FORENSIC ACCOUNTING
1. Meaning of forensic accounting
Forensic accounting involves the application of special skills such as accounting, auditing procedures,
finance, quantitative methods, research, and investigations. It also involves knowledge of certain areas of
the law. This knowledge combined with these skills enable forensic accountants to collect, analyze, and
evaluate evidential matter and to interpret and communicate findings.
Key elements of this definition including the following:
● Accounting. Forensic accounting is a branch of accounting. At its most general level, accounting involves
the communication of financial information.
● Special skills. Forensic accounting requires special skills that are not required of accountants in general.
● Law. Forensic means pertaining to the law. Forensic accounting deals with financial issues that may
come before a trier of fact in a court of law or other venue (such as arbitration).
● Evidential matter. Especially important to forensic accounting is evidential matter that may bear on the
truth or falsity of an assertion made before a trier of fact.
● Interpretation and communication. In many cases, forensic accounts interpret evidence and
communicate expert opinions for clients and a trier of fact.
Forensic accounting is typically divided into two areas:
● Litigation services. The forensic accountant serves as a testifying expert or non-testifying consultant and
provides assistance for actual or potential legal or regulatory proceedings before a trier of fact in
connection with the resolution of disputes between parties. Litigation services include serving as an expert
witness, a litigation consultant (that is, a non-testifying expert), and in various other roles in dispute-
resolution or legal processes (for example, as a bankruptcy trustee.)
● Investigative services. The forensic accountant serves as a consultant in cases that do not involve actual
or threatened litigation, but do involve performing analyses or investigations that may require the same
skills used in litigation services.
3. Forensic accounting versus traditional accounting
Traditional accounting involves recording, classifying, analyzing, and reporting financial data and
information. The emphasis is on converting raw financial data into information useful for decision makers
by using an applicable financial reporting framework. The useful information is typically presented to
decision makers in the form of financial statements. In summary, the work product of the traditional
accountant is one or more financial statements. On the other hand, the typical work product of forensic
accountants tends to be much different from that of traditional accountants. The scope of each forensic
accounting project is unique and the work product flows from the scope of the particular project. Such
work products often consist of a written or oral report of findings or recommendations or both. When
testifying before a trier of fact as an expert witness, forensic accountants ordinarily express their findings
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as expert opinions. In this use, “opinion” is a term of art in judicial guidelines on evidence and the law,
and differs from its use in the accounting literature.
3. Forensic accounting versus auditing
In some respects, forensic accounting is very much like auditing. Forensic accountants generally use
procedures and exercise professional skepticism in a manner similarly used by auditors. For instance, both
examine evidence (usually financial related) and form professional judgments on what they observe. But
the overall objectives of these two kinds of engagements are very different.
The objective of audit engagements usually is to express an audit opinion on whether financial statements,
taken as a whole, are fairly presented. In contrast, forensic accounting engagements tend to be focused
on one or more particular areas. Speaking simply, virtually all audit engagements have a single objective
of expressing one opinion on a set of financial statements whereas each forensic accounting project is
very uniquely focused on a client’s particular needs and the objective is usually to report
recommendations or findings.
All forensic accounting work performed by CPAs is subject to Consulting Services (CS). In addition, forensic
accounting services may be subject to other requirements such as applicable laws and regulations, rules
of evidence, civil or criminal procedures, and other professional pronouncements such as other applicable
professional standards.
Forensic accountants sometimes engage in auditing work, but for purposes other than providing an
opinion on an entity’s financial statements. For example, a forensic accountant may conduct a forensic
engagement as part of an occupational fraud investigation. The result of such an investigation will likely
be a report that identifies, for example, the amount of the fraud loss and any control weaknesses that led
to the fraud. These fraud engagements are performed as consulting engagements and are governed by
CS.
Forensic accountants apply specialized skills (in the form of specialized procedures) that differ from those
used by auditors of historical financial statements. For example, auditors may use observation techniques
whereas forensic accountants may use surveillance techniques. Unlike traditional auditors, not all forensic
accountants are required to be “independent” of their clients in the way the term is used in other
accounting literature.
Independence is required, though, when forensic accountants participate in attest engagements such as
audits of financial statements for the purpose of opining on the fairness of their presentation and reviews
of financial statements.
