Forensic accounting, forensic accountancy or financial

forensics is the specialty practice area of accounting that

investigates whether firms engage in financial reporting misconduct,
[1]
or financial misconduct within the workplace by employees,
officers or directors of the organization.[2] Forensic accountants
apply a range of skills and methods to determine whether there has
been financial misconduct by the firm or its employees. [3]

History
Forensic accounting was not formally defined until the 1940s.
Originally Frank Wilson is credited with the birth of forensic
accounting in the 1930s. When Wilson was working as a CPA for the
US Internal Revenue Service, he was assigned to investigate the
transactions of the infamous gangster Al Capone. Capone was
known for his involvement in illegal activities, including violent
crimes. However it was Capone's federal income tax fraud that was
discovered by forensic accountants. Wilson's diligent analysis of the
financial records of Al Capone resulted in his indictment for federal
income tax evasion. Capone owed the government $215,080.48
from illegal gambling profits and was found guilty of tax evasion for
which he was sentenced to 10 years in federal prison. This case
established the significance of forensic accounting. [4]

Application area
Forensic accountants are necessary for a variety of reasons. They
can be useful for criminal investigations, litigation support,
insurance claims, and corporate investigations. [5]
Financial forensic engagements may fall into several categories. For
example:
 Economic damages calculations, whether suffered
through tort or breach of contract;
 Post-acquisition disputes such as earnouts or breaches
of warranties;
 Bankruptcy, insolvency, and reorganization;
 Divorce settlement
 Securities fraud;
 Tax fraud;
 Money laundering;
 Business valuation;
 Credit card fraud;[6]
 Skimming;[6]
 Computer forensics/e-discovery; and
 Fraud risk assessments under SOX 404 or otherwise.

Forensic accountants
Main article: Forensic accountant
Forensic accountants, investigative accountants or expert
accountants may be involved in recovering proceeds of serious
crime, and provide evidence to confiscation proceedings concerning
actual or assumed proceeds of crime or money laundering. In
the United Kingdom, relevant legislation is contained in
the Proceeds of Crime Act 2002. Forensic accountants typically hold
the following qualifications; Certified Forensic Accounting
Professional [Certified Forensic Auditors] (CFA - England & Wales)
granted by the Forensic Auditors Certification Board of England and
Wales (FACB), Certified Fraud Examiners (CFE - US /
International), Certificate Course on Forensic Accounting and Fraud
Detection (FAFD) by Institute of Chartered Accountants of India
(ICAI), Certified Public Accountants (CPA - US) with AICPA's [Certified
in Financial Forensics est. 2008] (CFF) Credentials, Chartered
Accountants (CA - Canada), Certified Management
Accountants (CMA - Canada), Chartered Professional
Accountants (CPA - Canada), Chartered Certified Accountants (CCA -
UK), or Certified Forensic Investigation Professionals (CFIP). In India
there is a separate breed of forensic accountants called Certified
Forensic Accounting Professionals.[7]
The Certified Forensic Accountant (CRFAC) program from
the American Board of Forensic Accounting assesses Certified
Public Accountants (CPAs) knowledge and competence in
professional forensic accounting services in a multitude of areas.
[8]
Forensic accountants may be involved in both litigation support
(providing assistance on a given case, primarily related to the
calculation or estimation of economic damages and related issues)
and investigative accounting (looking into illegal activities). The
American Board of Forensic Accounting was established in 1993. [8]
Large accounting firms often have a forensic accounting
department.[9] All of the larger accounting firms, as well as many
medium-sized and boutique firms and various police and
government agencies have specialist forensic accounting
departments. Within these groups, there may be further sub-
specializations: some forensic accountants may, for example,
specialize in insurance claims, personal injury claims, fraud, anti-
money-laundering, construction,[10] or royalty audits.[11] Forensic
accounting used in large companies is sometimes called financial
forensics.
The role of the forensic accountants differ from what auditors do.
[12]
Forensic accountants are involved with investigating and
analyzing the factual information brought about by the crime,
whereas auditors handle the gross financial statements. [12] Auditors
detect financial deficiencies that need to be corrected, and they give
suggestions to investors, based on their professional opinion, on the
reliance of financial statements.[12] Forensic accountants examine
evidence of criminal offences and through this evidence, make
efforts to improve the processes adopted by those affected.
[12]
Though audits and forensic accounting investigations have their
differences, they share a couple similarities; both require knowledge
of the practices and processes possessed by the business and the
general accounting principles concerned with the particular
situation, and they both require the ability to interpret financial
documents and be objective and impartial.[12]
Forensic accountants combine knowledge of the law with their
accounting skills. They can assess companies, and help companies
resolve issues. This can help companies prevent corruption, fraud,
embezzlement, etc. As with all accounting professionals, forensic
accountants performing an audit of a company should remain
neutral. Large companies mainly use forensic accountants when
performing audits; however, there are other uses for forensic
accountants in companies.[13] Forensic accountants often assist in
professional negligence claims where they are assessing and
commenting on the work of other professionals. Forensic
accountants are also engaged in marital and family law, analyzing
lifestyle for spousal support purposes, determining income available
for child support, and equitable distribution of marital assets.
Forensic accounting and fraud investigation methodologies [14] are
different than internal auditing.[15] Thus forensic accounting
services[16] and practice should be handled by forensic accounting
experts, not by internal auditing experts. Forensic accountants may
appear on the crime scene a little later than fraud auditors; their
major contribution is in translating complex financial transactions
and numerical data into terms that ordinary laypersons can
understand, because if the fraud comes to trial, the jury will be
made up of ordinary laypersons. On the other hand, internal
auditors investigate using checklists and techniques that may not
surface the types of evidence that the jury or regulatory bodies look
for in proving fraud. Forensic investigation fieldwork may carry legal
risks and consultant malpractice risks if internal auditing checklists
are used, rather than the specialized skills of forensic accounting.
The fraud cycle describes the process which is taken by those in
order to conduct a fraud.[5] It begins with planning the actions of the
fraud, which is then followed by the actual commitment of the act,
ending with the conversion of the assets to cash. [5] The main goal of
Forensic accountants is to determine whether financial crime has
been committed, and if so, to what extent. They are often used as
expert witnesses to assist the judge or jury in forming the verdict.
[17]
It is important that forensic accountants possess skills such as
microeconomics, cost-center accounting systems, coming up with
conclusions with little data, report writing, research skills and
interview skills.[17]
This process can employ one or more of the following techniques:
review of Public records; background investigations; interviews of
knowledgeable parties; analysis of Real evidence to identify
possible Forgery and/or document alterations; Surveillance and
inspection of business premises; analysis of individual Financial
transactions or statements; review of Business records to identify
fictitious vendors, employees, and/or business activities, or
interrogation of suspects, questioning of witnesses or victims. [18]
Forensic accountants are also increasingly playing more proactive
risk reduction roles by designing and performing extended
procedures as part of the statutory audit, acting as advisers to audit
committees, fraud deterrence engagements, and assisting in
investment analyst research.[19]

Methods
Forensic accounting combines the work of an auditor and a public or
private investigator. Unlike auditors whose goal is focused on finding
and preventing errors, the role of a forensic accountant is to detect
instances of fraud, as well as identify the suspected perpetrator of
the fraud.[2] Some of the most common types of fraud schemes
include overstating revenues, understating liabilities, inventory
manipulation, asset misappropriation, and bribery/corruption. To
discover these, forensic accountants apply a variety of techniques.
[20]

Forensic accounting methods can be classified into quantitative and

qualitative. The qualitative approach studies the personal
characteristics of the individuals behind financial fraud schemes. A
popular theory of fraud revolves around the fraud triangle, which
classifies the three elements of fraud as perceived opportunity,
perceived need (pressures), and rationalization. [21] This theoretical
construct was first articulated by behavioral scientist Donald
Cressey.[22] More recently, forensic accountants have gone beyond
incentive effects and focused on behavioral characteristics, a branch
of accounting known as accounting, behavior and organizations,
or organizational behavior. Certain predictive factors, like being
labeled as “narcissistic” or committing adultery, are common traits
among fraud perpetrators.[1] These characteristics are often not
conclusive enough on their own to identify the culprit, but can help
forensic accountants to narrow down a suspect list, sometimes
based on behavioral or demographic factors.[23]
The quantitative approach focuses on financial data information and
searches for abnormalities or patterns predictive of misconduct.
[1]
Today, forensic accountants work closely with data analytics to
dig through complex financial records. Data collection is an
important aspect of forensic accounting because proper analysis
requires data that is sufficient and reliable.[24] Once a forensic
accountant has access to the relevant data, analytic techniques are
applied. Predictive modeling can detect potentially fraudulent
activities, entity resolution algorithms and social network analytics
can identify hidden relationships, and text mining allows forensic
accountants to parse through large amounts of unstructured data
quickly.[25] Another common quantitative forensic accounting
method is the application of Benford's law. Benford's law predicts
patterns in an observed set of accounting data, and the more the
data deviates from the pattern, the more likely that the data has
been manipulated and falsified.[26]

