A well designed engagement letter reduces chances of legal exposure when forensic accountants are carrying out accounting services. The following includes the contents of an engagement letter I have prepared. Based on the three key discussions, we have designed the financial statements to meet the requirements of the company. In addition, the statements are meant only for management use and will not be disclosed to any other third party. Although there have been previous dealings with the client, we do not expect any conflict of interest to occur because we intend to adhere to the Generally Accepted Accounting Principles (GAAP).
The client should acknowledge that they are conversant with procedures applied in accounting and any other basic assumptions used when preparing the financial statement, which enables them to arrange the financial information in the right context. In addition, you agree that the usage of the financial information will be limited to specific management personnel having similar knowledge. The financial statements will not be exposed to any person outside the management of the company.
If the process of investigation will require computer data mining skills, the company will be duly informed because our data-mining expert is engaged somewhere else. If sharing financial information with a third party is agreed, we will be at hand to discuss the level of service and amount of disclosure. We should consider such agreements as separate and not part of the professional service agreed on the engagement paper. You must acknowledge that you are responsible for establishing and maintaining internal controls in addition to overseeing all financial activities pertaining to the services.
Our engagement should not be exclusively relied upon to reveal illegal acts, errors and frauds that may be present in your books of account (Atkinson, 2004, p. 22). However, any material errors, illegal acts or fraud that we discover we will inform the appropriate management, unless the issues are inconsequential. To add on, I will inform you of any information or evidence that I discover during our investigation concerning illegal activities that could have happened unless they are minute and inconsequential.
The issue of adverse publicity has been clearly understood and any reports will only be made available to specific members of the management team. If a dispute arises in the course of our engagement, to avoid publicity, the dispute will be submitted to a mediator where a third party will be mutually selected to enable us find an agreement. Mediation cost will be equally shared between the two of us. However, if I incur cost as a result of falsified representation from your side, you will have to reimburse all the legal fees I paid and any other related costs.
With respect to the mentioned limitations, you accept not to support any actions which intend to hold us liable for any damages as a result of deficiency of the information we provide you with. Moreover, you must accept to remove us from any liability and other costs which arises if a third party takes hold of the financial statements we provide you with in contravention to our agreement. This will acknowledge that our job will be paid on hourly basis of $250 per hour and any cost of collection will be due on all dues that have not been cleared.
Moreover, you have to guarantee personally that all payments on service rendered will be honored. Please inform me within seven days in writing if the agreement is accepted. Question 2 After forensic experts have analyzed the financial statements and discovered the anomalies, the first step is to inform the management and especially the CEO if senior management team seems to be involved. Financial transactions that have been found to be fraudulent and they appear to directly implicate a certain individual; the evidence obtained acts as a powerful ammunition that can be used by the management to confront the employee.
After serious allegations of fraud have been identified and have been directed towards a certain individual, the management should be informed so that it can take the necessary actions. Although the company may at first decide to suspend the guilty party, it should first consult with the investigative team before carrying out any actions. Suspension or termination of the contract of an employee will significantly hinder the ability of the investigative team to clearly assess the situation and avoid cover-up. The investigator should therefore take control of the environment that he will use to interview the employee.
The surprise element is important since the individual will not have the opportunity of framing an explanation to the established fraud (Shildneck, 2007, p 21). After discovering and notifying the management of the fraud, the transitional phase should entail the moral and ethical considerations and this should be composed of the most effective team that will confront the employee. A team of two people is most efficient and effective because there will be a witness in case a person decides to change the statements he or she made earlier.
A team made up of more than two people may lead to intimidation of the employee. An interviewer who is well experienced should be the one to interview the subject. The forensic expert should be at hand to provide the details of the financial statement and the discrepancies that have been found. On certain circumstances, another person such as the immediate supervisor, a representative from the human resource, a senior official, a counsel or a person from the investigative team may be included in the interrogation process.
Since the company requires that the whole process be confidential, the investigating team may choose home visits or off-site locations to interrogate the subject and to seek further compliance to investigation. When secrecy is maintained when confronting the individual, the investigation has the advantage of remaining secret especially when the person being investigated remains corporative. In addition, an off-site location may be better if there is risk of disruption or violence occurring in the workplace when the subject is confronted with the allegations.
For moral and professional ethics to be maintained, the investigative team must come up with the best approach of confronting and investigating the subject. One important aspect is the amount of information that the subject ought to be given. The individual may be confronted with the entire information in order for team to analyze his reaction. Moreover, some of the information could be given ought but the important issue is to ensure maximum cooperation. In conclusion, ethics play a significant role in the profession of forensic accountants.
