOVERNANCE

FORENSIC SCIENCE
Scientific - review paper
Singidunum University International Scientific Conference

FORENSIC ACCOUNTING IN FUNCTION OF

PREVENTION AND FIGHT AGAINST CORRUPTION
IN THE PUBLIC SECTOR

Duško Šnjegota1, Abstract:

In recent times, corruption in public sector has been considered one of the biggest problems, that
Branka Milošević Šnjegota2 directly affects the stability of public finances and the functioning of the public sector in general,
and therefore the economic stability of the country as a whole. Standard mechanisms of preven-
tion of systematic corruption, among other things, represent different types of monitoring and
1
Faculty of Economics University of control in the public sector, which are directed towards the facilitation of efficient and effective
Banja Luka, management of public funds.
Banja Luka, Bosnia and Herzegovina In recent years, special emphasis in the fight against corruption has been placed on the role of
police, and investigative and prosecutorial authorities as bodies primarily aimed at repression and
2
University of Business Studies in
strengthening of cooperation between these bodies and the authorities which are primarily focused
Banja Luka, on prevention in the system.
Banja Luka, Bosnia and Herzegovina This paper attempts to answer the question whether, in our circumstances it would be appropriate
to establish an entirely new public function - forensic accounting, which would deal with people
with specific skills without which it is clearly not possible to make a good connection between
prevention and repression.

Keywords:
public monitoring and control, corruption, law enforcement agencies, forensic accounting.