Analytical techniques
Forensic accountants utilize an understanding of economic
theories, business information, financial reporting systems,
accounting and auditing standards and procedures, data
management & electronic discovery, data analysis techniques for
 fraud detection, evidence gathering and investigative techniques,
and litigation processes and procedures to perform their work. [27]
When detecting fraud in public organizations accountants will look in
areas such as billing, corruption, cash and non-cash asset
misappropriation, refunds and issues in the payroll department. To
detect fraud, companies may undergo management reviews, audits
(both internally and externally) and inspection of documents.
[28]
Forensic accountants will often try to prevent fraud before it
happens but searching for errors and in-precise operations as well
as poorly documented transactions.[28]
The process begins with the forensic accountant gathering as much
information as possible from clients, suppliers, stakeholders and
anyone else involved in the company. Next, they will analyze
financial statements in order to try and find errors or mistakes in the
reporting of those financial statements as well as they will analyze
any background information provided. The next step involves
interviewing employees in order to try and find where the fraud may
be occurring. Investigators will look at company values,
performance reviews, management styles and the overall structure
of the company. After this is complete the forensic accountant will
try to draw conclusions from their findings.[29]

See also
 Benford's law
 Certified Fraud Examiner
 Association of Certified Fraud Examiners

References
External links
 International Institute of Forensic Investigation Professionals Inc
 Association of Certified Fraud Examiners
 Certified in Financial Forensics
 Forensic Accountants, Forensic Accounting Certifications, and Due
Diligence
In law, fraud is intentional deception to deprive a victim of a legal
right or to gain from a victim unlawfully or unfairly. Fraud can
violate civil law (e.g., a fraud victim may sue the fraud perpetrator
to avoid the fraud or recover monetary compensation) or criminal
law (e.g., a fraud perpetrator may be prosecuted and imprisoned by
governmental authorities), or it may cause no loss of money,
property, or legal right but still be an element of another civil or
criminal wrong.[1] The purpose of fraud may be monetary gain or
other benefits, such as obtaining a passport, travel document, or
driver's licence. In cases of mortgage fraud, the perpetrator may
attempt to qualify for a mortgage by way of false statements. [2]

Terminology
Fraud can be defined as either a civil wrong or a criminal act. For
civil fraud, a government agency or person or entity harmed by
fraud may bring litigation to stop the fraud, seek monetary
damages, or both. For criminal fraud, a person may be prosecuted
for the fraud and potentially face fines, incarceration, or both. [3]
Civil law
In common law jurisdictions, as a civil wrong, fraud is considered
a tort.[4][5] While the precise definitions and requirements of proof
vary among jurisdictions, the requisite elements of fraud as a tort
generally are the intentional misrepresentation or concealment of
an important fact upon which the victim is meant to rely, and in fact
does rely, to the detriment of the victim.[6] Proving fraud in a court of
law is often said to be difficult as the intention to defraud is the key
element in question.[7] As such, proving fraud comes with a "greater
evidentiary burden than other civil claims". This difficulty is
exacerbated by the fact that some jurisdictions require the victim to
prove fraud by clear and convincing evidence.[8]
In cases of a fraudulently induced contract, fraud may serve as
a legal defence in a civil action for breach of contract or specific
performance of a contract.[9] Similarly, fraud may serve as a basis
for a court to invoke its equitable jurisdiction.[10][11] The remedies for
fraud may include rescission (i.e., reversal) of a fraudulently
obtained agreement or transaction, the recovery of a monetary
award to compensate for the harm caused, punitive damages to
punish or deter the misconduct, and possibly others. [12]
Criminal law
In common law jurisdictions, as a criminal offence, fraud takes many
different forms, some general (e.g., theft by false pretense) and
some specific to particular categories of victims or misconduct
(e.g., bank fraud, insurance fraud, forgery). The elements of fraud as
a crime similarly vary.[13] The requisite elements of perhaps the most
general form of criminal fraud, theft by false pretense, are the
intentional deception of a victim by false representation or pretense
with the intent of persuading the victim to part with property and
with the victim parting with property in reliance on the
representation or pretense and with the perpetrator intending to
keep the property from the victim.[14]

Types of fraud

An advertisement for a possibly fraudulent "work-at-

home scheme"
The falsification of documents, known as forgery, and counterfeiting
are types of fraud involved in physical duplication or fabrication.
[15]
The "theft" of one's personal information or identity, like finding
another's social security number and then using it as identification,
is a type of fraud.[16][17] Fraud can be committed through and across
many media including mail, wire,[15] phone, and
the Internet (computer crime and Internet fraud).[18]
Given the international nature of the web and the ease with which
users can hide their location, obstacles to checking identity and
legitimacy online, and the variety of hacker techniques available to
gain access to PII have all contributed to the very rapid growth of
Internet fraud.[19] In some countries, tax fraud is also prosecuted
under false billing or tax forgery.[20] There have also been fraudulent
"discoveries", e.g., science, where the appetite is for prestige rather
than immediate monetary gain.[21] A hoax is a distinct concept that
involves deliberate deception without the intention of gain or of
materially damaging or depriving a victim.[22]
Internal fraud
Internal fraud, also known as "insider fraud", is fraud committed or
attempted by someone within an organization such as an employee.
[23]

Commodities fraud
The illegal act of obtaining (or the attempt to obtain) a certain
amount of currency in accordance with a contract that promises the
later exchange of equated assets, which ultimately never arrive, is a
type of fraud, known as commodities fraud. Alternatively, the term
can relate to the failure of registering in an exchange, the act of
deliberately providing falsified information to clients, the action of
executing transactions with the sole purpose of making a profit for
the payee, and the theft of client funds.[24][25]

Detection
Further information: Data analysis techniques for fraud detection

A fraudulent manufacturer's suggested retail price on a

speaker
The detection of fraudulent activities on a large scale is possible
with the harvesting of massive amounts of financial data paired
with predictive analytics or forensic analytics, the use of electronic
data to reconstruct or detect financial fraud. Using computer-based
analytic methods in particular allows for the surfacing of errors,
anomalies, inefficiencies, irregularities, and biases which often refer
to fraudsters gravitating to certain dollar amounts to get past
internal control thresholds.[26] These high-level tests include tests
related to Benford's Law and possibly also those statistics known as
descriptive statistics. High-level tests are always followed by more
focused tests to look for small samples of highly irregular
 transactions. The familiar methods of correlation and time-series
analysis can also be used to detect fraud and other irregularities. [27]

Cost
Participants of a 2010 survey by the Association of Certified Fraud
Examiners estimated that the typical organization loses five per cent
of its annual revenue to fraud, with a median loss of $160,000.
Fraud committed by owners and executives was more than nine
times as costly as employee fraud. The industries most commonly
affected are banking, manufacturing, and government. [28]

By region
Asia
China
In China, according to the Criminal Law of the People's Republic of
China, the Crime of Fraud (诈骗罪) refers to the "criminal act of
deceiving and obtaining public or private property". [29] According to
Article 266 of the Criminal Law:[29]
1. Those who commit fraud involving a "relatively large amount" of
public or private property shall be sentenced to fixed-term
imprisonment of not more than three years, criminal detention, or
injunction control with community correction, and may additionally
or solely be fined.
2. If the amount involved is "large" or there are other serious
circumstances, the offender shall be sentenced to fixed-term
imprisonment of not less than three years but not more than ten
years and shall also be fined.
3. If the amount involved is "particularly large" or there are other
particularly serious circumstances, the offender shall be sentenced
to fixed-term imprisonment of over ten years or life imprisonment
and shall also be fined or have their property confiscated.
According to the "Interpretation on Several Issues Concerning the
Specific Application of the Law in Handling Criminal Cases of Fraud"
(关于办理诈骗刑事案件具体应用法律若干问题的解释) issued by the Supreme People's
Court and the Supreme People's Procuratorate in 2011, for cases of
fraud involving public or private property with a value ranging from
3,000 yuan to 30,000 yuan, from 30,000 yuan to 500,000 yuan, and
over 500,000 yuan, they should be respectively deemed as
"relatively large amount", "large amount", and "particularly large
amount" as stipulated in Article 266 of the Criminal Law. [30]
India
In India, the criminal laws are enshrined in the Indian Penal Code,
[31]
supplemented by the Criminal Procedure Code and Indian
Evidence Act.[32]
Europe
United Kingdom
In 2016, the estimated value lost through fraud in the UK was £193
billion a year.[33] In January 2018, the Financial Times reported that
the value of UK fraud hit a 15-year high of £2.11bn in 2017,
according to a study. The article said that the accountancy firm BDO
examined reported fraud cases worth more than £50,000 and found
that the total number rose to 577 in 2017, compared with 212 in
2003. The study found that the average amount stolen in each
incident rose to £3.66m, up from £1.5m in 2003.[34]
As at November 2017, fraud is the most common criminal offence in
the UK according to a study by Crowe Clark Whitehill, Experian and
the Centre for Counter Fraud Studies.[35] The 2017 Annual Fraud
Indicator shows that fraud costs about £10,000 per family in the UK,
and the UK's fraud cost exceeds the gross domestic product of 148
countries[36] such as Romania, Qatar and Hungary.[37]
According to another review by the UK anti-fraud charity Fraud
Advisory Panel (FAP), business fraud accounted for £144bn, while
fraud against individuals was estimated at £9.7bn. The FAP has
been particularly critical of the support available from the police to
victims of fraud in the UK outside of London. Although victims of
fraud are generally referred to the UK's national fraud and
cybercrime reporting centre, Action Fraud, the FAP found that there
was "little chance" that these crime reports would be followed up
with any kind of substantive law enforcement action by UK
authorities, according to the report.[38]
In July 2016, it was reported that fraudulent activity levels in the UK
increased in the 10 years leading up to 2016 from £52 billion to
£193 bn. This figure would be a conservative estimate, since as the
former commissioner of the City of London Police, Adrian Leppard,
has said, only 1 in 12 such crimes are actually reported. [39] Donald
Toon, director of the NCA's economic crime command, stated in July
2016: "The annual losses to the UK from fraud are estimated to be
more than £190bn". Figures released in October 2015 from the
Crime Survey of England and Wales found that there had been 5.1
million incidents of fraud in England and Wales in the previous year,
affecting an estimated one in 12 adults and making it the most
common form of crime.[40]
Also in July 2016, the Office for National Statistics (ONS) stated:
"Almost six million fraud and cyber crimes were committed last year
in England and Wales and estimated there were two million
computer misuse offences and 3.8 million fraud offences in the 12
months to the end of March 2016." Fraud affects one in ten people
in the UK. According to the ONS, most fraud relates to bank account
fraud. These figures are separate from the headline estimate that
another 6.3 million crimes (distinct from fraud) were perpetrated in
the UK against adults in the year to March 2016. [41]
Fraud was not included in a "Crime Harm Index" published by
the Office for National Statistics in 2016. The Chief of the National
Audit Office (NAO), Sir Anyas Morse has also said "For too long, as a
low-value but high-volume crime, online fraud has been overlooked
by government, law enforcement and industry. It is now the most
commonly experienced crime in England and Wales and demands
an urgent response."[42]
HM Treasury issued guidance to central government departments in
January 2011 concerned with "Tackling Internal Fraud", concerned
that economic pressures and potential staff redundancies at the
time might lead those staff who "might be tempted" to commit fraud
to make more of any opportunity which might arise, noting a
possible shift in the balance between "the reward from fraud" and
the risk of detection.[43] An aspect of the guidance was to equip staff
to look out for "fraud indicators": clues or hints that an individual
member of staff, team or area of activity might need "a closer look".
[43]: Section 4.16

