01-Vol I - Forensic Accounting and Financial Statement Fraud PDF

Forensic Accounting and Financial Accounting, Auditing
REZAEE
THE BUSINESS
EXPERT PRESS Financial Statement Fraud, and Taxation Collection
DIGITAL LIBRARIES Volume I Mark S. Bettner, Michael P. Coyne, and Roby Sawyers, Editors
EBOOKS FOR Fundamentals of Forensic Accounting
Forensic
BUSINESS STUDENTS
Curriculum-oriented, born- Zabihollah Rezaee
digital books for advanced The existence and persistence of high profile alleged financial
Accounting
business students, written statement fraud (FSF) have negatively affected the safety and
by academic thought soundness of financial markets and investors confident in public
leaders who translate real- financial information. Forensic accounting has advanced as an
and Financial
world business experience important and rewarding field of accounting to prevent, detect
into course readings and and correct FSF. There has been significant demand for and in-
FORENSIC ACCOUNTING AND FINANCIAL STATEMENT FRAUD, VOLUME I

tertest in forensic accounting as well substantial growth in both
reference materials for
Statement Fraud,
investigation and litigation services.
students expecting to tackle
The first volume addresses the relevance and importance of for-
management and leadership
ensic accounting and fraud examination as well as the framework
challenges during their
Volume I
and structure of forensic accounting practices. The author pres-
professional careers. ents an introduction to forensic accounting and financial state-
POLICIES BUILT ment fraud examination and their relevance and importance to
businesses, financial markets, economies and society. Also dis-
BY LIBRARIANS
• Unlimited simultaneous
usage
cussed is forensic accounting opportunities, skills, and services;
forensic accounting profession; and professional responsibilities
and codes of conduct for forensic accountants. Finally, forensic ac-
Fundamentals of
Forensic Accounting
• Unrestricted downloading counting best practices, education, and research are touched on.
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• Perpetual access for a Dr. Zabihollah (Zabi) Rezaee, PhD, CPA, CMA, CIA, CFE, CGFM,
one-time fee CSOXP, CGOVP, CGRCP, CGMA and CRMA, is the Thompson-Hill
• No platform or Chair of Excellence, PhD coordinator and professor of accountan-
maintenance fees cy at the University of Memphis. He also served a two-year term
• Free MARC records on the Standing Advisory Group of the Public Company Account-
ing Oversight Board (PCAOB). He received his BS degree from the
• No license to execute
Iranian Institute of Advanced Accounting, his MBA from Tarleton
The Digital Libraries are a State University in Texas, and his PhD from the University of
comprehensive, cost-effective Mississippi. Dr. Rezaee holds ten certifications, including certi-
way to deliver practical fied public accountant (CPA) and certified fraud examiner (CFE).
treatments of important
business issues to every
He served as the 2012–2014 secretary of the Forensic Account-
ing Section of the American Accounting Association (AAA) and
Zabihollah Rezaee
is currently the editor of the Journal of Forensic Accounting Research
student and faculty member. (JFAR). Professor Rezaee has published over 220 articles and made
more than 240 presentations, written 11 books including the two
books on Corporate Governance and Audit Committees published
by the Business Expert Press. He has testified before the Federal
For further information, a Courts as the expert witness.
free trial, or to order, contact:
Financial Accounting, Auditing
and Taxation Collection
Mark S. Bettner, Michael P. Coyne, and Roby Sawyers, Editors
Forensic Accounting
and Financial Statement
Fraud, Volume I
Forensic Accounting
and Financial Statement
Fraud, Volume I
Fundamentals of Forensic
Accounting
Zabihollah Rezaee
Forensic Accounting and Financial Statement Fraud, Volume I: Fundamentals
of Forensic Accounting
Copyright © Business Expert Press, LLC, 2019.
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First published in 2019 by

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Printed in the United States of America.

