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Introduction to Forensic Accounting

Preprint · July 2023

DOI: 10.13140/RG.2.2.22092.39045

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Introduction to Forensic Accounting

Dewan Mahboob Hossain, Phd

Professor;
Department of Accounting & Information Systems;
University of Dhaka;
Dhaka-1000;
Bangladesh
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Introduction to Forensic Accounting

Introduction

These days, accounting scandals and corporate frauds have become common phenomena in the
corporate world. Over the past few decades, corporate scandals such as Enron and WorldCom have
made the stockholders, media, policy makers and the society more aware. Increasing number of
fraudulent activities and immense corruption are creating several social problems. For that reason,
the issues such as auditor’s independence, corporate governance, fraud audit and forensic
accounting are getting more importance. The issue of control is becoming important. This chapter
is about forensic accounting. Because of increasing number of fraud cases all over the world, the
demand for forensic accounting and fraud examination is increasing.

What is forensic accounting?

According to Hopwood, Leiner and Young (2012, p. 3), “Forensic accounting is the application of
investigative and analytical skills for the purpose of resolving financial issues in a manner that
meets standards required by courts of law”. Rufus, Miller and Hahn (2015, p. 17) define forensic
accounting as the “… use of accounting theories, principles and analyses in a legal action, often
through expert witness testimony”.

By nature, forensic accounting is a multidisciplinary subject. In their investigation, forensic

accountants may have to apply knowledges of several disciplines such as accounting, auditing,
economics, statistics, finance, information systems, law, criminology and others.

In general, forensic accountants provide services such as business valuation, fraud investigation
and litigation support (Rufus, Miller & Hahn, 2015). Forensic accounting services are engagement
specific. Individuals, organizations and even government can appoint a forensic accountant when
a specific need arrives.

Forensic accounting Vs. Audit

The discipline of forensic accounting involves investigation. From that perspective, it has
similarity with auditing. Though, both forensic accounting and audit applies similar investigative
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tools and techniques, in many ways, the purpose of forensic accounting is different from that of
audit.

The objective of audit is to “… enable the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance with an applicable financial
reporting framework”1. Audit is an assurance service that enables auditors to provide an opinion
on the financial statements prepared by the organization’s management. In general, an audit report
to the shareholders is provided through the annual report of the organization. Audit is a recurring
activity. In general, in order to fulfil the statutory requirement, organizations need to appoint
auditors in every financial year so that an independent audit report can be presented to the
stakeholders.

However, forensic accounting is not a recurring activity. Rather, forensic accountants are called
for specific engagements that address specific questions or issues (Rufus, Miller & Hahn, 2015).
As mentioned earlier, forensic accountants can be engaged for services such as business valuation,
fraud investigation and litigation support. The difference between forensic accounting and auditing
can be summarized as follows (Skalak, Alas & Sellitto, 2006, p. 20):

Table 1: Difference between Auditing and Forensic Accounting

Audit Forensic accounting investigation

Objective Form an opinion on the overall Determine the likelihood and /or
financial statements taken as a magnitude of fraud occurring.
whole
Purpose Usually required by third-party Sufficient prediction that a fraud has or
users of financial statements may have occurred.
Value Adds credibility to reported Resolves suspicions and accusations;
financial information determines the fact.
Sources of evidence Inquiry, observation, examination Review detailed financial and
and reperformance of accounting nonfinancial data, search public
transactions to support financial records, conduct fact-finding as well as
statements assertions. admission-seeking interviews,
including third-party inquiries.
Sufficiency of evidence Reasonable assurance Establish facts to support or refute
suspicions or accusations.
Extracted from Salak, S. L., Alas, M. A. & Sellitto, G. (2006). Fraud: An Introduction. In Golden, T. W., Skalak,
S. L. and Clayton, M. M. (eds.) (pp. 1-20). Canada: Wiley.
Forensic Accounting Services

1
Taken from ACCA Study Text F8 Audit and Assurance published by BPP Learning Media (2010)
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Forensic accountants can provide three types of services. According to Rufus, Miller and Hahn
(2015), the major two services that the forensic accountants can offer include investigative services
and litigation services.

These authors defined investigation as a “… systematic inquiry, search, or research to obtain facts
regarding a specific or general concern or concerns” (Rufus, Miller & Hahn, 2015, p. 19).
Investigation services may include investigation of employee fraud, financial statement fraud,
corruption, misappropriation of assets, whistleblower complaint and financial viability
investigation.