In 2022, the television program Scam Interceptors revealed that the

majority of fraud in the United Kingdom was perpetrated by
industrial-scale scamming call centres in Asia.[44]
England, Wales, and Northern Ireland
Since 2007, fraud in England and Wales and Northern Ireland has
been covered by the Fraud Act 2006. The Act was given royal
assent on 8 November 2006, and came into effect on 15 January
2007.[45] The Act gives a statutory definition of the criminal offence
of fraud, defining it in three classes—fraud by false representation,
fraud by failing to disclose information, and fraud by abuse of
position. It provides that a person found guilty of fraud is liable to a
fine or imprisonment for up to six months on summary conviction, or
a fine or imprisonment for up to ten years on conviction
on indictment.[46] This Act largely replaces the laws relating to
obtaining property by deception, obtaining a pecuniary advantage
and other offences that were created under the Theft Act 1978.[47][48]
Serious Fraud Office
Main articles: Serious Fraud Office (United Kingdom) and Cifas
The Serious Fraud Office is an arm of the Government of the United
Kingdom, accountable to the Attorney General for England and
Wales. The National Fraud Authority (NFA) was, until 2014, a
government agency coordinating the counter-fraud response in the
UK. Cifas is a British fraud prevention service, a not-for-profit
membership organization for all sectors that enables organizations
to share and access fraud data using their databases. Cifas is
dedicated to the prevention of fraud, including internal fraud by
staff, and the identification of financial and related crime. [49]
Scotland
In Scots law, fraud is covered under the common law and a number
of statutory offences. The main fraud offences are common law
fraud, uttering, embezzlement, and statutory fraud. The Fraud Act
2006 does not apply in Scotland.[50]
North America
Canada
Section 380(1) of the Criminal Code provides the general definition
of fraud in Canada:[51]
380. (1) Every one who, by deceit, falsehood or other fraudulent
means, whether or not it is a false pretence within the meaning of
this Act, defrauds the public or any person, whether ascertained or
not, of any property, money or valuable security or any service,
(a) is guilty of an indictable offence and liable to a term of
imprisonment not exceeding fourteen years, where the
subject-matter of the offence is a testamentary instrument or
the value of the subject-matter of the offence exceeds five
thousand dollars; or
(b) is guilty
(i) of an indictable offence and is liable to imprisonment for a
term not exceeding two years, or
(ii) of an offence punishable on summary conviction, where the
value of the subject-matter of the offence does not exceed five
thousand dollars.
In addition to the penalties outlined above, the court can also issue
a prohibition order under s. 380.2 (preventing a person from
"seeking, obtaining or continuing any employment, or becoming or
 being a volunteer in any capacity, that involves having authority
over the real property, money or valuable security of another
person"). It can also make a restitution order under s. 380.3. [52] The
Canadian courts have held that the offence consists of two distinct
elements:[53]
 A prohibited act of deceit, falsehood or other fraudulent
means. In the absence of deceit or falsehood, the courts will
look objectively for a "dishonest act"; and
 The deprivation must be caused by the prohibited act, and
deprivation must relate to property, money, valuable security,
or any service.
The Supreme Court of Canada has held that deprivation is satisfied
on proof of detriment, prejudice or risk of prejudice; there does not
have to be actual loss.[54] Deprivation of confidential information, in
the nature of a trade secret or copyrighted material that has
commercial value, has also been held to fall within the scope of the
offence.[55]
United States
See also: United States free speech exceptions
Criminal fraud
The proof requirements for criminal fraud charges in the United
States are essentially the same as the requirements for other
crimes: guilt must be proved beyond a reasonable doubt.
Throughout the United States fraud charges can be misdemeanours
or felonies depending on the amount of loss involved. High-value
fraud can also trigger additional penalties. For example, in
California, losses of $500,000 or more will result in an extra two,
three, or five years in prison in addition to the regular penalty for
the fraud.[56] The U.S. government's 2006 fraud review concluded
that fraud is a significantly under-reported crime, and while various
agencies and organizations were attempting to tackle the issue,
greater cooperation was needed to achieve a real impact in the
public sector.[57] The scale of the problem pointed to the need for a
small but high-powered body to bring together the numerous
counter-fraud initiatives that existed.[49]
Civil fraud
Although elements may vary by jurisdiction and the specific
allegations made by a plaintiff who files a lawsuit that alleged fraud,
typical elements of a fraud case are that:[58]
1. Somebody misrepresents a material fact in order to obtain action or
forbearance by another person
2. The other person relies upon the misrepresentation
3. The other person suffers injury as a result of the act or forbearance
taken in reliance upon the misrepresentation.
To establish a civil claim of fraud, most jurisdictions in the United
States require that each element of a fraud claim be pleaded with
particularity and be proved by a preponderance of the evidence,
[59]
meaning that it is more likely than not that the fraud occurred.
Some jurisdictions impose a higher evidentiary standard, such
as Washington State's requirement that the elements of fraud be
proved with clear, cogent, and convincing evidence (very probable
evidence),[60] or Pennsylvania's requirement that common law fraud
be proved by clear and convincing evidence. [61]
The measure of damages in fraud cases is normally computed using
one of two rules:[62]
 The "benefit of bargain" rule, which allows for recovery of damages
in the amount of the difference between the value of the property
had it been as represented and its actual value;
 Out-of-pocket loss, which allows for the recovery of damages in the
amount of the difference between the value of what was given and
the value of what was received.
Special damages may be allowed if shown to have been proximately
caused by the defendant's fraud and the damage amounts are
proved with specificity. Some jurisdictions may permit a plaintiff in a
fraud case to seek punitive or exemplary damages.[63]
Anti-fraud provisioning

In response to securities fraud in the United States, Franklin D. Roosevelt

established the Securities and Exchange Commission.
Beyond legislation directed at preventing or punishing fraud, some
governmental and non-governmental organizations engage in anti-
fraud efforts. Between 1911 and 1933, 47 states adopted the so-
called Blue Sky Laws status.[64] These laws were enacted and
enforced at the state level and regulated the offering and sale
of securities to protect the public from fraud. Though the specific
provisions of these laws varied among states, they all required the
registration of all securities offerings and sales, as well as of every
U.S. stockbroker and brokerage firm;[65] however, these Blue Sky
laws were generally found to be ineffective. To increase public trust
in the capital markets, Franklin D. Roosevelt established the U.S.
Securities and Exchange Commission (SEC).[66] The main reason for
the creation of the SEC was to regulate the stock market and
prevent corporate abuses relating to the offering and sale of
securities and corporate reporting. The SEC was given the power to
license and regulate stock exchanges, the companies whose
securities traded on them, and the brokers and dealers who
conducted the trading.[67]

Forensic accountants are experienced auditors, accountants,

and investigators of legal and financial documents that are hired to
look into possible suspicions of fraudulent activity within a company;
or are hired by a company who may just want to prevent fraudulent
activities from occurring. They also provide services in areas such as
accounting, antitrust, damages, analysis, valuation, and general
consulting. Forensic accountants have also been used
in divorces, bankruptcy, insurance claims, personal injury claims,
fraudulent claims, construction, royalty audits, and tracking
terrorism by investigating financial records. Many forensic
accountants work closely with law enforcement personnel and
lawyers during investigations and often appear as expert witnesses
during trials.[citation needed]