He is required to collect information using legal and ethical means. He should not misrepresent himself nor can he abuse the rights of people in the process of gathering information. Question 3 Forensic accountants can protect themselves against legal liabilities by informing the client clearly that their services are limited in scope and may not be in a position to detect all material misstatement. According to experts, all forensic accountants must draft engagement letters before starting their investigations (Wegman, 2007, p.
15). An average of 85% of work done by forensic experts requires engagement letters. In cases where engagement letter are not used, the client is usually a close business associate or a benefit plan for an employee. Engagement letters are important evidence documents in case of a dispute concerning the type and quality of services rendered, or the period of the services rendered. For example, a bank may claim that it would not have given credit to a certain institution had the auditors submitted the report in a shorter period.
The accounting firm may rely on the engagement letter to show when they began rendering their services and establish a timeline to prove that they rendered their services within the required period, and that the bank did not consult the report before extending credit. Its important for accounting firms to ensure that the engagement letter is signed annually before carrying out their audit services to protect it self from disputes. Question 4. Directors of companies which have been incorporated under the Corporation Act 2001 must adhere to the Act while performing their duties.
Under the Act, the director should avoid misuse of information and position, limit conflict of interest, act with care, good faith, diligence, and disclose certain information. Under section 181 of the Act, the directors and the rest of the officers have a civil obligation of carrying out their duties and applying their powers in good faith for the benefit of the firm and for proper purpose. This implies that every employee in the company must adhere to the ethics and regulations of the law when carrying out their activities.
Illegal acts by a junior employee cannot make the senior directors to be held accountable especially when such acts were done without their knowledge. The director delegates authority to a competent employee and if the individual misuses the power given to him, only the specific individual will be apprehended. There are a number of situations when the directors can be held liable. When directors use their authority for sectional interest instead of the whole institution, or for the benefit of a third party or personal interest, such acts are in breach of their powers because they do not promote the interest of the company.
Under section 184 of the Act, breaching of this authority may lead to criminal prosecution if the breach occurs after the director or any employee of the company is reckless or defrauds the firm intentionally. Every employee must exercise his authority with reasonable care and discharge his duties with diligence. ‘Reasonable’ means that the person should act in a way in which a reasonable person in a similar position in a company would act in the circumstance of the company.
It is important to note that directors do not accomplish the necessary levels of diligence, care and skill just by delegating authority and not following up the activities of the junior employees. They must be active in all affairs of the company and have a clear understanding of the general activities going on in the company. They are also required to investigate anything peculiar that they discover. A person who gets information because they are or they were once a director or any employee of the company are not supposed to use the information for personal advantage or to influence another employee or to affect the company.
This factor is especially important especially in the case where the director has certain interest in the same market which the company operates. Under the Corporation Act 2001, any employee who uses information dishonestly or improperly commits a crime and this may lead to prosecution. When an individual misuses his position, just like the senior finance officer, he must be held accountable. This issue is particularly important to directors or senior officers who control the finances of the company, or those controlling expenditure of the cash left at their command.
Senior management officers are required to handle information especially those they receive during board meetings in a confidential manner. Confidential information which relate to the company should not be given any associates, union official or any other third party (MULR, 2008). Section 184 of the Act makes it illegal for any individual who misuses his position in the workplace. Any company official who has a certain interest on the affairs which are connected to the company must notify the senior management to avoid conflict of interest.
The notice should describe the type and level of interest and should be provided to the managers as soon as possible so that directors can evaluate the extent of the matter. One example that commonly occurs is where an employee has an interest on a certain contract which the company has entered. Unless the rest of the directors resolve the issue, an individual should not be allowed to vote or be around during the board meeting when the issue on which he has personal interest is being discussed. Section 995 also gives directions on deals which have deceptive or misleading information. Question 5.
Directors have the responsibility of managing the affairs of the company. The duties of the director are broadly classified into two parts: his actions must be honest and of good faith and should be for the best interest of the company; he should also exercise care, skill and diligence that any person with integrity would exercise in similar situations. In addition, board member such as the president, secretary and the treasurer are also required to observe those duties and the have similar liabilities as those of the director. Although the two duties usually overlap, certain factors are distinct.
Fiduciary duties of the director include duties of honesty, loyalty and good faith. When a director has personal interest on certain activities, such interest must not conflict with the activities of the company (Cindy, 2003, p. 18). If any interests are determined, he should inform the board members so that appropriate action is taken. Moreover, the director would be required to compensate the company any loss it incurs or to return the benefits that he accrues through illegal means. The director should not acquire opportunities available to the company and use them for personal means.