INTRODUCTION

According to the relevant literary sources, the term “forensic accounting” was used
for the first time by Maurice E. Peloubet, a partner in the accounting firm Pogson,
Peloubet & Co from New York, in the article entitled “Forensic accounting: Its place
in today’s economy” in 1946.1
According to the American Institute of Certified Public Accountants (American
Institute of Certified Public Accountants - AICPA) a service provided by forensic
accountants implies a set of accounting, auditing, financial and research skills, and
knowledge of legal regulations, which are used for the purposes of collecting, ana-
lyzing and evaluating evidence and presentation of research results to solve financial
problems.
The Association of Certified Fraud Examiners (The Association of Certified Fraud
Examiners - ACFE), defined forensic accounting as a discipline that is based on the use
of accounting skills in civil or criminal cases, including generally accepted accounting
and auditing principles, in order to determine the loss of profits, revenue, property or
damage, estimate the effectiveness of system of internal control, fraud detection, or the
performance of other activities that require the involvement of accounting expertise
in the legal system.
The largest number of associations whose activities are connected with forensic
Correspondence: accounting is registered in the United States. In addition to the AICPA and ACFE,
Duško Šnjegota
Association of Certified Fraud Specialist (Association of Certified Fraud Specialists
e-mail:
[email protected] 1 See, for example, in Belak, V. (2011). Business forensics and forensic accounting, the fight against
corruption, Belak excellens doo, Zagreb, 10.
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- ACFS), American College of Forensic Examiners (Ameri- A SUMMARY OF TYPES, SCOPE AND POSSIBLE
can College of Forensic Examiners - ACFE), Forensic Ac- WAYS OF ESTABLISHING AND ORGANIZING
counting Society of North America (Forensic Accounting THE FUNCTION OF FORENSIC ACCOUNTING
Society of North America - FASN), The Network of inde-
pendent Forensic Accountants (The Network of independ-
The definition of forensic accounting encompasses fraud,
ent Forensic Accountants - NIFA) and others operate in the
fraud prevention and investigation of fraud.2 According to
United States.
the classification AICPA3 in 1986 forensic accounting con-
The European Office for the Fight against Fraud (Office sists of two categories: investigative accounting and services
Européen de Lutte Anti-fraude - OLAF) was established in of judicial support. Investigative accounting appears in the
1999 in the European Union with the authority to investi- form of financial-criminal investigations and forensic audits,
gate fraud and corruption that proved detrimental to the EU and judicial support services makes any professional sup-
budget, as well as for its explicit policy designed to combat port to lawyers in court proceedings by persons who are not
fraud. lawyers by profession, in this case by forensic accountants.
The Anti-Fraud Coordinating Structures (Anti-Fraud Financial-criminal investigations are related to the in-
Coordinating Structures - AFCOS) is an operationally in- volvement of people who investigate fraud and operate
dependent authority which is formed at the level of Member within the police and other agencies authorized to conduct
States and which is responsible for the protection of EU fi- investigative actions, inspection authorities, auditing firms,
nancial interests against fraud and for providing assistance law enforcement etc. The main task of investigators who deal
and support to OLAF. with financial-criminal investigations is not based on the use
In the Republic of Srpska and BIH, specially established of specific knowledge and skills to recognize symptoms of
bodies or organizations that would be responsible for pro- fraud and to collect appropriate evidence of its existence.
moting the development of the theory and practice of fo- Forensic auditing can be defined as a special service to
rensic accounting have not been founded so far. Also, it is audit financial statements, based on the application of ac-
not currently possible to identify a sufficiently clear commit- counting and audit techniques and skills, and targeted, fo-
ment on the need to establish such public function or possi- cused and detailed, in-depth audit procedures, aimed at de-
ble ways of its organization, which equally indicates how the tecting criminal activities, whose effects can be recognized
application of forensic accounting applies in the real sector in the financial statements and reporting on these actions
and the same way in the public sector. On the other hand, and their effects in a manner that is acceptable to the legal
when it comes to the state of public finances and the public proceedings.4
sector in general, there is a widely held public perception Forensic accountant in legal proceedings can appear as a
that a high level of corruption in different areas, such as pub- consultant or expert witness. As a consultant, that person can
lic procurement, employment, allocation of public funds in be examined by a lawyer for being a professional, who has
the form of subsidies, grants, etc. exists. It demonstrates that the task of gathering and interpreting certain documentary
there exists the need for implementation of some new, addi- evidence, preparing the analysis, consulting the lawyer, etc.
tional activities in relation to the already existing ones in the Forensic accountant can be in the role of an expert witness
system, which would allow solving the accumulated prob- or may be hired by the lawyer or summoned by the court as
lems. It is usually expected that these additional activities an expert witness to testify in court proceedings. In this case,
be entrusted to some of the existing public oversight bodies forensic accountants are expected to express their opinion
such as external public audit, although realistically this is not on trial.
possible for various reasons. The described methods of possible action and the role of
The aim of research in this paper is to attempt to give forensic accountants based on classifications AICPA, in the
an answer to the question whether, in our circumstances it existing organization of the investigative and judicial process
should be appropriate to establish an entirely new public in the Republic of Srpska and BIH could be partially identi-
function such as forensic accounting, which would be led by fied as:
people with specific knowledge and skills, and with whose ◆◆ the role of forensic accountants as persons responsible
action it would be possible to give new quality system of pre- for running financial-criminal investigation best re-
vention of and fight against corruption. lates to the existing role of persons within competent
police agencies working on criminal and other inves-
tigations, especially in the field of financial crime,
◆◆ forensic accountant as a person dealing with the fo-
2 Budimir, N. (2013). Forensic accounting. Business economists, No. rensic audit corresponds to the meaning of classical
8/13, 2 financial auditor, or a person who performs activities
3 www.aicpa.org
4 Adapted from: Petkovic, A. (2010). Forensic audit – fraud in the of audit of financial statements and audit compliance,
financial statements, Proleter Bečej, 188 although their activities are not identical, whereas
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◆◆ Forensic accountants as persons, that provide the Although auditors have long been recognized as hav-
most current judicial support can appear as a court ing an important role in detecting fraud, it is well known
expert, an economist or some other professional. that they do not operate in a vacuum.5 Although their roles
However, on the basis of these comparisons it cannot be sometimes overlap, auditors of financial reports and forensic
reasonably concluded that the function of forensic account- accountants deal with financial fraud issues from different
ing has in fact been already established, it is obvious that viewpoints, usually using different information documented
there are significant differences between forensic account- in different ways and for different purposes.6
ants and persons acting under the now recognizable roles As an illustration of the above, the following table lists
and responsibilities (police inspectors, court experts, exter- some of the main similarities and differences between the
nal auditors, etc.). classical (traditional) financial and forensic audits, based on
competencies, standards and implementation methodologies
that are obtained as audit evidence in the context of activities
related with the audit of financial statements.