Tasks performed
Forensic accounting or forensic accountancy has been used since
the time of the ancient Egyptians when Pharaoh had scribes account
for his gold and other assets. These scribes worked in Pharaoh's
courts and were charged with fraud prevention and detection. Their
role stayed much the same until the turn of the 20th century. [1] As
an accountant they must have knowledge of the latest accounting
standards and procedures, be proficient in many different Financial
Reporting Systems being used, and be able to provide
recommendations that will strengthen internal controls. They also
need to have an understanding of the different monetary units used
internationally due to the different types used in foreign accounts or
companies. As an auditor they must perform regular financial audits
to prevent possible situations that could lead to fraud. As an
attorney they must know the current Federal and State laws and
regulations, and should be able to approve or disprove suspicions of
fraud. They may also be called to be an expert witness in a court
trial so they must be able to communicate well and at a level that is
understandable by individuals without accounting knowledge.
As an investigator they must investigate and gather evidence to be
presented in a court of law; be able to investigate complaints,
allegations, and tips of suspected fraud; must be able to sort,
analyze, and compare data in support of an investigation; and must
have a working relationship with the investigating and prosecuting
agencies involved.
When acting as an expert witness in court proceedings in Federal
Court in the United States a forensic accountant is required to give
testimony which is based upon sufficient facts or data and is the
product of reliable principles and methods, and they are required to
have applied the principles and methods reliably to the facts of the
case.[2] When acting as an expert witness in court proceedings in
England and Wales a forensic accountant is obliged to give
"objective, unbiased opinion on matters within [their] expertise". [3]
[4]
For a comparison with French practices, see a study of "Forensic
Accountants at Work".[5]

Information needs
Forensic accountants need to have a great deal of access to
information regarding the company they are investigating or
assisting. The information will determine how much a person
actually makes, the worth of a business, if there has been fraudulent
activity, who committed the fraud, everyone involved, how much
was taken from the company, where the money went, and how
much can be recovered. Some of the obvious information needs
consist of the financial statements, bank statements, credit
statements, and computers. Some of the less obvious information
needs consist of address books, emails, phone numbers,
spreadsheets, electronic memos, and so forth.[citation needed]
Forensic Investigation/Audit
Forensic accountants need to advance fully to become all rounded
forensic investigators or auditors that can handle any type of
situation requiring financial or digital forensic skills. These days
white collar criminals are high tech to the extent of using computers
to defraud and perpetrate financial related crimes in such a manner
that a traditional forensic accountant can not be able to trace.
Sometimes investigation involves e-mail tracing to ascertain intent
an element that must exist for any one to be convicted of fraud.
Certified Forensic Investigation Professionals have such training.
They are part forensic accountants and part digital forensic experts.
[citation needed]

Financial statements
Financial statements are very important to forensic accountants
because they must analyze the information given on the statements
and compare that information to other sources. The balance sheet,
income statement, statement of owner's equity, and statement of
cash flows are the four most important financial statements that
forensic accountants look at; however, they also look at business
plans and disclosures in footnotes.[citation needed]
The balance sheet shows the financial position of a company at a
given point in time. It lists the company's assets, liabilities, and
owner's equity while showing the resources of the company. The
income statement shows the results of the company's operations
during a period of time, revenues minus expenses for a given time
period ending at a specified date. The statement of owner's equity,
also known as the statement of retained earnings or the equity
statement, reconciles the beginning and ending retained earnings
for the period, using information such as net income from the other
financial statements.[6] The statement of cash flows lists the sources
and uses of cash and divides them into operating, investing, and
financing activities. They evaluate the company's ability to pay its
bills while indicating if there is enough cash for routine operations.
Some other financial documents that need to be examined include
the general journal, general ledger, sales journal, purchases journal,
cash receipts journal and cash disbursements journal.
Even though forensic accountants need to analyze and compare
financial statements most cases of fraudulent activity will not be in
plain sight. Most fraudulent activity will be hidden and manipulated
to the point that forensic accountants must dig deep into the
company.
Bank statements
Bank statements are also needed in order to investigate a company.
The owner's personal bank statements are needed as well as the
company's bank statements. If the company is the one who wanted
the investigation to be conducted then they most likely suspect an
employee. Therefore, bank statements would be needed from the
individual being investigated. They will show how much cash is
coming into and out of the company. They will also show where the
money is going and where it is coming from, who are the clients,
and if any money has been transferred to foreign accountants.
Once again, if the owner of the company was performing fraudulent
activities then the discrepancies would not be in plain sight; the
owner would most likely have foreign accountants with no trace to
them. If evidence of a foreign account can be found then there may
also be evidence on what the individual has been purchasing with
that account, when it was opened, how much has been deposited,
and if there is a valid reason for the individual to have a foreign
account open. If the company is based overseas, then that alone is
reason enough to have a foreign account. However, if it is an
individual's personal account and they put the account under a
different name (mother's maiden name who died 10 years ago) then
there is enough reason to believe the individual is trying to hide
something.
Credit statements
Credit statements can show evidence that bank statements may
not, but once again, the evidence will not be in plain sight. Forensic
accountants must look to see if there were any big purchases that
do not match the individual's income, for instance, a new vehicle.
Credit statements may also reveal that the individual has been
taking several exotic vacations over the past few years that are
outside of their means.
Forensic rating models
Forensic rating models are financial models used to represent the
information known about a business and to derive an overall score,
indicating a risk of financial fraud. Financial ratios are calculated
from published figures, then techniques to judge the stability of a
company by looking at particular ratios have been used since the
1930s.[7] An improved technique is based on discriminant analysis,
[7]
where these ratios are weighted by coefficients to give an overall
value or Z-score.[7][8] The coefficients are chosen based on research
by forensic accountants across good and bad business practices,
and may vary for particular market sectors or for different models.
 Since Altman's 1968 publication[7] and later work such as Taffler's in
1983,[9] these Z-score models have been widely used.
In India, such models were developed in response to the Satyam
scandal of 2008.[8] Models such as J-score were developed,[10] from
the work of CA Mayur Joshi and published in 2011. [11] J-score is built
on the presumption that it is more difficult to manipulate the cash
flows than to present an inflated value for an asset, and so
emphasises these.[8]

Education
A person in this field should have at least 2 years experience in
auditing or accounting and a Bachelor's degree in Accounting or a
related field. Some forensic accountants are Certified Forensic
Accounting Professionals (CFAPs),[12] Certified Forensic Investigation
Professionals (CFIPs), Certified Public Accountants (CPAs), Chartered
Accountants (CAs), Certified Management Accountants or Chartered
Professional Accountants (CMA/CPA), Certified Fraud
Examiners (CFEs), Certified in Financial Forensics (CFFs), Certified
Forensic Accountant (CRFAC), Certified Valuation Analysts (CVAs),
Investigative & Forensic Accountants (IFAs), or Chartered Certified
Forensic Accountants (CCFA). Some have other professional
certifications. The comparison of all these certifications is available
on different third party media portals.
Certified Forensic Investigation Professional (CFIP)
The Certified Forensic Investigation Professional program for
potential investigators' knowledge and competence in professional
forensic investigation skills in various subjects include:
1. Criminology & Psychology
2. Principles and Practice of Accounting
3. Computer and digital forensics
4. Fraud Auditing and Forensic Accounting
5. Criminal Investigations
6. Studies on Fraud and Corruption
7. Investigation Law
8. Investigative accounting[citation needed]
Certified Forensic Investigation Professionals have the following
skills sets:
1. Fraud Prevention and Detection
2. Forensic Investigation
3. Criminal Investigation
4. Design and Implementation of Preventive Controls
5. Digital forensics
6. Forensic Accounting
7. Assets tracing in Divorce, Bankruptcy and Money Laundering Cases
and
8. Expert witnessing
Basic Entry qualifications:
1. A bachelor's degree plus
2. 3 years experience in finance, auditing, investigation, accounting,
security and law enforcement, digital forensics or cyber security or
3. High school diploma with over 5 years experience in finance,
auditing, investigation, accounting, security and law enforcement,
digital forensics or cyber security. Those with certifications like CPA,
ACCA, CA, CFE, or equivalent professional qualification with over 8
years’ experience in auditing or investigation may become fully
certified via the grandfathering process.
The CFIP credential was first put into use in 2012. [citation needed]
Certified Forensic Accountant (CRFAC)
The Certified Forensic Accountant credentialing process offered by
the American Board of Forensic Accounting is used to assess
the knowledge and competence of Certified Public Accountants
(CPAs) in professional forensic accounting services in a multitude of
areas.[13]
Forensic accountants may be involved in both litigation support
(providing assistance on a given case, primarily related to the
calculation or estimation of economic damages and related issues)
and investigative accounting (looking into illegal activities).
The CRFAC covers the broad base of forensic accounting knowledge.
[14]
The CRFAC credential was first put into use in 1993. [15] The
American Board of Forensic Accounting offers many programs. [16] For
effective learning, professionals will need expert training in the
practices of forensic accounting. The American Board of Forensic
Accounting offers the "Forensic Accounting Review". [17]
Certified Fraud Examiner (CFE)
The Association of Certified Fraud Examiners offers the Certified
Fraud Examiner (CFE) credential to members involved in fraud
prevention, deterrence, detection and investigation. Candidate
eligibility is based on a point system (representing a combination of
formal education, professional certifications and relevant work
experience) and a minimum of two years of anti-fraud professional
experience. To earn the CFE credential, candidates must pass a
four-part examination and abide by a code of professional ethics.
The terms forensic accounting and fraud examination are often used
interchangeably, however they are not the same discipline. Forensic
accounting focuses on litigation support and covers both fraud and
non-fraud situations (e.g. economic damages, personal injury, family
law, etc.). Fraud examination concerns itself exclusively with fraud-
related matters and encompasses the prevention, deterrence,
detection and investigation of fraud.
The CFE credential is recognized by partner organizations leading
the global fight against fraud and including, among others, the
Federal Bureau of Investigation, the Securities and Exchange
Commission, the Internal Revenue Service, the Ontario Provincial
Police, the City of London Police and the City of Toronto Auditor
General's Office.
[18]

