Editing Forensic accounting

{{Short description|Branch of accounting which investigates financial misconduct and fraud}}

{{ForensicScience|criminal}}'''Forensic accounting''', '''forensic accountancy''' or '''financial forensics''' is the specialty practice area of [[accounting]] that investigates whether firms engage in [[Accounting scandals|financial reporting misconduct]],<ref name=":4">{{Cite journal|last=Honigsberg|first=Colleen|date=2020-10-13|title=Forensic Accounting|journal=[[Annual Review of Law and Social Science]]|volume=16|issue=1|pages=147–164|doi=10.1146/annurev-lawsocsci-020320-022159|s2cid=241891310|issn=1550-3585|doi-access=free}}</ref> or financial misconduct within the workplace by employees, officers or directors of the organization.<ref name="Homer 172–187">{{Cite journal |last=Homer |first=Emily M. |date=2020-01-01 |title=Testing the fraud triangle: a systematic review |url=https://doi.org/10.1108/JFC-12-2018-0136 |journal=Journal of Financial Crime |volume=27 |issue=1 |pages=172–187 |doi=10.1108/JFC-12-2018-0136 |s2cid=213294263 |issn=1359-0790|url-access=subscription }}</ref> Forensic accountants apply a range of skills and methods to determine whether there has been financial misconduct by the firm or its employees.<ref>W.S. Hopwood, J.J. Leiner & G.R. Young, ''Forensic Accounting'', McGraw-Hill Irwin (2008), as quoted by Stephen Pedneault, Frank Rudewicz, Michael Sheetz & Howard Silverstone, ''Forensic Accounting and Fraud Investigation'', John Wiley & Sons, Inc. (4th ed. 2017).</ref>

== History ==
Forensic accounting was not formally defined until the 1940s. Originally [[Frank J. Wilson|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.<ref>{{Cite web|url=https://elearning.scranton.edu/resource/business-leadership/what-is-forensic-accounting|title=What is Forensic Accounting?|last=kimberly.vigil|date=2016-03-31|website=The University of Scranton Online|language=en|access-date=2019-09-12}}</ref>

== 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.<ref name=":03">{{Cite book |last1=Singleton |first1=Tommie W. |url=https://onlinelibrary.wiley.com/doi/book/10.1002/9781118269183 |title=Fraud Auditing and Forensic Accounting |last2=Singleton |first2=Aaron J. |date=2010-08-23 |publisher=Wiley |isbn=978-0-470-56413-4 |edition=1 |language=en |doi=10.1002/9781118269183}}</ref>

Financial forensic engagements may fall into several categories. For example:
* [[Damages|Economic damages]] calculations, whether suffered through [[tort]] or [[breach of contract]];
* Post-acquisition disputes such as [[earnout]]s or breaches of [[warranty|warranties]];
* [[Bankruptcy]], [[insolvency]], and [[Corporate action|reorganization]];
* [[Divorce settlement]]
* [[Securities fraud]];
* [[Tax fraud]];
* [[Money laundering]];
* [[Business valuation]]; 
* [[Credit card fraud]];<ref name=":1">{{Citation |last=Connell |first=Des W. |title=Financial Crimes |date=2005 |work=Financial Investigation and Forensic Accounting |pages=35–56 |url=https://www.taylorfrancis.com/chapters/mono/10.1201/9781420039061-9/financial-crimes-des-connell |access-date=2024-04-23 |edition=2 |publisher=Routledge |doi=10.1201/9781420039061-9 |isbn=978-0-429-24781-1|url-access=subscription }}</ref> 
* [[Skimming (fraud)|Skimming]];<ref name=":1" /> 
* [[Computer forensics]]/[[Electronic discovery|e-discovery]]; and
* [[Fraud risk assessments]] under [[Sarbanes–Oxley Act|SOX 404]] or otherwise.

==Forensic accountants==
{{main|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 Examiner]]s (CFE - US / International), [[Certificate Course on Forensic Accounting and Fraud Detection (FAFD)]] by [[Institute of Chartered Accountants of India (ICAI)]], [[Certified Public Accountant]]s (CPA - US) with [[AICPA]]'s [Certified in Financial Forensics est. 2008] (CFF) Credentials, [[Chartered Accountant]]s (CA - Canada), [[Certified Management Accountant]]s (CMA - Canada), [[Chartered Professional Accountant]]s (CPA - Canada), [[Association of Chartered Certified Accountants|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.<ref>{{Cite journal |title=3.2. China and India catching up |date=2008 |url=http://dx.doi.org/10.1787/404104023422 |access-date=2022-03-24 |doi=10.1787/404104023422 |url-access=subscription }}</ref>

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.<ref name=":0" /> 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.<ref name=":0">{{Cite web |title=Becoming a Certified Forensic Accountant® {{!}} ABFA.US |url=https://abfa.us/crfac/ |access-date=2022-02-21 |language=en-US}}</ref>