Abstract
The existence and the persistence of high-profile alleged financial state-
ment fraud (e.g., Enron, WorldCom, Parmalat, Satyam), as well as the
investment Ponzi schemes and credit crunch scandals, have negatively af-
fected the safety and soundness of financial markets and investors’ confi-
dence in public financial information. Forensic accounting has advanced
as an important and rewarding field of accounting to prevent, detect,
and correct these financial scandals and other types of fraud. In such an
increasingly unstable economic and litigious environment, there has been
significant growth in the demand for and interest in forensic accounting
and investigative services. Forensic accountants provide litigation con-
sulting, expert witnessing, valuation, and fraud investigation services.
The organization of this book provides maximum coverage and flexibil-
ity in choosing the amount and order of materials on forensic accounting
and financial statement fraud (FSF) theory, education, and practice. This
book is organized into two volumes; each volume can be utilized separately
or in an integrated form. The first volume, entitled “Fundamentals of Fo-
rensic Accounting,” consists of five chapters and addresses the relevance and
importance of forensic accounting and fraud examination as well as the
framework and structure of forensic accounting practices. The first chap-
ter presents an introduction to forensic accounting and financial statement
fraud examination and their relevance and importance to businesses, finan-
cial markets, economies, and society. Chapter 2 presents forensic accounting
opportunities, skills, and services. Chapter 3 illustrates the forensic account-
ing profession. Chapter 4 presents authoritative guidelines for professional
responsibilities and codes of conduct for forensic accountants. Chapter 5
describes forensic accounting best practices, education, and research.
Keywords
forensic accounting; financial statement fraud; fraud examination; expert
witnessing; litigation consulting; skill sets of forensic accountants; pro-
fessional standards; codes of professional conduct; fraud and non-fraud
forensic accounting services; forensic accounting research; forensic
accounting education
Contents
Preface...................................................................................................ix
Acknowledgments....................................................................................xi
Chapter 1 An Introduction to Forensic Accounting............................1
Chapter 2 Forensic Accounting Services and Skills............................25
Chapter 3 Forensic Accounting Profession........................................43
Chapter 4 Forensic Accounting Guidelines and Standards................65
Chapter 5 Forensic Accounting Practices, and Education and
Research...........................................................................91
About the Author.................................................................................127
Index..................................................................................................129
Preface
Financial statement fraud (hereafter, FSF) is a severe threat to investor
confidence in financial information and thus capital markets. Reported
financial scandals by high-profile companies (Enron, Global Crossing,
Qwest, WorldCom, Parmalat) and ethical debacles in corporations have
eroded investor confidence and public trust in corporate America, its cor-
porate governance, financial reporting, and audit functions. These scan-
dals and related FSF reinvigorated interest in education and practice of
forensic accounting and financial statement fraud examination. Forensic
accounting is gaining considerable attention because the American Ac-
counting Association (AAA) has added a new educational and research
section on “Forensic Accounting.” The Securities and Exchange Com-
mission (SEC) has strengthened its FSF divisions and trained its staff in
the area of forensic accounting and financial statement fraud, all inter-
national public accounting firms have established a forensic accounting
department, and forensic accounting and fraud examination is becoming
one of the fundamental components of business school’s curriculum in
recent years.
This book presents a comprehensive framework of the theory and
practice of forensic accounting investigation and FSF examination in two
volumes. The purpose of this book is to present a comprehensive primer
of forensic accounting in areas of fraud and nonfraud services. At present,
headlines have again been dominated by the investment Ponzi schemes
and credit crunch scandals. Banks have been hit by record levels of fraud
over the past several years, and the situation is likely to get worse as the
full impact of the credit crunch unfolds. In such increasingly unstable
economic and litigious environment, there has been significant growth in
the demand for and interest in forensic accounting services. During the
2007–2009 global financial crisis, the focus on financial statement fraud
prevention and detection become more important as regulators, inves-
tors, and companies seek better understanding of corporate malfeasance
and misconduct.
x PREFACE
In this book, forensic accounting is defined as the practice of rigorous