Certified in Financial Forensics (CFF)

The American Institute of Certified Public Accountants has a subject
matter expertise credential for forensic accountants. The credential
is Certified in Financial Forensics ("CFF"). "The CFF credential is
granted exclusively to CPAs who demonstrate considerable
expertise in forensic accounting through their knowledge, skills, and
experience. The CFF encompasses fundamental and specialized
forensic accounting skills that CPA practitioners apply in a variety of
service areas, including: bankruptcy and insolvency; computer
forensic analysis; family law; valuations; fraud prevention, detection,
and response; financial statement misrepresentation; and economic
damages calculations."[19]
The average salary for a forensic accountant in the US is around
$74,000.00. A forensic accountant in New York could make up to
$102,655.00 while a forensic accountant in Orlando usually only
makes $56,071.00.[20]
Forensic accountants must be able to work independently and be
able to travel at least 10-15% of the time. Some forensic
accountants acting as consultants are not paid on salary and are
rather contracted to do a specific task for a company. A decision is
made between the organization and the accountant on what is to be
paid if the job is done in a specific amount of time and the
accountant is paid upon completion. These contracts can range from
a few thousand to several million depending on the time taken and
the specialized skills, if any, that are needed.
Certified Valuation Analyst (CVA)
A Certified Valuation Analyst (CVA) is a designation issued by the
National Association of Certified Valuation Analysts (NACVA) to
accounting professionals who have knowledge and expertise
of business valuation standards. Requirements for the CVA
designation include holding an active, valid, and unrevoked CPA
license or holding a business degree (i.e., in management,
economics, finance, marketing, accounting, or another business
field) and/or an MBA (master of business administration) or higher
business degree from an accredited college or university and two
years or more of full-time or equivalent experience in business
valuation and related disciplines for non-CPAs. In addition to these
requirements, CVA applicants must complete and pass specified
training courses and exams and complete a case study or submit an
actual and sanitized fair market value report, prepared during the
last 12 months, for peer review.[21]
NACVA's recertification process is designed to ensure that credential
holders keep up with changes in the constantly evolving valuation
field and that they continue to adhere to the industry's high
standards. Recertification is required every three years. [22]
CVAs are used to perform business valuations in a wide variety of
instances. These can include matters related to mergers and
acquisitions, buy/sell agreements, determination of damages in
third-party liability matters, dissenting shareholder actions, business
disputes, divorce settlements, estate and succession/exit planning,
initial public offerings, partner disputes, public domain matters and
fraud and arson defences that involve insurance values.
Chartered Certified Forensic Accountant (CCFA)
The Chartered Certified Forensic Accountant, CCFA designation is a
global forensic accounting designation awarded by the International
Institute of Certified Forensic Accountants, Inc. (IICFA). To be
awarded with the CCFA designation, one must pass all three (3)
levels of the CCFA qualifying exams and must obtain two years post
qualification or professional experience with a reputable forensic
accounting firm.
CCFA candidates must hold a bachelor's degree and pass all 15
papers of the CCFA Exam with an 80% pass Mark.
CCFA Level 1 Exam
1.1 Principles of Forensic Accounting
1.2 Principles of Fraud Examination
1.3 Forensic Criminology & Legal Studies
1.4 Financial Crime Investigation
CCFA Level 2 Exam
2.1 Computer & Digital Forensics
2.2 Criminal Investigation
2.3 Corporate Fraud & Internal Audit
2.4 Corruption & Public Sector Fraud
2.5 International Financial Reporting
2.6 Money Laundering & Terrorist Financing
CCFA Level 3 Exam
3.1 Advanced Forensic Accounting
3.2 Compliance, Ethics & Governance
3.3 Ethics & Financial Forensics
3.4 International Criminal Law
3.5 Fraud Audit & Assurance
The CCFA exam is rigorous, tough and credible. It will take
consistent determination to earn the CCFA credential. The CCFA
credential is the global certification for truly qualified forensic
accountants. CCFA's are saving government and corporations
millions of dollars every day through the dint of the CCFA's skills and
competence.
CCFAs are required to comply with CPE provisions of the Institute. To
maintain the CCFA designation and be in good standing, 30 CPE
hours per year are mandatory.[23]
 References
 Benny K B Kwok, Forensic Accountancy 1st and 2nd
editions published by LexisNexis 2002 and 2008
 "International Institute of Certified Forensic Accountants, Inc -
IICFA". iicfaglobal.com.

External links
 Association of Certified Fraud Examiners
 Association of Certified Forensic Accounting Professionals
 International Institute of Certified Forensic Accountants, Inc. IICFA
 International Institute of Certified Forensic Investigation
Professionals, IICFIP
 Certified in Financial Forensics
 Hong Kong Institute of Certified Public Accountants HKICPA
 Forensic Accounting Certifications
 HKICPA training in forensic accountancy
 Institute of Chartered Accountants in England and Wales ICAEW
 ICAEW forensics group

Forensic accounting, forensic accountancy or financial

forensics is the specialty practice area of accounting that
investigates whether firms engage in financial reporting misconduct,
[1]
or financial misconduct within the workplace by employees,
officers or directors of the organization.[2] Forensic accountants
apply a range of skills and methods to determine whether there has
been financial misconduct by the firm or its employees. [3]

History
Forensic accounting was not formally defined until the 1940s.
Originally Frank Wilson is credited with the birth of forensic
accounting in the 1930s. When Wilson was working as a CPA for the
US Internal Revenue Service, he was assigned to investigate the
transactions of the infamous gangster Al Capone. Capone was
known for his involvement in illegal activities, including violent
crimes. However it was Capone's federal income tax fraud that was
discovered by forensic accountants. Wilson's diligent analysis of the
 financial records of Al Capone resulted in his indictment for federal
income tax evasion. Capone owed the government $215,080.48
from illegal gambling profits and was found guilty of tax evasion for
which he was sentenced to 10 years in federal prison. This case
established the significance of forensic accounting. [4]

Application area
Forensic accountants are necessary for a variety of reasons. They
can be useful for criminal investigations, litigation support,
insurance claims, and corporate investigations. [5]
Financial forensic engagements may fall into several categories. For
example:
 Economic damages calculations, whether suffered
through tort or breach of contract;
 Post-acquisition disputes such as earnouts or breaches
of warranties;
 Bankruptcy, insolvency, and reorganization;
 Divorce settlement
 Securities fraud;
 Tax fraud;
 Money laundering;
 Business valuation;
 Credit card fraud;[6]
 Skimming;[6]
 Computer forensics/e-discovery; and
 Fraud risk assessments under SOX 404 or otherwise.