Activity Financial audit Forensic accounting

The financial statements, with a focus
subject to review The financial statements as a whole
on certain parts
All or most of the transactions related to
The scope of the audit Sample activities that are the subject of
investigation
Any transaction related to the fraud
Based on the threshold of materiality
Rating significance transactions being investigated is important for
and material transactions
auditors
Mostly based on standard accounting
In addition, it includes the evidence
Audit evidence and other business documents of
received from various external sources
the auditee
Relatively informal set of standards and
Fortified law and international
auditing standards principles, primarily based on knowl-
auditing standards
edge, experience and skill of auditors
The time period that last for over
Time spent on audit One business year
several years
Statement of committing fraud, and
The auditor's opinion on the financial
reporting identify the circumstances,
statements and on compliance
the perpetrator, damage, etc.
Period encompassing several months at
Typically significantly longer compared
time conducting audits the end audited and the beginning
to traditional financial audit
of next year
Usually relatively low, especially in the
Significantly higher compared to
Cost of audit case of the so-called commercial
traditional external audit
auditors in local conditions
Source: author’s treatment

Responsibilities and powers of court experts stipulate the the appointment of experts in the Republic of Srpska are as
applicable law and, as a rule, there are no specially formal- follows: the candidate to be hired as a court expert needs to
ized professional standards related to the area of judicial ex- holda university degree or to have completed the first cycle
pertise. For example, according to the provisions of the Law of studies in the duration of four years and to have obtained
on Experts of the Republic of Srpska7, special conditions for at least 240 ECTS credits or equivalent, to have at least five
years of professional experience in the areas specified in the
5 Golden, T.W., Skalak, S.L., Clayton, M.M. (2006). A guide to fo- request for the appointment and must not perform activities
rensic accounting investigation. John Wiley & Sons, Inc., Hoboken,
New Jersey, 33
that are incompatible with business experts. A person who is
6 Mikerevic, D. and other (2013). Forensic of business. ‘’Finrar’’
d.o.o. Banja Luka, 19 7 Official Gazette of the Republic of Srpska, No. 74/17
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appointed as a court expert is required to develop profes- When it comes to hiring forensic accountants under
sionally, through a program organized by the Ministry of the auspices of the Supreme Audit Institution it is impor-
Justice. Some other specific double determinants of expert tant to note that such a model of their organization is not
witnesses and their professional work have not been speci- recognized by the relevant auditing standards that underpin
fied yet, therefore, it can be concluded that the conventional the work of these audit institutions.8
comparison of the expert witness to forensic accountant is
practically groundless. REASONS FOR THE ESTABLISHMENT OF
Organizational function of forensic accounting in the FUNCTION OF FORENSIC ACCOUNTING IN
public sector can be established through a variety of models,
THE PUBLIC SECTOR
including a model of engaging a forensic accountant in the
activities of the prosecution, the model that engages forensic
The reasons for the development of forensic accounting
accountants in specific, independent professional organiza-
are numerous, and the main reasons are the lack of special-
tions, a model that is a combination of the previous two and
ized knowledge and experience of internal and external audi-
others.
tors, inspectors and accountants during the investigation and
As regards a potential model for the involvement of fo-
other illegal activities, as well as due to the expert opinion on
rensic accountants in the public sector, some protagonists
legal, business and other needs.9
of the idea of the need to establish the functions of forensic
accounting, see the possibility of their involvement in the The public sector in each country includes a number of
activities of the supreme audit institution. Each country has public subjects of different legal forms and forms of organi-
a mandate to conduct audit of budget beneficiaries, public zation which have been assigned the rights, responsibilities
enterprises, public institutions and other entities in the pub- and powers in order to provide quality public services (oper-
lic sector. Forensic accountants, of course, can be engaged by ators of special public importance, ministries, departments,
the independent audit firms in the event that they have a le- directorates, agencies, public institutions, public enterprises
gal mandate and economic interest to provide forensic audit. etc.) and which, directly or indirectly manage large quan-
tities of financial and other public funds. In order to con-
In the case of forensic investigation as an integral part of
trol these subjects, the state on its part establishes different
the overall activity and investigation bodies (the appropri-
control mechanisms whose main objective is to ensure the
ate police agency, etc.), it is important to note that, as such,
legality, efficiency and effectiveness in the functioning of the
these bodies are not something of a novelty, although it can
entire system. The backbone of the system of public over-
be seen, that the term of forensics usually denotes investiga-
sight and control of today, mainly consists of internal and
tion of the circumstances in which serious crimes have been
external audits, as well as traditional inspection bodies, such
committed, such as murder and others. At the same time,
as budget inspection.
research of the circumstances and consequences of criminal