data collection and analysis in the areas of litigation support consulting,
expert witnessing, and fraud examination. Furthermore, forensic and in-
vestigative accounting services range from expert report preparation to
appearing in the witness box, and from carrying out a fraud investigation
to interviewing witness and securing evidence. As a rapidly growing area
within the accounting profession, forensic and investigative accounting
has gradually been recognized by professionals and academics. Forensic
accounting is viewed as one of the most secured career tracks. There ap-
pears to be a gap between forensic and investigative accounting practice
and education given that there is only a limited number of forensic ac-
counting modules/courses offered within accounting and business cur-
ricula in universities worldwide. This book is intended to develop an
awareness and understanding of the main themes, perspectives, frame-
works, and issues pertaining to forensic and investigative accounting. This
book provides practitioners, academics, and students with the knowledge
and the professional and personal skills in technical, analytical, and com-
munication areas to equip them to become successful forensic accoun-
tants with adequate knowledge in FSF examination.
The two volumes of this book present the essential and fundamental
aspects, structure, theory, and practice of forensic and FSF, with a keen
focus on a holistic approach in forensic accounting and fraud investi-
gation. These two volumes should assist forensic accountants and fraud
examiners with adequate knowledge and tools in effectively performing
fraud and nonfraud forensic accounting services. Anyone who partici-
pates in the preparation of financial reports or uses financial information
in making financial decisions should be interested in this book. Specifi-
cally, corporations and their executives, the boards of directors and audit
committees, internal and external auditors, accountants, governing bod-
ies, users of financial statements (investors, creditors, pensioners), busi-
ness schools, other professionals (attorneys, financial analysts, bankers),
forensic accountants, and fraud examiners will benefit from this book.
Sincerely,
Zabi Rezaee
January 15, 2019
Acknowledgments
I acknowledge the Securities and Exchange Commission, the Public
Company Accounting Oversight Board, the American Institute of Certi-
fied Public Accountants, the Big Four Accounting Firms and Corporate
Governance Organizations, American Accounting Association, American
Certified Fraud Examiner, and other forensic accounting organizations
for permission to quote and reference their professional standards and
other publications.
The encouragement and support of my colleagues at the University of
Memphis are also acknowledged. Especially, three of my graduate assis-
tants, Mr. Charles Bell, Mr. Matthew Cantin, and Mr. Jon Paul Squitieri
for providing invaluable assistance. I thank the members of the Business
Expert Press team and S4Carlisle Publishing Services for their hard work
and dedication in editing the book, including, Scott Isenberg, Mark
Bettner, Michael Coyne, and Premkumar Narayanan.
My sincere thanks are due to my family, my wife Soheila, and my
children Rose and Nick. Without their love, enthusiasm, and support,
this book would not have come to fruition when it did.
Zabihollah (Zabi) Rezaee

January 15, 2019
CHAPTER 1
An Introduction to Forensic
Accounting
Executive Summary
Business and accounting scandals (Madoff, Satyam, Stanford F inancial,
and subprime mortgage fraud) have dominated the business news in
the past several decades. Numerous cases of high-profile alleged FSF
(e.g., Enron, WorldCom, Parmalat, Satyam) as well as the investment
Ponzi schemes and credit crunch scandals have negatively affected the
financial markets and investors’ confidence in public financial informa-
tion. Forensic accounting has advanced as an important and rewarding
field of accounting to prevent, detect, and correct these financial scandals
and other types of fraud. In such an increasingly unstable economic and
litigious environment, there has been significant growth in the demand
for and interest in forensic accounting and investigative services. Forensic
accountants provide litigation consulting, expert witnessing, valuation,
and fraud investigation services. This chapter presents an introduction to
forensic and investigative accounting.
Introduction
Forensic accounting is a growing and ever-changing field of accounting
with tremendous opportunities for advancements. Forensic accounting
services of fraud investigations, litigation consulting, valuation, and ex-
pert witnessing are both rewarding and exiting. For example, tracking
down criminals by holding them accountable for committed illegal acts
can be a tedious task but rewarding in making our society safer and free
from material wrongdoings and frauds. The field of forensic accounting
2 FORENSIC ACCOUNTING AND FSF, VOLUME I
has grown significantly over the past decades and is expected to make
further progress as the demand for, and interest in, forensic accounting
services increases.
There is also a growing need for business schools and accounting pro-
grams to train and educate the most competent and ethical future foren-
sic and investigative accountants. This field is not specific to any country,
industry, or organization; as such, there are numerous employment op-
portunities available. Forensic and investigative accounting is viewed by
many as one of the most exciting, rewarding, and secured career tracks.1
However, there appears to be a gap between forensic and investigative ac-
counting practice and education, given that there is only a limited num-
ber of forensic accounting modules/courses offered within accounting and
business curricula in universities worldwide.2 A few existing textbooks in
this area all primarily focus on occupation fraud with a limited coverage
of Financial Statement Fraud (FSF). This chapter develops an awareness
and understanding of the main themes, perspectives, frameworks, and
issues pertaining to forensic and investigative accounting. This chapter
presents an introduction to forensic accounting with a keen focus on the
knowledge and the professional and personal skills needed to become suc-
cessful forensic and investigative accountants, such as adequate know-
ledge in accounting, law, criminology, psychology, auditing, and business
and (FSF) examination.
Definition of Forensic Accounting