Forensic accountants
Main article: Forensic accountant
Forensic accountants, investigative accountants or expert
accountants may be involved in recovering proceeds of serious
crime, and provide evidence to confiscation proceedings concerning
actual or assumed proceeds of crime or money laundering. In
the United Kingdom, relevant legislation is contained in
the Proceeds of Crime Act 2002. Forensic accountants typically hold
the following qualifications; Certified Forensic Accounting
Professional [Certified Forensic Auditors] (CFA - England & Wales)
granted by the Forensic Auditors Certification Board of England and
Wales (FACB), Certified Fraud Examiners (CFE - US /
International), Certificate Course on Forensic Accounting and Fraud
Detection (FAFD) by Institute of Chartered Accountants of India
(ICAI), Certified Public Accountants (CPA - US) with AICPA's [Certified
in Financial Forensics est. 2008] (CFF) Credentials, Chartered
Accountants (CA - Canada), Certified Management
Accountants (CMA - Canada), Chartered Professional
Accountants (CPA - Canada), Chartered Certified Accountants (CCA -
UK), or Certified Forensic Investigation Professionals (CFIP). In India
there is a separate breed of forensic accountants called Certified
Forensic Accounting Professionals.[7]
The Certified Forensic Accountant (CRFAC) program from
the American Board of Forensic Accounting assesses Certified
Public Accountants (CPAs) knowledge and competence in
professional forensic accounting services in a multitude of areas.
[8]
Forensic accountants may be involved in both litigation support
(providing assistance on a given case, primarily related to the
calculation or estimation of economic damages and related issues)
and investigative accounting (looking into illegal activities). The
American Board of Forensic Accounting was established in 1993. [8]
Large accounting firms often have a forensic accounting
department.[9] All of the larger accounting firms, as well as many
medium-sized and boutique firms and various police and
government agencies have specialist forensic accounting
departments. Within these groups, there may be further sub-
specializations: some forensic accountants may, for example,
specialize in insurance claims, personal injury claims, fraud, anti-
money-laundering, construction,[10] or royalty audits.[11] Forensic
accounting used in large companies is sometimes called financial
forensics.
The role of the forensic accountants differ from what auditors do.
[12]
Forensic accountants are involved with investigating and
analyzing the factual information brought about by the crime,
whereas auditors handle the gross financial statements. [12] Auditors
detect financial deficiencies that need to be corrected, and they give
suggestions to investors, based on their professional opinion, on the
reliance of financial statements.[12] Forensic accountants examine
evidence of criminal offences and through this evidence, make
efforts to improve the processes adopted by those affected.
[12]
Though audits and forensic accounting investigations have their
differences, they share a couple similarities; both require knowledge
of the practices and processes possessed by the business and the
general accounting principles concerned with the particular
situation, and they both require the ability to interpret financial
documents and be objective and impartial.[12]
Forensic accountants combine knowledge of the law with their
accounting skills. They can assess companies, and help companies
resolve issues. This can help companies prevent corruption, fraud,
embezzlement, etc. As with all accounting professionals, forensic
accountants performing an audit of a company should remain
neutral. Large companies mainly use forensic accountants when
performing audits; however, there are other uses for forensic
accountants in companies.[13] Forensic accountants often assist in
professional negligence claims where they are assessing and
commenting on the work of other professionals. Forensic
accountants are also engaged in marital and family law, analyzing
lifestyle for spousal support purposes, determining income available
for child support, and equitable distribution of marital assets.
Forensic accounting and fraud investigation methodologies [14] are
different than internal auditing.[15] Thus forensic accounting
services[16] and practice should be handled by forensic accounting
experts, not by internal auditing experts. Forensic accountants may
appear on the crime scene a little later than fraud auditors; their
major contribution is in translating complex financial transactions
and numerical data into terms that ordinary laypersons can
understand, because if the fraud comes to trial, the jury will be
made up of ordinary laypersons. On the other hand, internal
auditors investigate using checklists and techniques that may not
surface the types of evidence that the jury or regulatory bodies look
for in proving fraud. Forensic investigation fieldwork may carry legal
risks and consultant malpractice risks if internal auditing checklists
are used, rather than the specialized skills of forensic accounting.
The fraud cycle describes the process which is taken by those in
order to conduct a fraud.[5] It begins with planning the actions of the
fraud, which is then followed by the actual commitment of the act,
ending with the conversion of the assets to cash. [5] The main goal of
Forensic accountants is to determine whether financial crime has
been committed, and if so, to what extent. They are often used as
expert witnesses to assist the judge or jury in forming the verdict.
[17]
It is important that forensic accountants possess skills such as
microeconomics, cost-center accounting systems, coming up with
conclusions with little data, report writing, research skills and
interview skills.[17]
This process can employ one or more of the following techniques:
review of Public records; background investigations; interviews of
knowledgeable parties; analysis of Real evidence to identify
possible Forgery and/or document alterations; Surveillance and
inspection of business premises; analysis of individual Financial
transactions or statements; review of Business records to identify
fictitious vendors, employees, and/or business activities, or
interrogation of suspects, questioning of witnesses or victims. [18]
Forensic accountants are also increasingly playing more proactive
risk reduction roles by designing and performing extended
procedures as part of the statutory audit, acting as advisers to audit
committees, fraud deterrence engagements, and assisting in
investment analyst research.[19]

Methods
Forensic accounting combines the work of an auditor and a public or
private investigator. Unlike auditors whose goal is focused on finding
and preventing errors, the role of a forensic accountant is to detect
instances of fraud, as well as identify the suspected perpetrator of
the fraud.[2] Some of the most common types of fraud schemes
include overstating revenues, understating liabilities, inventory
manipulation, asset misappropriation, and bribery/corruption. To
discover these, forensic accountants apply a variety of techniques.
[20]

Forensic accounting methods can be classified into quantitative and

qualitative. The qualitative approach studies the personal
characteristics of the individuals behind financial fraud schemes. A
popular theory of fraud revolves around the fraud triangle, which
classifies the three elements of fraud as perceived opportunity,
perceived need (pressures), and rationalization. [21] This theoretical
construct was first articulated by behavioral scientist Donald
Cressey.[22] More recently, forensic accountants have gone beyond
incentive effects and focused on behavioral characteristics, a branch
of accounting known as accounting, behavior and organizations,
or organizational behavior. Certain predictive factors, like being
labeled as “narcissistic” or committing adultery, are common traits
among fraud perpetrators.[1] These characteristics are often not
conclusive enough on their own to identify the culprit, but can help
forensic accountants to narrow down a suspect list, sometimes
based on behavioral or demographic factors.[23]
The quantitative approach focuses on financial data information and
searches for abnormalities or patterns predictive of misconduct.
[1]
Today, forensic accountants work closely with data analytics to
dig through complex financial records. Data collection is an
important aspect of forensic accounting because proper analysis
requires data that is sufficient and reliable.[24] Once a forensic
accountant has access to the relevant data, analytic techniques are
applied. Predictive modeling can detect potentially fraudulent
activities, entity resolution algorithms and social network analytics
can identify hidden relationships, and text mining allows forensic
accountants to parse through large amounts of unstructured data
quickly.[25] Another common quantitative forensic accounting
method is the application of Benford's law. Benford's law predicts
patterns in an observed set of accounting data, and the more the
data deviates from the pattern, the more likely that the data has
been manipulated and falsified.[26]

Analytical techniques
Forensic accountants utilize an understanding of economic
theories, business information, financial reporting systems,
accounting and auditing standards and procedures, data
management & electronic discovery, data analysis techniques for
fraud detection, evidence gathering and investigative techniques,
and litigation processes and procedures to perform their work. [27]
When detecting fraud in public organizations accountants will look in
areas such as billing, corruption, cash and non-cash asset
misappropriation, refunds and issues in the payroll department. To
detect fraud, companies may undergo management reviews, audits
(both internally and externally) and inspection of documents.
[28]
Forensic accountants will often try to prevent fraud before it
happens but searching for errors and in-precise operations as well
as poorly documented transactions.[28]
The process begins with the forensic accountant gathering as much
information as possible from clients, suppliers, stakeholders and
anyone else involved in the company. Next, they will analyze
financial statements in order to try and find errors or mistakes in the
reporting of those financial statements as well as they will analyze
any background information provided. The next step involves
interviewing employees in order to try and find where the fraud may
be occurring. Investigators will look at company values,
performance reviews, management styles and the overall structure
 of the company. After this is complete the forensic accountant will
try to draw conclusions from their findings.[29]

See also
 Benford's law
 Certified Fraud Examiner
 Association of Certified Fraud Examiners

References

External links
 International Institute of Forensic Investigation Professionals Inc
 Association of Certified Fraud Examiners
 Certified in Financial Forensics
 Forensic Accountants, Forensic Accounting Certifications, and Due
Diligence

International Financial Reporting Standards, commonly

called IFRS, are accounting standards issued by the IFRS
Foundation and the International Accounting Standards
Board (IASB).[1] They constitute a standardised way of describing the
company's financial performance and position so that
company financial statements are understandable and comparable
across international boundaries.[2] They are particularly relevant for
companies with shares or securities publicly listed.
IFRS have replaced many different national accounting standards
around the world but have not replaced the separate accounting
standards in the United States where US GAAP is applied.

History
The International Accounting Standards Committee (IASC) was
established in June 1973 by accountancy bodies representing ten
countries. It devised and published International Accounting
Standards (IAS), interpretations and a conceptual framework. These
were looked to by many national accounting standard-setters in
developing national standards.[3]
In 2001, the International Accounting Standards Board (IASB)
replaced the IASC with a remit to bring about convergence between
 national accounting standards through the development of global
accounting standards. During its first meeting the new Board
adopted existing IAS and Standing Interpretations Committee
standards (SICs). The IASB has continued to develop standards
calling the new standards "International Financial Reporting
Standards" (IFRS).[4]
In 2002, the European Union (EU) agreed that, from 1 January 2005,
International Financial Reporting Standards would apply for the
consolidated accounts of the EU listed companies, bringing about
the introduction of IFRS to many large entities. Other countries have
since followed the lead of the EU.
In 2021, on the occasion of COP26 of the United Nations Framework
Convention on Climate Change in Glasgow, the IFRS Foundation
announced the formation of the new International Sustainability
Standards Board ISSB.[5]

Adoption
IFRS Standards are required or permitted in 132 jurisdictions across
the world, including major countries and territories such
as Australia, Brazil, Canada, Chile, the European Union, GCC
countries, Hong
Kong, India, Israel, Malaysia, Pakistan, Philippines, Russia, Singapore
, South Africa, South Korea, Taiwan, and Turkey.[6]
To assess progress towards the goal of a single set of global
accounting standards, the IFRS Foundation has developed and
posted profiles about the use of IFRS Standards in individual
jurisdictions. These are based on information from various sources.
The starting point was the responses provided by standard-setting
and other relevant bodies to a survey that the IFRS Foundation
conducted. As of August 2019, profiles are completed for 166
jurisdictions, with 166 jurisdictions requiring the use of IFRS
Standards.[7]
Due to the difficulty of maintaining up-to-date information in
individual jurisdictions, three sources of information on current
worldwide IFRS adoption are recommended:
 IFRS Foundation profiles page[7]
 The World Bank[8]
 International Federation of Accountants[9]
Ray J. Ball described the expectation by the European Union and
others that IFRS adoption worldwide would be beneficial to investors
and other users of financial statements, by reducing the costs of
comparing investment opportunities and increasing the quality of
information.[10] Companies are also expected to benefit, as investors
will be more willing to provide financing. Companies that have high
levels of international activities are among the group that would
benefit from a switch to IFRS Standards. Companies that are
involved in foreign activities and investing benefit from the switch
due to the increased comparability of a set accounting standard.
[11]
However, Ray J. Ball has expressed some scepticism of the
overall cost of the international standard; he argues that the
enforcement of the standards could be lax, and the regional
differences in accounting could become obscured behind a label. He
also expressed concerns about the fair value emphasis of IFRS and
the influence of accountants from non-common-law regions, where
losses have been recognised in a less timely manner. [10]