offenses that had been committed in the area of economic However, as expected by the public, these mechanisms
crime are essentially nothing but forensic research activities, cannot provide a sufficient level of protection of public inter-
although usually they are not called by that name. est or protection against misuse of public funds. For exam-
The basic assumption for the organization of forensic ac- ple, research conducted by the ACFE shows that the external
countants in independent professional organizations refers audit reveals only about 11.0% of criminal acts10, while in
to a clear legal determination of the conditions for its estab- domestic conditions it is quite certain that the contribution
lishment and funding, then earning of the professional title of the internal audit process of prevention and detection of
of forensic accountants, the establishment of a public register such actions is much smaller. It is pointless to discuss the
of forensic accountants, defining conditions for their profes- significance, role and achievements of budget inspection.
sional engagement, establishing clear rules for their continu- Special emphasis in the fight against corruption in recent
ous education and training, etc. years should be put on the role of the police, and investiga-
The combination of the previous two models of organiza- tive and prosecutorial authorities, as bodies primarily aimed
tion of forensic accountants would make sense in the context at repression and prosecution of perpetrators of corruption
of creating conditions for quality competition and confron- and other illegal activities, and at strengthening cooperation
tation of different professional opinions about these actions between these and the bodies, that are primarily focused on
and activities that are the subject of forensic investigations, prevention in the system, and the creation of a system whose
which would have a positive impact on the quality of the mechanisms is going to prevent the occurrence of fraud or risk
profession and strengthen the de facto independence of a of their occurrence should be reduced to a minimum level.
forensic accountant.
9 Budimir, N. (2013). Forensic accounting. Business economists, No.
8 It is the ISSAI framework of the auditing standards, principles and 8/13, 2
guidelines established by the International Organization of Supre- 10 Singleton, T.W., Singleton, A.J., Bologa, J., Lindquist, R. (2010).
me Audit Institutions (INTOSAI) - more about these standards Revision of criminal actions and forensic accounting, translation of
can be found on the website www.issai.org the Association of Accountants and Auditors of Serbia, Belgrade, 23.
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It is widely held that authorities and bodies responsible with others in the system responsible for the prevention and
for public oversight and control in the management of public repression could be presented as follows:
funds, regardless of the fact that as such they are generally ◆◆ the establishment of a legal, transparent, efficient and
directed towards a system and not to the person (individual) effective system of public procurement in a public
who operates the system, should be in the role of direct ac- subject presents a direct responsibility of manage-
complices investigation and prosecution, or in the role of ment,
someone who through their daily work reveals, and therefore ◆◆ internal auditors (if the internal audit function in the
reports the corruption and other criminal activities. reporting subject is established) monitor and review
Without denying the obligation of all persons acting in the system of internal controls and with their advice
public interest (as external and internal auditors certainly help the management, that in this case the (sub) sys-
do), it should be noted that (audit) principles and standards tem of public procurement functions in accordance
are not designed as tools that could not be efficiently used with the principles promoted through the regulations
for this purpose. of public procurement and other regulations under-
If the above is true, a perfectly logical question arises - pinning the system of management of public funds,
how in the management of public funds in the context of ◆◆ in accordance with the principles underlying the sys-
prevention and fight against corruption, is it possible to tem of Public Internal Financial Control (PIFC)13, in-
make a connection between prevention and repression, be- ternal auditors have a duty to inform all managers of
tween organs and bodies which are primarily engaged in the all illegal activities that are detected, and the respon-
system and those who are primarily concerned with persons sibility for reporting such acts and their perpetrators
that manage or otherwise operate the system? It seems that to the law enforcement rests with the management
it is an important issue for a forensic accountant to address. and leadership14,
Otherwise, various anomalies which appear in the man- ◆◆ external public auditors, generally, audit operations in
agement of public funds could be classified into two main public sector, give an independent opinion on the fi-
groups - an error or a fraud. The key difference between them nancial statements audited and ensure the operations
is that the latter, unlike the former, is committed knowingly comply with the statute and other regulations, and
and on purpose. Scams are actions that are illegal and made evaluate cost-effectiveness for performance audits,
in secret in order to obtain a material benefit to the perpetra- assess efficiency and effectiveness of operations of the
tor, to the detriment of a public subjects or public interest. program and projects implemented in the public sec-
Frauds in the public sector appear in three basic forms tor; among other things, external auditors cooperate
- misleading financial reporting, corruption and misappro- with them and work in coordination with the internal
priation of public funds. According to the ACFE research auditors,