Forensic accounting is the application of technical accounting, investi-
gative, and law as well as analytical and communication skills for the
purpose of resolving financial and nonfinancial issues in a manner that
meets the standards required by courts of law.3 Forensic and investigative
accounting is generally defined as the practice of rigorous data collection
and analysis in the areas of litigation support consulting, expert witness-
ing, valuation, and fraud examination.4 Thus, forensic accountants con-
duct investigative, financial analysis, and valuation services, the result of
which could be used in a court of law. Forensic accountants apply special
skills in accounting, auditing, finance, business, psychology, quantitative
methods, analytical analyses, law, criminology, research, and investigative
An Introduction to Forensic Accounting 3
skills to collect, analyze, and evaluate evidential matters and to interpret

and communicate findings.5 Forensic accounting is a field in which ac-
countants use their accounting knowledge along with complex investiga-
tion skills to assist in fraud investigation, expert witnessing, valuation and
litigation, and investigative services. Forensic accounting is a process of
gathering and evaluating evidence and reaching conclusions when con-
ducting a fraud investigation, performing litigation services, determining
asset and liability valuation, or testing as an expert witness.
Forensic and investigative accounting practices include fraud examina-
tion, investigation of corruption and bribery, business valuation, being an
expert witness, cybercrime management/cybersecurity, and litigation sup-
port.6 Furthermore, forensic and investigative accounting services range
from expert report preparation to appearing in the witness box and from
carrying out a fraud investigation to interviewing witnesses and securing
evidence. As a rapidly growing area within the accounting profession, for-
ensic accounting has gradually been recognized by professionals, includ-
ing the formation of a new professional certification—Certified Fraud
Examiner, American Accounting Association forensic accounting section,
development of new continuing professional development courses on the
subject of fraud, Securities and Exchange Commission (SEC) focus on
fraud, and forensic accounting divisions of public accounting firms. The
academic community and research scholars have, in recent years, shown
much interest in forensic accounting by publishing new forensic account-
ing textbooks and developing modules/courses about forensic accounting
and conducting research on various aspects of forensic accounting pub-
lished in the accounting and business journals. Exhibit 1.1 shows a list
of selected books in forensic and fraud-related subjects. Within forensic
accounting, fraud in general is defined as an intentional wrongful act to
injure, damage, or deceive others, and thus, FSF is viewed as intentional
manipulation or misstatement of material financial information to mis-
lead users of financial statements.7 The Association of Certified Fraud
Examiners (ACFE) classifies occupational fraud in three primary categor-
ies: asset misappropriation, corruption, and (FSF).8 This book is different
and complements existing books listed in Exhibit 1.1 by focusing on both
FSF and nonfraud (valuation, expert witnessing, litigation consulting)
forensic accounting services.
Exhibit 1.1
Existing Forensic Accounting Books
Author(s) Title Publisher Year Synopsis
Clayton, A Guide Wiley 2006 This book provides a guide
Golden, Pill, to Forensic for practicing forensic
Skalak Accounting accounting and fraud
Investigation investigation. It includes
the topics of deterrence,
detection, and investigation
and mentions tools that
can be used in practice to
combat fraudulent behavior.
Nigrini Forensic Wiley 2011 This book details techniques
Analytics: and tools that can be used
Methods and by practitioners to detect
Techniques fraud and mistakes. It
for Forensic explains the upsides and
Accounting downsides of each technique
Investigations and advises when to use a
technique.
Singleton Fraud Wiley 2006 This book covers fraud
and auditing elements and simple
Singleton and forensic concepts. Topics include red
accounting flags, fraud schemes, and risk
assessment.
Nigrini Benford’s Wiley 2012 This book covers the
Law: use of Benford’s Law in
Applications the forensic accounting
for Forensic profession. It covers topics
Accounting, ranging from the discovery
Auditing, of the law to application in
and Fraud Ponzi schemes.
Detection
Hopwood, Forensic McGraw-Hill 2012 This book is catered to
Leiner Accounting practitioners and includes
and Fraud topics ranging from business
Examination valuation to civil and
criminal litigation.
Karancher, Forensic Wiley 2010 This book provides
Riley, Wells Accounting newly developed tools for
and Fraud practitioners to tackle fraud
Examination in the civil and criminal
environment.
Author(s) Title Publisher Year Synopsis