4. Forensic accounting knowledge and skills
Forensic accounting requires knowledge and skills in many different areas. Although these areas are
discussed individually, keep in mind that they overlap each other.
i. Accounting
Forensic accounting spans many areas of accounting, therefore broad accounting knowledge and skills are
required. However, certain accounting knowledge and skills are required within specialized areas of
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forensic accounting. For example, a forensic accountant specializing in investigating occupational fraud
might not need to be an up-to-date expert in international accounting standards, but would likely need
specialized knowledge and skills relating to accounting information systems, digital forensics, and
accounting information systems auditing procedures. Similarly, a forensic accountant specializing in
estimating economic damages may need business valuation skills. The many specialized areas within
forensic accounting are discussed in subsequent topics.
ii. Auditing
Auditors are specialists in collecting, interpreting, and evaluating data and information. Such skills are
essential to forensic accounting. As previously discussed, when forensic accountants testify before a trier
of fact as an expert witness, they ordinarily express their findings as expert opinions. Their findings must
be based on evidence, and evidence must be collected and interpreted. Therefore, forensic accountants
should be skilled in collecting and interpreting evidence. Finally, as previously mentioned, forensic
accounting requires knowledge and skills using specialized evidence gathering procedures.
iii. Investigative
Special skills and knowledge are required to conduct forensic accounting investigations. These special
skills and knowledge include an understanding of how to structure and manage investigations, the types
of evidence that may be collected, how to maintain the chain of custody, the legal rights of those under
investigation, how to identify different types of fraud schemes, how to conduct interviews, and how to
detect deception.
iv. Criminology and digital forensics
For criminal investigations, the forensic accountant should have a basic understanding of the various roles
played by crime scene investigators, digital forensics experts, forensic scientists, forensic laboratories,
prosecutors, and attorneys. Almost all crimes these days involve digital devices, including computers.
Therefore it is helpful for the forensic accountant investigating fraud to have a basic understanding of
digital forensics in both the areas of computer forensics and network forensics. In addition, advanced
digital forensics are employed by, for example, using computerassisted audit tools and techniques
(CAATTs) to extract and analyze digital data from enterprise resource planning (ERP) and accounting
systems.
v. Accounting information systems
Key elements of accounting information systems include internal control and business processes. Internal
fraud schemes typically involve the violation of weak or nonexistent internal controls within specific
business processes. Therefore, the forensic accountant must have a good understanding of internal
control processes and how they interface with business processes and the accounting information system.
For example, a sales-skimming fraud scheme may involve the absence of reconciliation controls in the
revenue cycle.
vi. Risk analysis
Fraud risk management is an issue commonly dealt with by forensic accountants. Fraud risk management
activities include fraud prevention, detection, and response. This type of management begins with fraud
risk assessment.
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vii. Communication
Communication skills are essential in all areas of accounting. However, such skills can become even more
critical in the area of forensic accounting. Forensic accountants serving as testifying experts often write
expert reports that are likely to be subject to intense scrutiny in depositions and cross-examinations at
trial. Furthermore, forensic accountants may need to explain their opinions on direct examination at trial,
which requires effective presentation skills.
viii. Psychology
Understanding the suspect and, in particular, his or her motivations can aid forensic accountants who
perform investigations. Motivation can, for instance, help identify the areas that should be investigated.
For example, a CEO may be motivated to compete successfully with a sibling by attempting to increase
the market price of stock by artificially inflating net asset values and income. The law enforcement
community has long known that one of the best ways to solve a fraud case is by obtaining a confession.
The process of obtaining a confession in financial fraud cases is a very carefully orchestrated one that
begins with collecting documentary evidence, proceeds to interviews with non-suspects, and often
terminates with an interview with the prime suspect. The key to success in interviewing involves the ability
to assess honesty versus deception. Consequently, forensic accountants, at times, are aided by the
employment of techniques rooted in psychology, such as the analysis of body language and eye
movements.
ix. Information technology
The importance of information technology to forensic accountants is closely related to the importance of
digital forensics and accounting information systems. Information technology is constantly evolving and
is an inescapable aspect of many types of forensic accounting work. Not only do forensic accountants use
the latest in technology in their investigations, they must also be aware of evolving technological advances
to maintain up-to-date professional skills.
x. Problem solving
If there is any one skill that stands out among the others, it is problem solving. Forensic accountants
constantly deal with puzzles and mysteries that offer opportunities to sharpen their critical-thinking skills.