conducted in the USA in the period from 2010 to 2014, the ◆◆ depending on the adopted regulatory framework and
misappropriation of funds was the most common offence, models of external public audit, external auditors have
followed by misleading financial reporting, although it is a responsibility to inform the authorities about cor-
quite rare, but has the greatest consequences and causes ruption and other criminal activities detected during
the greatest material damage.11 Perception of domestic and the audit, but it is not the main or primary purpose of
foreign publicity leads to the conclusion that in the domes- their establishment and operation, as public external
tic circumstances, corruption is the most common form of audit is an instrument of parliamentary control and
fraud, and that, as such, it strongly affected all segments of directly controls the functions carried out by the leg-
society, especially the public sector. Corruption as a form islative over the executive bodies,
of fraud occurs in different forms, through the conflict of
◆◆ in the present environment, forensic accountants may
interest, bribery, illegal gratuities and gifts, and economic
appear in the role of an investigator or forensic audi-
blackmail.12
tors, provided that their research is based on circum-
A special area of public sector that is frequently involved stantial evidence of possible fraud identified through
in corruption is the public procurement of goods and ser- the activities of internal and external auditors, with
vices, but we should not neglect the processes of hiring, the aim that the occurrence of fraud in case it had
granting of subsidies, grants and other similar support to actually occurred is documented, the damage caused
subjects or individuals and others. If, for example, the pos-
sible role of forensic accountants was to be considered in the 13 PIFC – Public Internal Financial Control
context of prevention and fight against corruption in public 14 For example, under the system of internal financial controls in
the public sector of the Republic of Srpska, the internal auditor is
procurement, the scope of their activities and relationships obliged to inform the head of the internal audit, if during the au-
dit a suspicion that a criminal offense or misdemeanor had been
11 More about this can be found on www.acfe.com/rttn/docs/2014- committed, while the Head of Internal Audit has an obligation to
report-to-nations-charts-and-graphs.pdf inform the head of the entity of the irregularities and the elements
12 Belak, V. (2011). Quoted work, 36 that indicate the offense.
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on the grounds of fraud is assessed and law enforce- damage that occurs with their perpetration. In this context,
ment authorities are adequately informed about the this debate needs to be encouraged in the legislative and
results of their work, other institutions of the system, but also in the respective
◆◆ Forensic accountants would be also defined in this higher education institutions as well as in the framework of
case as the most authoritative financial experts, who the existing professional associations that bring together ex-
could provide appropriate services to support the perts from related professions.
court, similar to expert witnesses, who are within If we take a look on the strongly expressed perception
their legal mandate only invited to describe in a pro- and the existence of high levels of crime and corruption in
fessional manner, that what they have acquired dur- the public sector that has so far at least partially been proved,
ing their expertise, it is easy to conclude that the benefits of establishing a foren-
◆◆ Finally, effective action of experts such as forensic sic accounting could far outweigh the costs of its introduc-
accountants would surely have a positive impact on tion into the system.
the system of preventing or reducing the risk of the Active participation of forensic accountants in the system
occurrence of acts of corruption and fraud associated of prevention and fight against corruption in the public sec-
with them. tor would not decrease the role and significance of the exist-
According to Belak15, forensic accountants may appear in ing mechanisms of public oversight and control (external
the role of government inspectors - forensics, internal audi- and internal auditors, budget inspection, etc.). On the con-
tors - forensics, forensic accounting and commercial court trary, it contributes to the better understanding of the real
experts. role of these mechanisms in the system and to the increase
In the modeled presentation, a possible role of forensic in the value of the results achieved through their function-
accountant is detecting fraud and preventing their occur- ing. This is especially important, owing to the fact that these
rence in public procurement procedures. Forensic account- results are not currently used to a sufficient extent by those
ants are considered to be persons, who work with them and they are primarily intended for.
use the results of other relatively related professionals, such In the context of everything stated above, by introduc-
as internal and external auditors, but their mandate does not ing forensic accounting into the processes of research and
interfere with the mandate of such persons. It is believed that proving corruption and other criminal activities in the pub-
synchronized, systemic and multidisciplinary approach to lic sector, it would be possible to make a quality connection
establishing a system of prevention and fight against cor- between prevention and repression, that is, ensure that the
ruption could give much better results, than the approach effectiveness in processing of the already committed crimes
which would occur as a result of certain intermingling of maximizes the risk of the occurrence of new ones. Therefore,
powers and responsibilities of the different agents involved forensic accounting would become a purposeful public func-
in the system. tion, the establishment of which would be fully justified.