Crain, Essentials Wiley 2018 This book is the most
Hopwood, of Forensic recently released forensic
Pacini, Accounting accounting book. It covers
Young topics such as some business
technologies to counteract
fraud, the process of fraud
investigation, and specialties
in forensic accounting.
Multiple-choice questions
and case studies are at the
end of each section to help
with knowledge retention.
Status of Forensic Accounting

Forensic accounting has been practiced for many decades and has become
more relevant in the aftermath of the wave of financial scandals at the turn
of the twenty-first century and the 2007 to 2009 global financial crisis. In
2013, CNNMoney reported that 1,216,900 individuals were employed as
forensic accountants with an expected 10-year growth of approximately 16
percent.9 The median salary was $103,000 in 2013, which, when compared
with over median auditor and tax accountant salary in 2016, is 51 percent
higher.10 Employment in forensic accounting has significantly grown in
the past decade with a steady annual rate of 18% from 2012 to 2017 ac-
cording to a report published by market research firm IBISWorld.11 This
increasing growth in forensic accounting services is expected to continue
in foreseeable years as the accounting profession establishing more robust
guidelines for forensic accounting engagements of a forensic standard is
intended to improve consistency and quality. The growth rate for other ac-
countants and auditors is only 10 percent, in comparison; thus, the steady
growth in the forensic accounting profession is expected to continue.12
One important area of forensic accounting practices is fraud examina-
tion. FSF has been detrimental to the integrity and quality of public financial
information, and Congress passed the Sarbanes–Oxley Act (SOX) of 2002,
which was intended to combat FSF. However, in the several years post-SOX,
the Department of Justice has obtained nearly 1,300 fraud convictions be-
tween 2002 and 2009.13 The 2010 Committee of Sponsoring Organizations
(COSO) report indicates the following: (1) FSF persisted in the past two
decades with 347 incidents between 1998 and 2007 compared with 294
cases from 1987 to 1997; (2) the magnitude (mean per cases) of FSF during
1998 to 2007 was about $400 million compared with a mean of $25 million
per case between 1998 and 1997; (3) FSF cases were committed with some
level of involvement of senior executives (CEO, CFO) in 89 percent of stud-
ied cases in 1998 to 2007 and about 83 percent of cases in 1987 to 1997; (4)
almost 20 percent of alleged fraudulent executives were indicted from which
more than 60 percent were convicted; (5) the most common FSF schemes
continue to be improper revenue recognition followed by overstatement of
assets; (6) over one-fourth of fraud firms changed auditors either during the
fraud period or in the fiscal year preceding the fraud period; and (7) fraud
firms experienced negative consequences of fraud either in terms of decline in
stock prices, bankruptcy, or delisting from major stock exchanges.14 Exhibit
1.2 presents many career opportunities in forensic accounting.
Exhibit 1.2
Forensic Accounting Careers
Topic Summary
Careers and professional Forensic Auditor for FBI, Certified Internal Auditors
standards in forensic (CIA), Internal Revenue Service (IRS), Law firms,
accounting accounting firms, and corporate Enterprise Risk
Management (ERM)
Forensic Accounting does not have its own authoritative
guidance, instead it uses AICPA code of conduct and other
non-autoreactive standards to form a framework.
Promoting Antifraud The Association of Certified Fraud Examiners (ACFE)
education and practice created an antifraud program that has 12 resources.
Many schools across the United States have forensic
accounting courses, such as Iowa State and Bucknell
University.
Investigating Types Occupational fraud such as asset misappropriation and
of Fraud financial statement fraud (FSF), and employee fraud.
Expert testimony and Experts are called upon to testify in court proceedings.
witness and litigation Consultants aid in the trial process using certain
consultation techniques techniques.
Enforcing Principles of The ACFE, AICPA, and others provide a code of ethical
ethics, corporate code conduct. Laws often address how to deal with ethical
of conduct, and ethical misconduct.
misconduct
Topic Summary
Engaging in fraud Fraud Triangle: Pressure to commit fraud, opportunity to
detection, deterrence commit fraud, and rationalization for actions taken.
program, and the Fraud Fraud detection:
Triangle Deterrence Program:
Internal control Internal control is tested for effectiveness and reports are
assessment and reporting issued regarding efficacy.
Resolutions of Once a decision is made, the allegations are resolved.
allegations of misconduct The resolution can be tried again later.
Identifying red flags Used to identify/warn of fraud within an organization.
Promoting corporate Corporate governance participants Consist of board of
governance and directors, audit committee, internal auditor, CEO and
compliance with laws CFO, external auditor, and regulators.
and regulations
Preventing earnings Legally making judgments on presentation and
management disclosure of financial statements.
Identifying cooking the Intentionally altering financial statements to meet
books and problems in targets.
accounting
Forensic accounting is a growing field of accounting. All “Big 4” account-