Litigation services include dealing with ‘… actual, pending or potential legal or regulatory
proceedings criminal or civil’ and also providing expert witness services and consulting services
(Rufus, Miller & Hahn, 2015, p. 21). Witnesses present the evidences in trial. There are two types
of witnesses: fact witnesses and expert witnesses. Fact witnesses present the firsthand facts on an
issue. The expert witness “… is an individual with scientific, technical, or other specialized
knowledge who is engaged to assist the ‘trier of facts’ (a judge or jury) to understand the evidence
or to determine a fact in issue” (Rufus, Miller & Hahn, 2015, p. 21). Expert witnesses can provide
opinions based on their expertise. Forensic accountants can serve as expert witnesses in the court
by providing their independent opinions on an issue. Other than serving as witnesses, forensic
accountants can provide consulting services by assisting the attorneys.

Pedneault, Rudewicz, Sheetz and Silverstone (2012) mentioned that other than fraud investigation,
forensic accountants can deal with bankruptcy, insolvency and reorganization, computer forensic
analysis, business valuation and economic damage calculation (say, for insurance claims).

Fraud and Forensic Accounting

Fraud investigation is the most common service provided by the forensic accountants. According
to Hopwood, Leiner and Young (2012, p. 4): Fraud is the result of misleading, intentional actions
or inaction (including making misleading statements and omitting relevant information) to gain an
advantage. Forensic accounting investigations involve (1) fraud detection, (2) fraud examination
and (3) fraud deterrence. Fraud detection involves the ‘discovery of fraud’ (Rufus, Miller & Hahn,
2015, p. 19). Whenever there is a suspicion that a fraud has occurred in the organization, fraud
detection is needed in order to find out whether the fraud occurred or not. Fraud examination is
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an after the fact activity. It is conducted when there is an indication of the crime (Rufus, Miller &
Hahn, 2015). It involves finding answers to the following questions (Rufus, Miller & Hahn, 2015):

1. Who committed the fraud?

2. How the fraud was committed?
3. When was it committed?
4. How much was misappropriated?
5. Why was the fraud committed?
6. Who else is involved in this fraud?

Fraud deterrence is a proactive strategy that helps in preventing fraud. Through pre-employment
screening, employee training, employee monitoring and promoting right organizational culture,
fraud deterrence can be ensured. According to Hopwood, Leiner and Young (2012, p. 7):

“In the past, forensic accountants who conducted fraud examinations were often called
after owners suspected that fraud has been committed. Now recent major corporate
scandals have prompted business owners to turn to fraud examiners for proactive fraud
checkups”.

Forensic Accounting Knowledge and Skills

It was mentioned earlier that in most of the forensic accounting investigations, forensic
accountants have to follow a multidisciplinary approach. According to Tiwari and Debnath (2017),
the forensic accountants need knowledge of six disciplines. These are as follows:

1. Accounting: In order to become a forensic accountant, one must be knowledgeable about

accounting standards, financial analysis and the creative accounting practices.
2. Auditing: Both auditing and forensic accounting apply several investigative tools.
Therefore, forensic accountants must have knowledge about auditing tools and techniques.
3. Statistics: Forensic accountants apply several statistical tools and models in their
investigation. Also, data mining has become a very popular tool in fraud investigation.
4. Information technology: Many of the corporate crimes include cybercrimes. Most of the
corporate data are stored in computers and clouds. For these reasons, forensic accountants
need the knowledge of information technology.
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5. Law: As mentioned earlier, in many cases, forensic accounting engagements end up in

legal proceedings. For that reason, forensic accountants need to know how to deal legal
issues in the court of law.
6. Communication: As forensic accounting is an investigative process; forensic accountants
must be good at communication in order to find out the facts. They must have good
interpersonal skills. Written and oral communication skills also help to deal with the legal
matters.

Rufus, Miller & Hahn (2015) prepared a pyramid of forensic accounting skills:

Figure 1: Pyramid of Forensic Accounting Skills (Rufus, Miller & Hahn, 2015)

Experience

Specialized forensic
accounting skills: business
valuations, family law, fraud
investigation, economic
damages, bankruptcy,
computer forensic skills,
others.

Core forensic accounting

skills : forensic accounting,
legal framework,
psychology, report writing,
research.

