So What Is Forensic
forensic accounting is not a new discipline, it is one that is rapidly
developing and gaining status in the accounting and legal communities.
The media have been energetically covering accounting scandals and
intrigues, which are often characterized as the forensic accountant’s
“beat. If the number of articles written on the topic is any
indication, readers of such esteemed newspapers as The Wall Street
Journal and The New York Times are captivated by the
forensic accounting topic. The good news for accounting professors and
students is that if current trends persist, forensic accounting and
its many subspecialties will provide some very interesting and
lucrative career opportunities.
Forensic Accountants Are Hot!
Accountants, long the butt of bean-counter jokes, are viewed a bit
differently these days. Major scandals such as Enron, WorldCom, and
Bernard Madoff certainly have tarnished the image of the accountant,
but the “forensic accountant is getting a lot of respect. Gordon
Brown, the then British Chancellor of the Exchequer, on October 10,
2006, said that “what the use of finger prints was to the 19th century
and DNA analysis was to the 20th, forensic accounting will be to the
terrorist attacks of September 11, 2001, it was determined that a
number of the perpetrators used debit cards that had been set up by
cash—largely untraceable—brought into the country. There were even
some transactions with no moving money, possibly using offsetting
receivables and payables, that were still traceable.*
The FBI agents employed forensic-type techniques when looking at
credit cards, phone records, and interviews with terrorists’ neighbors
and friends. Shutting down the cash flowing into the terrorists’
network was accomplished using financial sleuths.
Accounting also made the big screen, and its new notoriety has been
satirized in the popular media. A short film entitled The
Accountant won an Academy Award in March 2002. The hard-drinking,
chain-smoking backwoods movie accountant cynically states that
“numbers and facts are already fudged here and there; it’s called
accounting. A Jack Ziegler cartoon in the March 10, 2002, New
Yorker magazine shows a couple of women at a bar with one telling
the other that “being an accountant gives him that extra aura of
danger.* The AICPA now has an online game called
“Catch Me If You Can* which allows students and
professors to use their skills and smarts to trace the money trail
back to the crooks. There is a $2,000 cash prize plus other prizes.
be some unwelcome visions of accounting, but they point out that
accounting—and forensic accounting in particular—is not only
noteworthy, but newsworthy. In light of the notoriety and scandals,
one movie analogy does seem appropriate: Similar to the agents in the
film Men in Black, the forensic accountant’s armory must be
equipped with talent to suit every purpose, from detecting cooked
books, to kiting, to money laundering. As Al Pacino said in the movie
The Recruit, “Things are not what you think they are.
accounting is a challenging discipline that substantially interacts
with auditing, economics, finance, information systems, and law. Terry
McCarthy, audit partner with Green & Seifter, “liken[s] it to ‘CSI’ or
‘Law & Order,’ but instead of figuring out the trajectory of a bullet,
you’re trying to find out how a transaction occurred.*
Defining Forensic Accounting Broadly
Many people believe forensic accounting and fraud auditing are
synonymous. They are not. A fraud auditor is an accountant specially
skilled in auditing who is generally engaged in auditing with a view
toward fraud discovery, documentation, and prevention. A forensic
accountant may take on fraud auditing engagements and may in fact be a
fraud auditor, but he or she also will use other accounting,
consulting, and legal skills in broader engagements. In addition to
the accounting and investigative skills that should certainly be
present in the fraud auditor, the forensic accountant needs a working
knowledge of the legal system and excellent quantitative analysis and
communication skills to carry out expert testimony in the courtroom
and to aid in other litigation support engagements.
Dubinsky, a partner in Klausner, Dubinsky & Associates, stresses their
broad approach by emphasizing that there are plenty of accountants
getting involved who should not be involved in the niche. “‘The only
limit to our size is finding competent professionals.’ He explains
that just being an accountant is no longer enough to do this work—the
person has to understand the legal system, and what the law says. How
to interrogate and interview people are musts. Tracking leads and
obtaining legally usable intelligence is also crucial. ‘Many
accountants think it is simply fraud investigation and it’s not. It
really is much more than dealing with the numbers. It’s no longer just
basic fraud work."*
Overbaugh, a partner at Pittsburgh-based Sisterson & Co., is more
blunt. He asserts that “forensic accounting is often thought of, in
somewhat narrow terms, as dealing with the investigations of fraud or
financial misconduct. His firm thinks in broad terms and performs
engagements in most areas in which attorneys use financial experts in
litigation and disputes.* To put it another way, a
forensic accountant reduces the complexity by distilling information
and slicing away deceptions to help a judge or jury to see the essence
of a financial dispute.*
accountants provide perspective in situations evaluating whether
accounting information is presented fairly without GAAP-based
constraints, such as:
Identification of financial issues.