ing firms of Deloitte, Ernst and Young, KPMG, and PricewaterhouseCoo-
pers (PwC) and many of other national and international accounting firms
have forensic accounting departments and specialists now and are hiring
forensic experts in increasing numbers. Common services include all man-
ner of cyber risk management (security, risk, and analytics), eDiscovery,
computer and cybercrime forensics, managing fraud risk, and all manner
of dispute resolution. Exhibit 1.3 presents specifications of the forensic ac-
counting departments of top 10 public accounting firms, including the Big
4, as well as their forensic accounting services provided, their roles, respon-
sibilities, commitments, and websites. The steady growth and expansion of
forensic accounting services is driven by the downturn in the economy and
financial challenges and as corporations struggle, crime and FSF increase.
As the forensic accounting field is growing, there is a noticeable dis-
connect between the number of jobs available and the number of pro-
fessionals available. With a high demand for forensic accountants, firms
have been able to raise their fees and have higher hiring standards. This
is evidenced by many professionals expecting growth in forensic account-
ing from 2015 to 2020.15 Each Big four firm, as well as other accounting
8
Exhibit 1.3
Forensic Accounting Services Performed by Accounting Firms
Firm Forensic Accounting Services Roles/Responsibilities/Commitments Websites
Baker Tilly • Bankruptcy disputes Baker Tilly’s forensic accountants research, quantify, and http://www.bakertilly
Virchow • Computer forensics present the financial impact related to disputes and allegations .com/services/forensic-
Krause • Corporate securities disputes of financial misconduct. Attorneys and their clients rely on our litigation-valuation/
• Data mining and analyses team because of our demonstrated ability to analyze complex forensic-investigations
• Internal investigations financial and accounting issues, and to present findings and
• False Claims Act and government contracts opinions in a manner that is clear and understandable by all
investigations stakeholders, including the courts.
• Labor investigations
• Monitor-ship
• Postacquisition disputes
• Shareholder and partnership disputes
• Tax controversy
• Marital dissolution
BDO USA • Corporate Investigations BDO’s Forensic Accounting and Investigations Practice https://www.bdo.com/
• Due Diligence provides a wide variety of services to organizations, their services/consulting/
• Anticorruption Compliance and Investigations counsel, and their stakeholders. We conduct forensic analyses forensic-accounting-
• Forensic Technology Services of books and records, computer forensics and data analytics, investigations/
• Financial Reporting Disputes and assist clients with interviews and background checks. overview
• False Claims Act When required, we also provide oral or written testimony and
• Fraud Prevention serve as monitors and independent reviewers or as forensic https://www.bdo
• Information Governance accountants to monitor independent reviewers. .com/services/
• Digital Forensics and Cyber Investigations consulting/forensic-
• eDiscovery technology-services/
• Data Analytics overview
• National Security Compliance/CFIUS
• Investigations
• Reporting disputes
• False claims act
• Forensic technology
Crowe Digital forensics: Crowe Horwath LLP’s forensic experts use insights gained from https://www.
Horwath • Using proper chain-of-custody methodology for extensive technical and industry knowledge to cut beneath the crowehorwath.com/
field triage and acquisition of target ESI; surface and help uncover the real story behind the numbers. In services/advisory/
• Working with virtually any digital storage medium; the event of litigation, Crowe’s professionals tell the story to forensic-services.aspx
• Investigating and analyzing forensic images; the judge, jury, or arbitrator through clear, convincing expert
• Recovering, reconstructing, and preserving lost testimony and compelling visual presentations.
and deleted data;
• Providing expert witness testimony;
• Coordinating with counsel, forensic accountants,
and other litigation professionals;
• Interacting with human resources to handle
management-level changes; and
• Providing training, education, and reporting.
(Continued )
9