In fraud investigations and litigation and dispute resolution, there is always an opposing side, and in many
cases the opposing side is highly intelligent and seeks to deceive and cover up the truth. The opposing
side might, for example, be a fraudster in an embezzlement investigation, a spouse hiding assets in a
divorce, a debtor hiding assets in a bankruptcy, or a potential corporate acquisition target providing false
financial statements in order to inflate its value.
xi. Legal
By definition, forensic work is affected by the legal system. In performing litigation services, forensic
accountants assist in the legal and dispute resolution processes. Therefore, the forensic accountant is
familiar with the court systems, applicable state rules of procedure, and rules of evidence. The forensic
accountant often needs a basic understanding of various types of common-law and financial crimes such
as conspiracy, money laundering, and embezzlement.
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5. Professional opportunities in forensic accounting
Forensic accounting is an accounting specialty that is rich with many subspecialties. Forensic accountants
tend to work in the subspecialties that interest them the most. Some of these subspecialties are discussed
here in general terms.
i. Investigative services
As previously discussed, the two main areas of forensic accounting are litigation services and investigative
services. The distinction between the two areas rests not so much on the work done but rather on whether
or not litigation is contemplated or anticipated. There is almost no end to the types of financial cases that
involve investigation, including those of occupational fraud and other kinds of fraud.
Besides fraud, there are many other types of issues that forensic accountants investigate. Examples
include determining the value of a spouse’s assets in a divorce case, investigating public corruption,
tracing the sources of funds in a terrorism case, determining the extent of money laundering in narcotics
trafficking cases, and ascertaining the validity of specific representations made by the target of a
corporate merger. Forensic accountants tend to be experts in investigating fraud because of their deep
understanding of many types of fraud schemes. As a result, they are in an excellent position to identify
fraud risks and recommend ways to prevent and detect fraud schemes. One example of the need for fraud
risk management is the rise of digital technologies, which has opened the door to constant, devastating
fraud attacks against even some of the largest and strongest companies. Consequently, fraud risk
management has grown into an enormous industry and has strongly embraced the forensic accounting
profession for its knowledge and skills in preventing and detecting fraud.
ii. Expert consulting
As expert consultants, forensic accountants give advice on a wide range of areas. Examples include fraud
risk mitigation, internal dispute resolution systems, the value of an estate, and the financial impact of
bankruptcies, mergers, or acquisitions.
iii. Expert testimony
Generally speaking, fact witnesses are only permitted to testify in court to what they perceive through
their senses (that is, touch, hearing, sight, and smell). On the other hand, qualified experts are permitted
to give opinions on relevant issues before the trier of fact. Qualified forensic accountants can serve as
testifying experts in virtually any area of forensic accounting. Testifying experts usually provide a written
report to the opposing side before the trial. They are then subject to depositions and at trial they state
their opinions in direct examination, which is then subject to cross-examination by the opposing party.
The legal system permits the use of experts as a way of assisting the trier of fact (usually a judge or jury)
rather than as an advocate for a particular party.
iv. Business valuation
Business valuation is a very important subspecialty area within forensic accounting. Forensic accounting
and business valuation are so intertwined that they are in the same member interest area within the
AICPA (American Institute of Certified Public Accountants) (the section is named Forensic and Valuation
Services [FVS]). Business valuation involves not only valuing businesses, but many kinds of assets or
liabilities. Forensic accountants may measure or value economic damages, patents, assets owned by
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divorcing spouses, future medical expenses, loan portfolios, and stock options. Business valuation is also
applicable to financial reporting. Accounting standards have shifted towards valuing many assets at fair
value. For example, goodwill listed on the balance sheet of a company is to be tested for impairment at
least once a year; this impairment testing involves determining a value of the net assets that gave rise to
the goodwill to arrive at a current fair value of goodwill. If the current value of goodwill is less than the
carrying value of goodwill, goodwill is to be written down to its current value. Therefore, a valuation
expert may be engaged to value specific assets or groups of assets, or provide an opinion on an already
determined fair value of assets.
v. Other
Other areas in which forensic accountants can serve include alternative dispute resolution, trust services,
and bankruptcy. In dispute resolution, forensic accountants can serve as mediators or arbitrators. In trust
services, they can serve as trustees or executors, and in bankruptcies they can serve as private trustees
appointed by the U.S. Trustee Program, a component of the Department of Justice responsible for
overseeing the administration of bankruptcy cases and private trustees.