Knowledge of investigating techniques.
Knowledge of evidence.
Interpretation of financial information.
Presentation of finding.*
Edwards, the publisher of the Journal of Forensic Accounting,
champions this broad definition rather than the narrow fraud
examination definition. He believes that forensic accountants are
employed to seek, interpret, and communicate transactional and
reporting event evidence in an objective, legally sustainable fashion,
not only in situations in which there are specific allegations of
wrongdoing, but also in situations in which interested parties judge
that the risk of loss from wrongdoing is such that proper prudence
requires legally sustainable evidence to support the conclusion that
no wrongdoing is occurring.
defined, forensic accounting is the use of accounting for
legal purposes. Hal Rosenthal gives the modern definition of forensic
accounting as “the use of intelligence-gathering techniques and
accounting/business skills to develop information and opinion for use
by attorneys involved in civil litigation and give trial testimony if
Distinction Between Forensic Audit and Financial Audit
A forensic audit is often different than a typical financial audit. A
financial audit is generally a sampling activity that does not look at
every transaction. Thus, the system can be exploited by someone, such
as an executive, who knows how to “cook the books.
forensic audit looks at the details of a specific aspect of the
records, trying to determine why everything does not or should not add
up. Thus, a forensic audit is much more time-consuming and can be
significantly more expensive than a regular financial audit.*
Doug Carmichael, former Chief Auditor for PCAOB, faults auditors for
not adopting forensic techniques. He prefers more tests of detail
rather than relying on tests of controls.*
Durkin suggests the following differences in a forensic audit versus a
limiting the scope of the engagement based upon materiality.
accepting sampling as evidence.
assuming management has integrity.
the best legal evidence.
the requirements of the evidential matter standard with the rules of
Two practitioners have suggested these
additional procedures may be used in a forensic audit:*
use of interviews and leveraging techniques designed to
elicit sufficient information to prove or disprove a hypothesis.
inspection that may extend to authentication procedures and
Forensic Accountants in Novels
In general, forensic accounting can be broken into two broad
categories: investigative auditing and litigation services. A series
of fictional novels involving the financial and investigative intrigue
of fraud portrays a forensic accountant as the hero and illustrate
these two broad areas. The novels place Professor Lenny Cramer in
exotic locations with colorful characters and surround him with
murders and crime. Some of the plots include "track[ing] foreign
receipts to uncover a plot to steal Burmese religion
treasures...conducting an audit at Coca-Cola [and] uncovering a scheme
to steal the company's secret formula...[and using] his forensic
accounting skills to solve a series of murders in the New York art
A more recent novel teaching forensic
accounting entitled The Big R: A Forensic Accounting Action
Adventure provides a description of the forensic accountant
character called Fred Campbell.*
Now he did more than just disputed
divorce-settlement work. His areas included antitrust analysis,
general consulting, and cost allocation. Anytime someone had to dig
into the books and records, he was available. Super Accountant
Campbell! Maybe he should get a special cape to wear like Superman. Or
was that batman? He packed a HP 12-X pocket calculator and a notebook
computer. He thought of himself like the forensic anthropologist in a
Patricia Cornwell or Kathy Reichs novel.
Lenny Cramer shows up in a new novel
entitled Trap Doors and Trojan Horses: An Auditing Action
Adventure. Espionage and fraud place Lenny’s life on the line as
he uncovers a scheme to steal Coke’s secret formula. The story
features a variety of settings, from Washington, D.C. to Poland. The
suspenseful story combines computer and auditing concepts in a fashion
even a novice can understand and enjoy.*
A key element of a forensic accountant knowledge base is behavioral
concepts. Some fraud schemes cannot be effectively detected using
data-driven approaches. Corruption schemes such as bribery, kickbacks,
and bid-rigging may go undetected using data-driven techniques.
Searching relevant transaction data patterns and unexplained
relationships often fail to yield results because the information may
not be recorded by the system.
Just like an IRS agent, a forensic
accountant should be aware of the lifestyles of employees of companies
as well. The lifestyle of a taxpayer or employee may give clues as to
the possibilities of unreported income. Jack Bologna and Robert
Lindquist* refer to this approach of looking at
events, transactions, and environments in their covert aspects. They
believe that fraud auditing is like an iceberg with many of the
behavioral, covert aspects of the fraud below the water line,
(fear, anger, etc.)