10
Exhibit 1.3 (Continued)
Data analysis/Data mining:
• Detecting data anomalies;
• Reconstructing accounting records and transaction
tracking through coordination with forensic
accountants;
• Completing data set analysis using statistical
methodologies;
• Providing custom analysis database programming; and
• Delivering robust reporting with rich graphics and
written narrative.
eDiscovery:
• Working with counsel to extract pertinent data
from forensic images;
• Uploading and providing access to documents; and
• Performing OCR (optical character recognition)
scanning, deduplication, and indexing of documents.
• Forensic Technology
• Insolvency
Deloitte • Anticorruption and fraud We help our clients predict, detect, and respond to the risks https://www2
• Business intelligence services and vulnerabilities that come from global corruption, litigation, .deloitte.com/us/
• Cyber risk fraud, financial mismanagement, and other threats. Learn en/pages/advisory/
• Discovery how Deloitte’s Forensic Advisory professionals are helping solutions/forensics-
• Foreign Corrupt Practices Act (FCPA) organizations lead, navigate, and disrupt to turn complex issues and-investigations-
consultation into opportunities for resilience and long-term advantage. solutions.html
• Financial risk, transactions and restructuring
• Internal audit and assurance
• Investigations
• Investigations on the corporate level
• Litigation and dispute consulting
• Strategic and reputation risk management
EY • Antibribery/anticorruption analytics Our forensic accountants and technologists, certified fraud http://www.ey.com/
• Antifraud analytics examiners, and anticorruption and antimoney laundering us/en/services/
• Computer forensics, data mining, and analysis specialists work with our clients’ legal counsel and internal assurance/fraud-
• Cybercrime investigation audit and compliance departments investigating complex investigation---
• Cyber breach diagnostics issues and developing practical solutions that address dispute-services/
• Cybercrime forensics operational challenges. ey-how-we-can-
• Cyber analytics We apply the collective knowledge and insight gleaned help-2
• Dispute and damage analysis from working across industries and geographies to help our
• Early case assessment clients conduct fraud risk assessments, institute proactive
• eDiscovery anticorruption programs, and utilize forensic data analytics
• eDiscovery advisory services that enable corporations to manage risk and regulatory
• Forensic data analytics compliance.
• Incident preparedness and response services
• Information governance
• Insider threat analysis
• Investigation and Dispute Managed document review
• Predictive modeling
• Preservation and collection of ESI
• Risk assessment
11
• Technology-assisted review
(Continued )

12
Grant • Computer forensics Our forensic technology professionals utilize state-of-the- https://www
Thornton • eDiscovery art hardware and software—along with advanced discovery .grantthornton.com/
• Data analytics (i.e., predictive coding) processes, methodologies, and proprietary analytical routines— services/advisory/
• Records and risk management to identify, collect, recover, reconstruct, and preserve business-risk/forensic-
• Incident response and data breach investigations electronic evidence. This sophisticated protocol of testing advisory.aspx
• Analyzing suspicious transactions complete data populations allows our team to reach accurate
• Identifying hidden relationships and defensible conclusions, whether those conclusions
• Analyzing large volumes of transactions more efficiently represent simple control deficiencies or are indicators of
• Monitoring fraud threats and vulnerabilities potential corruption, waste, or abuse.
• Assessing effectiveness of internal controls
• Considering unique organizational and industry issues
• Cybersecurity
• Investigation
• Insurance
• Disputes
KPMG • eDiscovery KPMG Forensic works with organizations to help them in https://home.kpmg
• Forensic Data Analytics their efforts to achieve the highest level of integrity. We .com/us/en/home/
• Analyzing suspicious transactions assist businesses to effectively manage the costs and risks of services.html
• Identifying hidden relationships complying with new regulations and enforcement activity.
• Analyzing large volumes of transactions more efficiently We help assess, design, and implement internal controls and
• Monitoring fraud threats and vulnerabilities compliance programs to mitigate vulnerabilities to fraud
• Assessing effectiveness of internal controls and misconduct and assist in the prevention, detection, and
• Considering unique organizational and industry issues response to fraud, waste, abuse, and other forms of misconduct.
• Corporate Intelligence
• Digital Forensic
• Fraud Risk Management
Moss Does not have information concerning forensic Delivering a full spectrum of accounting, consulting, and Does not have
Adams accounting online wealth management services, we dive deep into each industry information
to bring greater contextual understanding to every engagement. concerning forensic
As a result, conversations are more illuminating and solutions accounting online
more precise.
PwC • Anticorruption services Our purpose is central to our business. https://www.pwc
• Antibribe and fraud For more than 160 years, the role we play has always .com/gx/en/services/
• Capital projects and infrastructure been underpinned by the need for trust and our ability to advisory/forensics
• Cybersecurity deliver solutions. Our purpose brings meaning to our daily .html
• Digital forensics work, guides our decision-making, and inspires action in a
• Dispute services dynamically changing environment. It demonstrates our
• Financial Fraud ongoing, clear commitment to working collaboratively and
• Fraud risk mitigation innovatively to deliver the highest-quality outcomes for our
• Global intelligence people, clients, and society.
• Government contractor services and export controls
• Insurance claims
• Investigation services
• Technology solutions
• A crimes unit
RSM US Corporate investigation services RSM’s forensic accounting and investigative professionals have http://rsmus.com/
• Asset tracing, misappropriation, waste and the skills and experience to resolve high-stakes issues from the what-we-do/services/
embezzlement board room to the courtroom. Our team provides analytical and financial-advisory/
• Construction-related investigative services to major law firms, insurance companies, forensic-accounting-
• Fidelity claims financial institutions, governmental entities, private equity and-fraud-
• Financial fraud, including misrepresentation and FSF firms, venture capital funds, and corporate counsel and executive investigations.html
13
• Regulatory-related investigations management. Team members include expert testifiers, witness
(Continued )