6. Professional organizations and certifications
There are many professional organizations and certifications applicable to forensic accountants. The
particular organizations that are most beneficial to individual forensic accountants depend on their
education, training, experience, and areas of professional focus. Five of the major international
professional organizations and certifications are:
Various other organizations and certifications are included in the discussion in chapter 6, “Litigation
Services.” As a general rule, individual professional organizations require credential holders to adhere to
specific ethics codes and professional guidelines, and maintain their credentialed status by means of
continuing education or work experience. The organizations presented in the following sections are
representative of leading international forensic accounting associations and institutes.
AICPA (WWW.AICPA.ORG)
The American Institute of Certified Public Accountants (AICPA) is the premier American organization for
CPAs and the largest organization of CPAs in the world. It develops and determines answers to the Uniform
CPA exam and the exam associated with the Certified in Financial Forensics (CFF) credential. The CFF
credential can be earned by AICPA members who are CPAs by passing an examination of their knowledge
of forensic accounting and business valuation. Education and experience requirements must also be met
by those seeking this certification.
The AICPA also offers the Accredited in Business Valuation (ABV) credential. This credential is open to
CPAs who are members of the AICPA and who pass the ABV examination and meet certain education and
experience requirements. The ABV examination is waived for accredited members (AM) and accredited
senior appraisers (ASA) of the American Society of Appraisers.
ASA (WWW.APPRAISERS.ORG)
The American Society of Appraisers (ASA) is a nonprofit, international organization of professional
appraisers that represents a variety of appraisal disciplines, including business valuation. Its mission is to
encourage public trust of its members and the appraisal profession through compliance with high levels
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of ethical and professional standards by, for example, establishing and maintaining principles of appraisal
practice and a code of ethics. It offers two designations for qualified candidates: Accredited Member (AM)
and Accredited Senior Appraiser (ASA).
The ASA also promotes research and development in all fields of the appraisal profession through its
American Society of Appraisers Educational Foundation (ASAEF), which is a separate, nonprofit
corporation established by the ASA. The mission of the ASAEF is to conduct educational, research, and
charitable activities related to the advancement of the appraisal profession.
ACFE (WWW.ACFE.COM)
The Association of Certified Fraud Examiners (ACFE) is the world’s largest antifraud organization. Its
mission is to reduce the occurrence of fraud and white-collar crime and to assist its members in their
efforts to detect and deter fraud. The ACFE offers the Certified Fraud Examiner (CFE) credential. The CFE
exam covers the fraud examination body of knowledge, which comprises four disciplines: fraud,
prevention and deterrence, financial transactions, and fraud schemes, investigations, and law. The
credential is maintained by engaging in continuing professional education and adhering to its code of
ethics.
Every two years, the ACFE publishes its Report to the Nations on Occupational Fraud and Abuse, a study
based on data compiled from worldwide cases of occupational frauds that occurred during the two years
immediately prior to its publication and which were investigated by CFEs.
Although the ACFE is not an accounting association, many accountants are members and have the CFE
credential, which focuses on one area within forensic accounting (fraud) and can be earned by those in
accounting and non-accounting practice areas. A bachelor’s degree is required for the CFE, but can be in
any area. Subject to specific rules, relevant experience can substitute for the bachelor’s degree
requirement. A minimum of at least two years of relevant experience is required.
ISACA (WWW.ISACA.ORG)
According to ISACA’s website
[a]s an independent, nonprofit, global association, ISACA engages in the development, adoption and use
of globally accepted, industry-leading knowledge and practices for information systems. Previously known
as the Information Systems Audit and Control Association, ISACA now goes by its acronym only, to reflect
the broad range of IT governance professionals it serves.
ISACA offers three credentials of interest to forensic accountants. These include the Certified Information
Systems Auditor (CISA) credential, the Certified in Risk and Information Systems Control (CRISC)
credential, and the Certified Information Security Manager (CISM) credential. Of particular interest to the
forensic auditor is the CISA credential.