Of course, many of the structural, overt
aspects are important, but the behavioral aspects below the surface
can be extremely important. For example, a great deal of information
about fraud can be found by listening, especially around the copy
machine or break room (or wherever the employees congregate on
breaks). Stakeouts and sifting through garbage may be off-beat ways to
gather evidence. Interviewing peers, workers, and neighbors may be
helpful. Further, in addition to examining financial documentation, a
forensic accountant must focus on the individuals involved by
interviewing witnesses and suspects.
Niamh Brennan and John Hennessy state
that forensic accounting demands an awareness of motive. “Often a
pattern of evidence only becomes apparent and understandable when the
forensic accountant considers possible motive.”*
Robert J. Lindquist states: “You’ve got to have knowledge of fraud,
what it looks like, how it works, how and why people steal. You’re the
bloodhound much more than the watchdog.”* Sandi
Smith says that often a suspect’s lifestyle will give him or her away.
“Forensic accountants can study computerized banking records, tax
records, and the employee’s human relations department records to
create an individual profile.”
Certainly, obvious lifestyle changes may
indicate fraud and unreported income:
cars and boats
schools for children
the investigator must keep in mind that a high-living style may be
obtained by going into debt or through “family money” such as gifts
In today’s climate all accountants – external, internal, corporate
accountants, and yes, the forensic-accounting specialist – must
develop forensic competencies. I believe it will only be a matter of
times before most accounting majors will take one or two forensic-type
NJSCPA.org, “Accounting Makes the Headlines as Forensic CPAs Trace
Terrorists’ Funding,” (December 7, 2001) www.njscpa.org/story.cfm?m.
Cassell Bryan-Low, “A Sullied Profession Discovers It’s Hip to Be
Calculating,” The Wall Street Journal (March 26, 2002), pp. A-1 and 8.
Jeff Stimpson, “Forensic Accounting: Exponential Growth,” WebCPA
(February 1, 2007), p. 1.
Stuart Kahan, “Sherlock Holmes Enters Accounting,” WebCPA (May 1,
Jeff Stimpson, “Forensic Accounting: Exponential Growth,” WebCPA
(February 1, 2007), p. 2.
G. Bologna and R. Lindquist, Fraud Auditing and Forensic Accounting
(New York: John Wiley, 1995). F.T. DeZoort and J.D. Stanley, “Fair
Presentation in the SOX Era: An Assessment Framework and Opportunities
for Forensic Accountants,” Journal of Forensic Accounting 7 (2006), p.
Ask Hal home page, www.askhal.com.
Jake Poinier, “Fraud Finder,” Future Magazine,
Fall 2004 http://www.phoenix.edu/students/future/oldissue/winter2004.fraud.htm.
Kris Frieswick, “How Audit Must Change,” CFO (July 2003), p. 48.
R.L. Durkin, “Defining the Practice of Forensic Accounting,” CPA
Expert (special edition, 1999).
Annett Stalker and M.G. Ueltzen, “An Audit Versus A Fraud
Examination,” CPA Expert (Winter 2009), p. 4.
“Book ‘em! Forensic Accounting in History and Literature,” The Kessler
Report Vol. 1, No. 2. See FORENSIC ACCOUNTANTS APPEARING IN THE
D.L. Crumbley, THE BIG R: A FORENSIC ACCOUNTING ACTION ADVENTURE
(Durham, N.C.: Carolina Academic Press, 2009).
D.L. Crumbley, Smith, and DeLaune, TRAP DOORS AND TROJAN HORSES
(Durham, N.C.: Carolina Academic Press, 2009).
G.J. Bologna and R.J. Lindquist, Fraud Auditing and Forensic
Accounting, 2d ed. (New York: John Wiley, 1995), pp. 36–37.
N. Brennan and J. Hennessy, Forensic Accounting, (Dublin: Round Hall
Sweet & Maxwell, 2002), pp. 122-123.
Terry Carter, “Accounting Gumshoes,” ABA Journal (September 1997), p.
* Dr. Crumbley, CPA, CFF, CrFA, is KPMG
Endowed Professor at Louisiana State University. Portions of this
material is adopted from Crumbley, Heitger, and Smith, Forensic
and Investigative Accounting, Commerce Clearing House, 2007.
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