Large accounting firms often have a forensic accounting department.<ref>{{cite web|url=http://www.big4accountingfirms.org/forensic-accounting-firms/|title=Service of Forensic Accountants |publisher=big4accountingfirms.org |access-date=2014-04-08}}</ref> 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]] [[claim (legal)|claims]], [[personal injury]] claims, [[fraud]], [[Money Laundering|anti-money-laundering]], [[construction]],<ref>{{cite book|last=Cicchella|first=Denise|title=Construction audit guide: overview, monitoring, and auditing|publisher=IIA Research Foundation|year=2005|isbn=0-89413-587-2|location=Altamonte Springs, FL}}</ref> or [[Royalties|royalty]] [[audit]]s.<ref>{{cite book|last1=Parr|first1=Russell L.|title=Intellectual property: valuation, exploitation, and infringement damages.|last2=Smith|first2=Gordon V.|publisher=Wiley|year=2010|isbn=978-0-470-45703-0|location=Hoboken, N.J.|pages=Chapter 33}}</ref> Forensic accounting used in large companies is sometimes called financial forensics.

The role of the forensic accountants differ from what auditors do.<ref name=":02">{{Cite book |last1=Skalak |first1=Steven L. |url=https://books.google.com/books?id=_uwYG7S0d8UC&dq=forensic+accounting&pg=PT20 |title=A Guide to Forensic Accounting Investigation |last2=Golden |first2=Thomas W. |last3=Clayton |first3=Mona M. |last4=Pill |first4=Jessica S. |date=2011-04-04 |publisher=John Wiley & Sons |isbn=978-1-118-01773-9 |language=en}}</ref> Forensic accountants are involved with investigating and analyzing the factual information brought about by the crime, whereas auditors handle the gross financial statements.<ref name=":02" /> 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.<ref name=":02" /> Forensic accountants examine evidence of criminal offences and through this evidence, make efforts to improve the processes adopted by those affected.<ref name=":02" /> 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.<ref name=":02" />

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.<ref>{{Cite journal |last=Shapiro |first=David M. |date=Sep 2015 |title=Forensic Accounting: Beyond the courtroom |url=https://www.sfmagazine.com/articles/2015/september/forensic-accounting-beyond-the-courtroom/ |journal=Strategic Finance |volume=97 |issue=3 |pages= |via=Gale OneFile}}</ref> 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<ref>{{Cite web |last=Godbole |first=Pradeep |title=Fraud Investigation Methodologies and Report Structuring |url=https://wirc-icai.org/images/material/Investigation-Methodologies-Report-Structuring.pdf |url-status=deviated |archive-url=https://web.archive.org/web/20230630132615/https://wirc-icai.org/images/material/Investigation-Methodologies-Report-Structuring.pdf |archive-date=2023-06-30 |access-date=2024-09-23 |website=WIRC-ICAI}}</ref> are different than internal auditing.<ref>{{Cite web |title=What is internal audit? {{!}} About us {{!}} IIA |url=https://www.iia.org.uk/about-us/what-is-internal-audit/ |access-date=2024-03-15 |website=www.iia.org.uk}}</ref> Thus forensic accounting services<ref>{{Cite web |title=Forensic Accounting |url=https://us.aicpa.org/interestareas/forensicandvaluation/resources/forensic-accounting |access-date=2024-09-24 |website=AICPA |language=en}}</ref> and practice should be handled by forensic accounting experts, not by [https://www.iia.org.uk/about-us/what-is-internal-audit/ 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 [https://www.iia.org.uk/about-us/what-is-internal-audit/ 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.<ref name=":03"/> 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.<ref name=":03" /> 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.<ref name=":3">{{Cite journal |last1=Miller |first1=Joseph |last2=Jenkins |first2=Glen |last3=Houser |first3=John |date=2005 |title=The use of forensic accounting techniques in the determination of intellectual property damage |url=https://go.gale.com/ps/i.do?p=AONE&u=subd78095&id=GALE&#124;A138997209&v=2.1&it=r |journal=The Forensic Examiner |volume=14}}</ref> 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.<ref name=":3" />

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 transaction]]s or statements; review of [[Business record]]s to identify fictitious vendors, employees, and/or business activities, or interrogation of suspects, questioning of witnesses or victims.<ref>{{Cite web|url=https://forensicaccountingnyc.com |title=Forensic Investigations & Litigation Support|last=Gottlieb|first=Mark S|date=2020|website=ForensicAccountingNYC.com|access-date=2020-08-28}}</ref>

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.<ref>{{Cite web|url=https://www.nbim.no/contentassets/3c31bf0882e445b38ef45a1377cc0513/investing-in-equities_government-pension-fund-global_web_final.pdf|title=Investing in Equities|website=nbim.no|pages=135}}</ref>

== Methods ==
Forensic accounting combines the work of an [[auditor]] and a public or private [[Special agent|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.<ref name="Homer 172–187"/> 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.<ref>{{Cite journal |last=Gray |first=Dahli |date=October 1, 2008 |title=Forensic Accounting and Auditing: Compared and Contrasted to Traditional Accounting and Auditing |url=https://files.eric.ed.gov/fulltext/EJ1052569.pdf |journal=American Journal of Business Education |volume=1 |issue=2 |pages=115–126}}</ref>