Interest that may arise in contracts that the firm enters should be declared and necessary evaluations conducted. He has the obligation of ensuring that information concerning the company remains confidential and is not given to outsiders or third parties. A duty of care, diligence and skill involves those activities which can be exercised by a prudent person in similar or comparable situations. Directors are required to ensure that the standard of conduct is carried out in a reasonable manner which is applicable in the current conditions.
The director should therefore attend board and committee meetings regularly so that he can ensure that he is duly informed before he takes any action. Moreover, he should acquire detailed information on the operations of the company so that he can have the ability of making informed decisions. This may even involve taking expert opinions from external sources to ensure that the decisions he makes are informed. Perfect results are not a must in ever situation since directors must take risks to advance the interest of the company, but the risks taken must be calculated and the decision must be wise.
The CEO and the board of directors control the functions of the company. Although it’s not possible for them to understand each and every detail of the companies operation, they ought to play the role of supervision. They can delegate duties to other employees but they should not abandon their duty of management. The director can be held personally liable if they negligently or intentionally engage in activities that cause harm to other people. General tort principles that may make a director to be held liable include: libel and slander; unfair dismissal of workers; and fraudulent acts that are in breach of a contract.
However, directors acting in good faith and within jurisdiction of his authority cannot be held liable when a civil suit is brought against him. They can only be held liable when they act in bad faith and outside their authority. If for example he fires an employee for the interest of the company, he cannot be held personally liable for any civil suit brought against him. However, sander, defamation and fraudulent activities may lead to civil suits and he may be fined or face custodial sentences. There are several provincial and federal laws in which managers and other employees may face personal liability.
Many statutes make the director civilly liable when they fail to ensure that the company’s activities are legal. Some laws entail quasi-criminal liability when a manager directs, authorizes, acquiesces or participates in an illegal activity. Criminal activities such as corruption, insider trading, manipulation of financial statements may lead to heavy fines and penalties as well as jail sentences. Question 6. The legal system in Australia is based on the rule of law, justice as well as the independence of the judiciary.
Australian jurisprudence is based on common law system which is similar to the one developed in England. It is different from other law systems practiced in Europe which were developed from the Roman law (Ferran, 1999, p. 15). There are nine legal systems in Australia, eight of them being territory and state systems and the other one being the federal system. Australia and china have very distinct court systems. The court system in Australia consists of court hierarchy ranging from local level to federal level. Every court has a particular jurisdiction and is given certain powers to deal with particular legal issues.
In essence, the court system in Australia has two main arms which include the State courts and the commonwealth courts. In china, the judicial authority is distributed among four court levels. They include “the Supreme People’s Court, the Higher People’s Court, the Intermediate People’s Court, and the Basic People’s Court” (Managing intellectual Property, 2006). The location of the Basic People’s Court is in every district or county and the Intermediate People’s Courts are only found in provincial capitals and major cities.
The second instance court in china is usually the final court of appeal. Another difference concerns the type of sentences. In Australia, an accused person is considered innocent until guilt is proved beyond any reasonable doubt. In addition, the death penalty was abolished and only life sentences are given. China continues to hand over death sentences unlike Australia. Most Chinese convictions are based on written confessions. In addition, journalists are not welcomed in the court premises to cover court proceedings. Courts in china attach great relevance to pre-trial proceedings.
The presiding judge usually reviews the complainant, analyzes case material, performs investigations and retains relevant evidence, enquires about the witnesses and informs the concern parties to prepare for expert evaluation. China have adopted a system where a case is adopted after examination instead of registration as practiced in Australia. References Atikinson, R 2004, Connecting Business Ethics for the Common Good: Come and Let us Reason Together, Journal of Corporation Law, Vol. 29 Cindy, D 2003, The Tallahassan counters: A Problem-Based Learning Case in Forensic auditing.
Issues of Acounting Education, Vol. 18 p. 21-28 Ferran, M 1999, Company Law and Corporate Finance among States, Oxford University Press, New York Melbourne University Law Review 2008, The Corporations Act 2001, Corporate Governance in Commonwealth Nations, viewed 28 May 2010, <http://www. austlii. edu. au/au/journals/MULR/2008/7. html> Shildneck, B 2007, Forensic Accounting and Fraud Investigation for non-Experts, Journal of Accountancy, Vol. 203, p. 16-35 Wegman, J 2007, Impact of the Sarbanes-Oxley Act on Accountant Liability, Journal of Legal, Ethical and Regulatory Issues, Vol. 10.