Core accounting skills: accounting,

finance, economics, statistics,
communication, business law

Hopwood, Leiner and Young (2012) highlighted some similar knowledge and skills for the
forensic accountants:

1. Auditing skills: Like auditing, forensic accounting also involves information collection and
verification.
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2. Investigative knowledge and skills: These include “… surveillance tactics and interviewing
and interrogation skills” (Hopwood, Leiner and Young, 201, p.7).
3. Criminology: Criminology studies criminal psychology. Knowledge of criminology helps
forensic accountants to deal with frauds and perpetrators in an efficient manner.
4. Accounting: Accounting knowledge helps forensic accountants to analyse and interpret
financial information in financial investigations. Accounting knowledge is needed while
dealing with bankruptcy cases, money laundering matters and embezzlement schemes.
5. Legal knowledge: The forensic accountant must have the knowledge of court proceedings
and legal standards of the jurisdiction.
6. Information technology: Today’s world is full of paperless computer-based crimes.
According to Hopwood, Leiner and Young (2012, p. 7): “Forensic accountants use
technology skills to quarantine data, extract data through data mining, design and
implement controls over data manipulation, accumulate baseline information for
comparison purposes and analyse data”.
7. Communication skills: Forensic accountants need good communication skills in order to
convey the results of investigation to the relevant parties.

Also, Kass-Shraibman and Sampath (2011), highlighted that in order to become a forensic
accountant, one should take courses on computer, forensic accounting, law, statistics, psychology,
criminology, ethics and language.

According to Rufus, Miller and Hahn (2015), forensic accountants are:

 Researchers,
 Problem solvers,
 Intellectually curious,
 Eager to challenge conventional wisdom,
 Capable of systematic thinking,
 Able to look beyond the numbers, and
 Able to apply professional scepticism.

These authors also highlighted that a forensic accountant should be capable of critical thinking,
reasoning and communication. A critical thinker is rational, reasonable, sceptical, open minded
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and well informed (Rufus, Miller & Hahn, 2015). Capability of reasoning includes skill of drawing
inferences and conclusions. Finally, as mentioned earlier, a forensic accountant must be proficient
in both written and oral communication.

Career in Forensic Accounting

These days, several organizations promote the practice of forensic accounting (Hopwood, Leiner
and Young, 2012). Some of these are mentioned here:

1. The Association of Certified Fraud Examiners (ACFE) offer the credential titled Certified
Fraud Examiner (CFE). In order to get this credential, one has to pass the CFE
examinations with certain experience requirements.
2. The Association for Certified Fraud Specialists (ACFS) provides the designation titled
Certified Fraud Specialist (CFS).

Other than these, the AICPA “… supports forensic accounting through its Business Valuation and
Forensic and Litigation Services section. The section’s mission is to increase awareness of the
importance of business valuation and litigation support services, provide resources to its members,
create a community of persons interested in providing business valuation and forensic and
litigation services” (Hopwood, Leiner and Young, 2012, p. 10).

The Forensic and Valuation Services (FVS) Section of AICPA offers two credentials
(Rufus, Miller & Hahn, 2015):

1. The Certified in Financial Forensics (CFF) and

2. Accredited in Business Valuation (ABV)
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Tiwari and Debnath (2017) summarized the services, skill sets and opportunities of a forensic
accountant as follows:

Table 2: Services, skill sets and opportunities of a forensic accountant [Tiwari and Debnath, 2017]
Knowledge/ Skill Sets  Auditing
 Accounting
 Statistics
 Information technology
 Legal
 Human-behavior knowledge and skills
Services Consultancy: an expert retained by a party and is not expected to be called as a witness
at trial.
 dispute resolution
 reporting manipulations in corporate filings
 bankruptcy
 insolvency
 reorganization
 settle insurance claims
 consumer protection
 arbitration
 valuation
 family disputes
Non-scientific testimony: an expert identified by a party as a potential witness.
 fact finding
 collection of evidences for criminal investigation
Investigative services: a person who through education or experience has developed
skill or knowledge in a particular subject so that he or she may form an opinion that will
assist the fact-finder.
 accounting manipulations
 assessment of the damages
 corruption and negligence by employees and management
Prospective Clients/  Lawyers
Hirers/ Employers  Police forces
 Insurance companies
 Government bodies
 Banks
 Courts
 Corporate houses
 Investors

References

Hopwood, W. S., Leiner, J. J. & Young, G. R. (2012). Forensic Accounting and Fraud
Examination (International Edition). NY: McGraw-Hill.

Kass-Shraibman, F. & Sampath, V. S. (2011). Forensic Accounting for Dummies. NJ: Wiley.

Rufus, R. J., Miller, L. S. & Hahn, W. (2015). Forensic Accounting (Global Edition). Boston:
Pearson.
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Salak, S. L., Alas, M. A. & Sellitto, G. (2006). Fraud: An Introduction. In Golden, T. W., Skalak,
S. L. and Clayton, M. M. (eds.) (pp. 1-20). Canada: Wiley.

Tiwari, R. K. & Debnath, J. (2017). Forensic accounting: a blend of knowledge. Journal of

Financial Regulation and Compliance, 25(1), 73-85.

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