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.<ref>{{Cite journal |last=Ramamoorti |first=Sridhar |date=November 1, 2008 |title=The Psychology and Sociology of Fraud: Integrating the Behavioral Sciences Component Into Fraud and Forensic Accounting Curricula |url=http://jthomasniu.org/class/781/Readings/psychoffraud.pdf |journal=Issues in Accounting Education |volume=23 |issue=4 |pages=521–533|doi=10.2308/iace.2008.23.4.521 }}</ref> This theoretical construct was first articulated by behavioral scientist [[Donald Cressey]].<ref>{{Cite journal |last1=Schuchter |first1=Alexander |last2=Levi |first2=Michael |date=April 2016 |title=The Fraud Triangle revisited |url=http://link.springer.com/10.1057/sj.2013.1 |journal=Security Journal |language=en |volume=29 |issue=2 |pages=107–121 |doi=10.1057/sj.2013.1 |s2cid=256514786 |issn=0955-1662|url-access=subscription }}</ref>  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.<ref name=":4" /> 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.<ref>{{Cite web |last=Adkins |first=James |date=2023-07-28 |title=Inequality in embezzlement |url=https://news.warrington.ufl.edu/alumni-friends/inequality-in-embezzlement/ |access-date=2023-09-09 |website=UF Warrington News |language=en-US}}</ref>

The quantitative approach focuses on financial data information and searches for abnormalities or patterns predictive of misconduct.<ref name=":4" /> 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.<ref>{{Cite journal |last1=Jofre |first1=Maria |last2=Gerlach |first2=Richard H. |date=2018 |title=Fighting Accounting Fraud Through Forensic Data Analytics |url=https://www.ssrn.com/abstract=3176288 |journal=SSRN Electronic Journal |language=en |doi=10.2139/ssrn.3176288 |issn=1556-5068|arxiv=1805.02840 }}</ref> 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.<ref>{{Cite journal |last1=Rezaee |first1=Zabihollah |last2=Wang |first2=Jim |date=October 10, 2018 |title=Relevance of Big Data to Forensic Accounting Practice and Education |url=https://www.emerald.com/insight/content/doi/10.1108/MAJ-08-2017-1633/full/pdf |journal=Managerial Auditing Journal |volume=37 |issue=5 |pages=268–288|doi=10.1108/MAJ-08-2017-1633 |s2cid=158443983 |url-access=subscription }}</ref> 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.<ref>Kumar, Kuldeep; Bhattacharya, Sukanto (June 1, 2007). "Detecting the dubious digits: Benford's law in forensic accounting". ''Significance''. '''4''' (2): 81–83. {{doi|10.1111/j.1740-9713.2007.00234.x}} [[ISSN (identifier)|ISSN]] 1740-9705.</ref>

== Analytical techniques ==
Forensic accountants utilize an understanding of [[Economics|economic theories]], [[business information]], [[Financial statements|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.<ref>{{Cite book |last1=Singleton |first1=Tommie W. |url=https://onlinelibrary.wiley.com/doi/book/10.1002/9781118269183 |title=Fraud Auditing and Forensic Accounting |last2=Singleton |first2=Aaron J. |date=2010-08-23 |publisher=Wiley |isbn=978-0-470-56413-4 |edition=1 |language=en |doi=10.1002/9781118269183.ch1}}</ref>

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.<ref name=":2">{{Cite journal |last1=Akinbowale |first1=Oluwatoyin Esther |last2=Klingelhöfer |first2=Heinz Eckart |last3=Zerihun |first3=Mulatu Fikadu |date=2020-06-29 |title=An innovative approach in combating economic crime using forensic accounting techniques |url=https://www.emerald.com/insight/content/doi/10.1108/JFC-04-2020-0053/full/html |journal=Journal of Financial Crime |language=en |volume=27 |issue=4 |pages=1253–1271 |doi=10.1108/JFC-04-2020-0053 |s2cid=225744942 |issn=1359-0790|url-access=subscription }}</ref> 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.<ref name=":2" />

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.<ref>{{Cite journal |last1=I-Long |first1=Lin |last2=Kuang-Heng |first2=Shih |last3=Su-Li |first3=Lin |date=December 2018 |title=Following the Money- Constructing the Prototype of Digital Evidence Forensic Accounting Standard Operation Procedure for Government Audits |url=https://www.proquest.com/docview/2279772537 |journal=Journal of Accounting, Finance and Management Strategy |volume=13 |pages=141–162|id={{ProQuest|2279772537}} }}</ref>

==See also==
* [[Benford's law]]
* [[Certified Fraud Examiner]]
* [[Association of Certified Fraud Examiners]]

==References==
{{Reflist}}

==External links==
*[http://www.iicfip.org International Institute of Forensic Investigation Professionals Inc]
*[http://www.acfe.com Association of Certified Fraud Examiners]
*[https://web.archive.org/web/20130819020246/http://www.aicpa.org/InterestAreas/ForensicAndValuation/Membership/Pages/Overview%20Certified%20in%20Financial%20Forensics%20Credential.aspx Certified in Financial Forensics]
*[https://ssrn.com/abstract=2210016 Forensic Accountants, Forensic Accounting Certifications, and Due Diligence]

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