US Generally Accepted Accounting Principles

See also: Convergence of accounting standards § United States
US Generally Accepted Accounting Principles, commonly called US
GAAP, remains separate from IFRS. The Securities Exchange
Committee (SEC) requires the use of US GAAP by domestic
companies with listed securities and does not permit them to use
IFRS; US GAAP is also used by some companies in Japan and the rest
of the world.
In 2002 IASB and the Financial Accounting Standards Board (FASB),
the body supporting US GAAP, announced a programme known as
the Norwalk Agreement that aimed at eliminating differences
between IFRS and US GAAP.[12] In 2012 the SEC announced that it
expected separate US GAAP to continue for the foreseeable future
but sought to encourage further work to align the two standards. [13]
[14]

IFRS is sometimes described as principles-based, as opposed to a

rules-based approach in US GAAP; so in US GAAP there is more
instruction in the application of standards to specific examples and
industries.[15]

Conceptual Framework for Financial Reporting

The Conceptual Framework serves as a tool for the IASB to develop
standards. It does not override the requirements of individual IFRSs.
Some companies may use the Framework as a reference for
 selecting their accounting policies in the absence of specific IFRS
requirements.[16]
Objective of financial statements
The Conceptual Framework states that the primary purpose of
financial information is to be useful to existing and potential
investors, lenders and other creditors when making decisions about
the financing of the entity and exercising rights to vote on, or
otherwise influence, management's actions that affect the use of the
entity's economic resources.[17]
Users base their expectations of returns on their assessment of:
 The amount, timing and uncertainty of future net cash inflows to the
entity;
 Management's stewardship of the entity's resources.
Qualitative characteristics of financial information
The Conceptual Framework for Financial Reporting defines the
fundamental qualitative characteristics of financial information to
be:[18]
 Relevance; and
 Faithful representation
The Framework also describes the following enhancing qualitative
characteristics:
 Comparability
 Verifiability
 Timeliness
 Understandability
Elements of financial statements
The Conceptual Framework defines the elements of financial
statements to be:[19]
 Asset: A present economic resource controlled by the entity as a
result of past events which are expected to generate future
economic benefits.
 Liability: A present obligation of the entity to transfer an economic
resource as a result of past events.
 Equity: The residual interest in the assets of the entity after
deducting all its liabilities.
 Income: increases in economic benefit during an accounting period
in the form of inflows or enhancements of assets, or decrease of
liabilities that result in increases in equity. However, it does not
include the contributions made by the equity participants (for
example owners, partners or shareholders).
 Expenses: decreases in assets, or increases in liabilities, that result
in decreases in equity. However, these do not include the
distributions made to the equity participants.
 Other changes in economic resources and claims:
Contributions from holders of equity and distributions to them.
Recognition of elements of financial statements
An item is recognized in the financial statements when: [20]
 it is probable that future economic benefit will flow to or from an
entity.
 the resource can be reliably measured
In some cases specific standards add additional conditions before
recognition is possible or prohibit recognition altogether.
An example is the recognition of internally generated
brands, mastheads, publishing titles, customer lists and items
similar in substance, for which recognition is prohibited by IAS 38.
[21]
In addition research and development expenses can only be
recognised as an intangible asset if they cross the threshold of being
classified as 'development cost'.[22]
Whilst the standard on provisions, IAS 37, prohibits the recognition
of a provision for contingent liabilities,[23] this prohibition is not
applicable to the accounting for contingent liabilities in a business
combination. In that case the acquirer shall recognise a contingent
liability even if it is not probable that an outflow of resources
embodying economic benefits will be required. [24]
Concepts of capital and capital maintenance
Concepts of capital maintenance are important as only income
earned in excess of amounts needed to maintain capital may be
regarded as profit. The Conceptual Framework describes the
following concepts of capital maintenance:[25]
 Financial capital maintenance. Under this concept a profit is earned
only if the financial amount of the net assets at the end of the
period exceeds the financial (or money) amount of net assets at the
beginning of the period, after excluding any distributions to, and
contributions from owners during the period. Financial capital
maintenance can be measured in either nominal monetary units or
units of constant purchasing power;
 Physical capital maintenance. Under this concept a profit is earned
only if the physical productive capacity (or operating capacity) of
the entity (or the resources or funds needed to achieve that
capacity) at the end of the period exceeds the physical productive
 capacity at the beginning of period, after excluding any distributions
to, and contributions from owners during the period.
Most entities adopt a financial concept of capital maintenance.
However, the Conceptual Framework does not prescribe any model
of capital maintenance.

Requirements
Presentation of financial statements
IFRS financial statements consist of:[26]
 a statement of financial position (balance sheet)
 a statement of comprehensive income. This may be presented as a
single statement or with a separate statement of profit and loss and
a statement of other comprehensive income
 a statement of changes in equity
 a statement of cash flows
 notes, including a summary of the significant accounting policies.
Comparative information is required for the prior reporting period.
General features
The following are the general features in IFRS:
 Fair presentation and compliance with IFRS: Fair presentation
requires the faithful representation of the effects of the transactions,
other events and conditions in accordance with the definitions and
recognition criteria for assets, liabilities, income and expenses set
out in the Framework of IFRS.[27]
 Going concern: Financial statements are present on a going concern
basis unless management either intends to liquidate the entity or to
cease trading, or has no realistic alternative but to do so. [28]
 Accrual basis of accounting: An entity shall recognise items as
assets, liabilities, equity, income and expenses when they satisfy
the definition and recognition criteria for those elements in the
Framework of IFRS.[29]
 Materiality and aggregation: Every material class of similar items
has to be presented separately. Items that are of a dissimilar nature
or function shall be presented separately unless they are
immaterial.[30]
 Offsetting: Offsetting is generally forbidden in IFRS.[31] However
certain standards require offsetting when specific conditions are
satisfied (such as in case of the accounting for defined benefit
liabilities in IAS 19[32] and the net presentation of deferred tax
liabilities and deferred tax assets in IAS 12 [33]).
 Frequency of reporting: IFRS requires that at least annually a
complete set of financial statements is presented. [34] However listed
companies generally also publish interim financial statements (for
which the accounting is fully IFRS compliant) for which the
presentation is in accordance with IAS 34 Interim Financing
Reporting.
 Comparative information: IFRS requires entities to present
comparative information in respect of the preceding period for all
amounts reported in the current period's financial statements. In
addition comparative information shall also be provided for narrative
and descriptive information if it is relevant to understanding the
current period's financial statements.[35] The standard IAS 1 also
requires an additional statement of financial position (also called a
third balance sheet) when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its
financial statements, or when it reclassifies items in its financial
statements. This for example occurred with the adoption of the
revised standard IAS 19 (as of 1 January 2013) or when the new
consolidation standards IFRS 10-11-12 were adopted (as of 1
January 2013 or 2014 for companies in the European Union). [36]
 Consistency of presentation: IFRS requires that the presentation and
classification of items in the financial statements is retained from
one period to the next unless:
1. it is apparent, following a significant change in the nature of the
entity's operations or a review of its financial statements, that
another presentation or classification would be more appropriate
having regard to the criteria for the selection and application of
accounting policies in IAS 8; or
2. an IFRS standard requires a change.
Cash flow statements
Cash flow statements in IFRS are presented as follows: [37][38]
 Operating cash flows: the principal revenue-producing activities
of the entity and are generally calculated by applying the indirect
method, whereby profit or loss is adjusted for the effects of
transaction of a non-cash nature, any deferrals or accruals of past or
future cash receipts or payments, and items of income or expense
associated with investing or financing cash flows.
 Investing cash flows: the acquisition and disposal of long-term
assets and other investments not included in cash equivalents.
These represent the extent to which expenditures have been made
for resources intended to generate future income and cash flows.
 Only expenditures that result in a recognised asset in the statement
of financial position are eligible for classification as investing
activities.
 Financing cash flows: activities that result in changes in the size
and composition of the contributed equity and borrowings of the
entity. These are important because they are useful in predicting
claims on future cash flows by providers of capital to the entity.