CONCLUSION LITERATURE

Forensic accounting is a profession whose systematical Mikerevic, D. and other (2013). Forensic of business. ‘’Finrar’’
establishing in national circumstances generally speaking is d.o.o. Banja Luka, 544 pages,
still a stage in the process. Although some broad outlines of Budimir, N. (2013). Forensic accounting. Business economists,
No. 8/13, pp 1-16,
the profession can now be seen in the activities of persons in
Belak, V. (2011). Business forensics and forensic accounting, the
charge of public oversight and control, or in investigation
fight against corruption. Belak excellens doo, Zagreb, 321
conducted in order to detect and prove corruption and other pages,
criminal acts in the system. In the context of supporting the Petkovic, A. (2010). Forensic audit - fraud in the financial state-
activities of prevention and fight against corruption, despite ments. ‘’Proleter’’ d.oo. Bečej, 312 pages,
the obvious need for an established system, a new one needs Singleton, T.W., Singleton, A.J., Bologa, J., Lindquist, R. (2010).
to be built in the developed world; currently results of al- Revision of criminal actions and forensic accounting.
ready existing public mechanisms of monitoring and control Translation of the Association of Accountants and Auditors
such as, for example, a public external audit are required. of Serbia, Belgrade, 324 pages,
It seems that the establishment of a system of forensic Golden, T.W., Skalak, S.L., Clayton, M.M. (2006). A guide to fo-
accounting functions will hardly be provided for, unless we rensic accounting investigation. John Wiley & Sons, Inc.,
Hoboken, New Jersey, 565 pages,
firstly encourage an intense public debate about the impor-
Law of the Republic of Srpska experts. Official Gazette of the Re-
tance of this function and its possible contribution to dis-
public of Srpska, No. 74/17,
covering and documenting various criminal acts and the

15 Belak, V. (2011). Quoted work, 45

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Law on the system of internal financial controls in the public sec- www.aicpa.org,
tor of the Republic of Srpska Gazette of the Republic of www.acfe.com,
Srpska, No. 91/16, www.issai.org.

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