Most fraud investigations involve computer systems, and the need to use digital forensics in fraud
investigations is fairly common. However, basic computer forensics does not include the skills needed to
investigate frauds and other issues in many company accounting systems, database systems, and ERP
systems. The CISA credential is an exam-based credential that focuses on the advanced skills needed by
the forensic accountant.
NACVA (WWW.NACVA.COM)
The National Association of Certified Valuators and Analysts (NACVA) is an association of professionals
who provide valuation and litigation services for various types of business transactions. Its mission is to
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provide resources to its members in the fields of valuation, financial forensics, and related advisory
services. NACVA provides training in valuing businesses, damage determination, and fraud detection and
prevention and offers continuing professional education courses for members and nonmembers. In
addition, its members must adhere to an established code of ethics. NACVA offers the following
credentials: Certified Valuation Analyst (CVA), Accredited Valuation Analyst (AVA), Accredited in Business
Appraisal Review (ABAR), and Master Analyst in Financial Forensics (MAFF).
7. Summary
Forensic accounting involves the application of special skills in accounting, auditing, finance, quantitative
methods, research, and investigations. It also involves knowledge of certain areas of the law. These skills
and knowledge enable forensic accountants to collect, analyze, and evaluate evidential matter and to
interpret and communicate findings. When practicing litigation services, the forensic accountant serves
as an expert or consultant and provides assistance for actual or potential legal or regulatory proceedings
before a trier of fact in connection with the resolution of disputes between parties. When performing
investigative services, the forensic accountant serves as a consultant in cases that do not involve actual
or threatened litigation, performing analyses, or investigations that may require the same skills as used in
litigation services.
In many respects, forensic accounting is very much like auditing. Like the forensic accountant, the auditor
generally gathers evidence and exercises professional skepticism; is subject to certain standards, laws,
and regulations; and applies specialized skills. The auditing skills of collecting, interpreting, and evaluating
data and information are also essential to the practice of forensic accounting. These skills are used to
obtain evidence on which the findings, recommendations, and expert opinions of forensic accountants
are based. But the overall objectives of these two kinds of engagements are very different. The objective
of audit engagements usually is to express an opinion on whether financial statements, taken as a whole,
are fairly presented.
In contrast, forensic accounting engagements tend to be focused on one or more particular areas.
Furthermore, forensic accountants apply specialized skills (in the form of specialized procedures) that
differ from those used by financial statement auditors. In addition to possessing auditing skills, the
forensic accountant is knowledgeable as to how to structure and manage investigations, the types of
evidence that may be collected, how to maintain the chain of custody, the legal rights of those under
investigation, how to identify different types of fraud schemes, how to conduct interviews, how to detect
deception, and other areas.
The forensic accountant should also have a basic understanding of the various roles played by crime scene
investigators, digital forensics experts, forensic scientists, forensic laboratories, prosecutors, and
attorneys. When performing litigation services, forensic accountants assist in the legal and dispute
resolution processes. Therefore, the forensic accountant has familiarity with the court systems, applicable
federal and state rules of procedure, and rules of evidence. Because the key elements of accounting
information systems include internal control and business processes, forensic accountants can benefit
from a good understanding of internal control processes and how they interface with business processes
and the accounting information system.
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Weak or nonexistent internal controls within specific business processes are often present in internal
fraud schemes. Although communication and problem solving skills are essential in all areas of accounting,
these skills can be even more critical in the area of forensic accounting. Understanding psychology is
another important skill required in forensic accounting and affects the forensic accountant’s success when
determining the motivations of perpetrators and assessing the likelihood of deception during interviews.
Forensic accounting is an accounting specialty that comprises many subspecialties. The two main areas of
forensic accounting are litigation services and investigative services. The primary distinction between the
two areas is whether or not those knowledgeable of the case contemplate or anticipate litigation.
There are many professional organizations and certifications applicable to forensic accountants. Five of
the major professional organizations and certifications are the AICPA (with the CPA, CFF, and ABV
credentials), the ACFE (with the CFE credential), the ASA (with the AM and ASA credentials), ISACA (with
the CISA, CRISC, and CISM credentials), and NACVA (with the CVA, AVA, ABAR, and MAFF credentials).
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