Criticisms
In 2012, staff of the Securities and Exchange Commission (SEC)
issued a report setting out observations on a potential adoption of
IFRS in the United States. This included the following criticisms: [39][40]
 that it would be expensive for companies to move to compliance
with IFRS;
 that the IASB had reliance on funding from large accounting firms
which might jeopardise its actual or perceived independence;
 that the process of convergence of IFRS with US GAAP had not made
progress in some areas;
 that the valuation of inventory under Last In First Out (LIFO) remains
common in the United States, where it has some tax advantages,
but would be prohibited under IFRS;
 that IFRS is not comprehensive in its coverage.
IASB staff have responded to these observations and concluded that
there were no insurmountable obstacles for the adoption of IFRS by
the United States.[41]
In 2013 IASB member Philippe Danjou listed ten common criticisms
of IFRS. He sought to counter these, describing them as
misconceptions:[42]
 IFRS practise a generalized "fair value"
 IFRS are intended to reflect the global financial value of the
company
 IFRS deny the concept of accounting conservatism
 IFRS give prominence to economic reality over legal form
 Directors can not make heads or tails of IFRS financial statements
 IFRS financial statements do not reflect the business model
 Financial instruments are stated at "full fair value", thereby
maximizing earnings volatility. The "fair value" is always defined as
"market value" even when markets are illiquid.
 The treatment of business combinations is irrational.
 IFRSs create accounting volatility that does not reflect the economic
reality.
 Charles Lee, professor of accounting at Stanford Graduate School of
Business, has also criticised the use of fair values in financial
reporting.[43]
In 2019, H. David Sherman and S. David Young criticised the current
state of financial reporting under IFRS and US GAAP: [44]
 Convergence of reporting standards has stalled. IFRS is not
consistently applied;
 Alternative methods of revenue recognition make it difficult to
interpret reported results;
 Many companies are using unofficial measures, for
example earnings before interest, tax, depreciation and
amortisation (EBITDA), whether to get around a deficiency in the
format in accounting standards or potentially to mislead users;
 Companies can control decisions on expenditure to manage results.

Differences between IFRS and GAAP

There are two frameworks that investors and accountants recognize
on a global scale: International Financial Reporting Standards (IFRS)
and U.S. Generally Accepted Accounting Principles (GAAP).[45] They
both serve to ensure transparency and consistency in financial
statements. However, they take a vastly different approach to
recognizing revenues, reporting leases, and recording inventory.
IFRS is followed in over 140 countries, and the system is more
principle-based as it gives businesses flexibility in applying
standards.[46] GAAP on the other hand, is used exclusively in the
United States and is governed by the Financial Accounting
Standards Board (FASB). This system is rule-based and much
stricter, and it provides industry-specific guidelines. These
differences don’t just affect accountants, they also impact how
businesses operate and how investors interpret financial
performance.
Take two companies for example, one in the U.S. and one in Europe,
both selling software subscriptions. Even though they operate the
same way, they report their revenues differently, this is because of
the divide between IFRS and GAAP. Both companies follow a five-
step model under IFRS 15 and GAAP (ASC 606),[47] but GAAP includes
extra layers of industry-specific guidance for sectors such as real
estate, software, and financial services.[48] This means that a
software company in the U.S. might have detailed, step-by-step
rules enforcing revenue from subscriptions. In contrast, international
companies using IFRS have more flexibility in applying general
principles. For companies operating both frameworks, this can lead
to confusion when reporting revenue across different financial
statements.
Lease accounting
Lease accounting is another crucial part representing the different
approaches that IFRS and GAAP take. For IFRS 16, every lease must
be recorded on the balance sheet and classified as a right-to-use
asset with a corresponding liability.[49] However, GAAP (ASC842)
maintains two types of leases: one on the balance sheet and
operating leases, which are generally not recorded on the balance
sheet.[50] While this approach allows U.S. companies to hide some
lease obligations, critics like H. David Sherman and S. David Young
argue that it complicates financial comparisons, especially for global
investors trying to assess companies’ liabilities. [51]
Inventory valuation
Another divergence is inventory valuation. IFRS and GAAP differ in
their models, Last In First Out (LIFO) and First In First Out (FIFO).
This is primarily a difference in accounting-based calculations, which
can significantly impact results during fluctuating inventory costs.
[52]
IFRS adopts the FIFO method, while GAAP utilizes the LIFO
method. The LIFO method can provide tax savings during periods of
inflation since it results in lower reported profits. However, the
inconsistency between the two strategies might cause
inconvenience for companies trying to use a standardized rule to
value themselves, as using different calculation methods may not
always be an apples-to-apples comparison.
Economic opportunities
For businesses, the divergence in the two methods isn't just
differences in number or technical detail, as they also have real-
world consequences. Multinational corporations adjusting in both
IFRS and GAAP jurisdictions must maintain separate financial
reports, showing the inconvenience in the process. For investors,
transparency and accuracy in the decision-making process might be
disrupted by discrepancies in revenue timing, asset valuation, and
lease obligations to get a clear picture of financial health. Despite
ongoing efforts to harmonize the two systems, significant gaps
remain, and full convergence may never happen. For now,
understanding these variations is crucial, not just for accountants
but for anyone making investment decisions in a global economy. [53]
 Economic effects
Many researchers have studied the effects of IFRS adoption, but
results are unclear. For example, one study[54] used data from 26
countries to study the economic consequences of mandatory IFRS
adoption. It showed that, on average, even though market liquidity
increases around the time IFRS is introduced, it is unclear whether
IFRS mandate adoption is the sole reason for observed market
effects. Firms' reporting incentives, law enforcement, and increased
comparability of financial reports can also explain the effects. The
adoption of IFRS in the European Union is a special case because it
is an element of wider reforms aiming to consolidate the economies
of member countries. One study reports positive market effects for
companies adopting IFRS, but these positive effects occurred even
before the transition took place.[55] Another study looked at the
development of the stock market in Poland; it found positive effects
associated with Poland joining the EU but no specific effect
attributable to its adoption of IFRS.[56] Interestingly, member states
maintain a large degree of independence in setting national
accounting standards for companies that prefer to stay local. [57]

See also
 List of International Financial Reporting Standards
 Chinese accounting standards
 Generally Accepted Accounting Principles (Canada)
 Generally Accepted Accounting Principles (France)
 Generally Accepted Accounting Principles (UK)
 Generally Accepted Accounting Principles (United States)
 Indian Accounting Standards
 International Public Sector Accounting Standards
 Nepal Financial Reporting Standards
 Philosophy of accounting

References

Further reading
 International Accounting Standards Board (2007): International
Financial Reporting Standards 2007 (including International
Accounting Standards (IAS(tm)) and Interpretations as of 1 January
2007), LexisNexis, ISBN 1-4224-1813-8
 Original texts of IAS/IFRS, SIC and IFRIC adopted by the Commission
of the European Communities and published in Official Journal of the
 European
Union https://web.archive.org/web/20061020223959/http://ec.europ
a.eu/internal_market/accounting/ias_en.htm#adopted-commission
 Case studies of IFRS implementation in Brazil Archived 4 July 2010
at the Wayback Machine, Germany Archived 4 July 2010 at
the Wayback Machine, India, Jamaica Archived 4 July 2010 at
the Wayback Machine, Kenya Archived 31 March 2010 at
the Wayback Machine, Pakistan, South Africa and Turkey. Prepared
by the United Nations Intergovernmental Working Group of Experts
on International Standards of Accounting and Reporting (ISAR).
 Wiley Guide to Fair Value Under IFRS [1], John Wiley & Sons.
 Perramon, J., & Amat, O. (2006). IFRS introduction and its effect on
listed companies in Spain. Economics Working Papers 975,
Department of Economics and Business, Universitat Pompeu
Fabra. Available at SSRN 1002516.

External links
 IFRS Foundation
 International Accounting Standards Board
o The International Accounting Standards Board – (Archive) Free
access to all IFRS standards, news and status of projects in progress
 PwC IFRS page with news and downloadable documents
 The latest IFRS news and resources from the Institute of Chartered
Accountants in England and Wales (ICAEW)
 Initial publication of the International Accounting Standards in the
Official Journal of the European Union PB L 261 13-10-2003
 Directorate Internal Market of the European Union on the
implementation of the IAS in the European Union
 Deloitte: An Overview of International Financial Reporting Standards
 The American Institute of CPAs (AICPA) in partnership with its
marketing and technology subsidiary, CPA2Biz, has developed the
IFRS.com web site. Archived 29 September 2019 at the Wayback
Machine
 RSM Richter IFRS page with news and downloadable documents
related to IFRS Conversions in Canada
 U.S. Securities and Exchange Commission Proposal for First-Time
Application of International Financial Reporting Standards by Foreign
private issuers registered with the SEC
 IFRS for SMEs Presented by Michael Wells, Director of the IFRS
Education Initiative at the IASC Foundation
 Pricewaterhousecoopers's map of countries that apply
IFRS Archived 29 August 2012 at the Wayback Machine
 EY IFRS page with insights on IFRS Standards
 U.S. GAAP vs. IFRS comparisons from RSM US
Data related to International Financial Reporting Standards at
Wikidata

The Governmental Accounting Standards Board (GASB) is the

source of generally accepted accounting principles (GAAP) used by
state and local governments in the United States.[1] As with most of
the entities involved in creating GAAP in the United States, it is a
private, non-governmental organization.
The GASB is subject to oversight by the Financial Accounting
Foundation (FAF), which selects the members of the GASB and
the Financial Accounting Standards Board, and it funds both
organizations.[2]
Its mission is to establish and improve standards of state and local
governmental accounting and financial reporting that will result in
useful information for users of financial reports and guide and
educate the public, including issuers, auditors, and users of those
financial reports.[3]
The GASB has issued Statements, Interpretations, Technical
Bulletins, Concept Statements and Implementation Guides —
defining GAAP for state and local governments since 1984. GAAP for
the Federal government is defined by the Federal Accounting
Standards Advisory Board.
In January 2020, GASB appointed Joel Black to succeed David Vaudt
as the chair. Black is also partner-in-charge of Mauldin & Jenkins
LLC.[4]

See also
 List of GASB Statements
 References

External links
 GASB Official Website
 GASB 45 for the Masses--Tips for Small Employers to Comply with
GASB 45 Archived 2011-07-07 at the Wayback Machine