14
• Financial institution and health care fraud interviewers, data mining and computer forensic specialists, fraud
• Foreign Corrupt Practices and UK Bribery Acts examiners qualified as international investigators, and CPAs and
• USA PATRIOT Act DOJ, SEC, and State others you may need to document the facts of your situation.
Attorneys General inquiries and investigations
• Whistleblower investigations
• White-collar defense
Bankruptcy services
• Bankruptcy fraud
• Fraudulent conveyance actions
• Preferential payments
Litigation support, including expert testimony

• Billing, earn-out, working capital, and
postacquisition purchase price disputes
• Breach of fiduciary duty
• Director and officer liability
• Business interruption/insurance coverage disputes
• Securities and shareholder litigation
• Background investigations/due diligence
• Data mining and computer forensics
• Management fees and related-party transactions
firms, has its own website. On the website, there is a page related to foren-
sic accounting services that the firm offers. For example, PwC offers digi-
tal forensics, fraud risk mitigation, a crime unit, investigation solutions,
and many others. The services offered by PwC, KPMG, Deloitte, and
Ernst & Young (EY) are similar but deviate highly from the smaller firms,
such as Moss Adams and Baker, Tilly, Virchow, and Krause. The existence
of this gap can be explained by firm size, technological capability, human
capital, and revenue available to spend on forensic services.
The Federal Bureau of Investigation (FBI)’s forensic accountants inves-
tigate terrorists, spies, and criminals who are involved in financial crime.
For the FBI, these accountants participate in court proceedings using
knowledge of legal procedure and policies, principles for evidence gather-
ing and presentation, and security protocols dictated by law. Prior to en-
gaging forensic accountants to practice, the FBI administers a live course
to understand the systems, skills, techniques, and expertise that the field
offices require.16 The responsibilities of FBI forensic accountants include
performing thorough forensic financial analyses of the records of those
suspected of illegal activity, gathering evidence, preparing search warrants/
affidavits, going with case agents on subject/key witness interviews, piecing
together funding sources and interrelated transactions, generating investi-
gative reports, meeting with prosecutors to strategize, offering support dur-
ing proceedings, and acting as expert witnesses. After the training session,
the FBI assigns accountants to various teams, including forensic account-
ing squads and the Forensic Accountant Support Team.17
Forensic accountants can be employed by public accounting firms, the
FBI, insurance firms, governmental agencies, law firms, and/or finance com-
panies.18 A prominent case in recent history is a $200 million Medicare fraud
in which two employees of American Therapeutic Corporation recruited
beneficiaries. Another case involved insider trading of hedge funds by Raj
Rajaratnam. More information on these cases is included in Exhibit 1.4.
On the cases, several techniques were used to help find the perpetrators
guilty. First, interviewing was used heavily in these cases. Interviewing is
often used to gather specific information to be used during trial. Second, the
verification of red flags is used. In the above-mentioned cases, kickbacks and
prior legal troubles are probable causes of wrongdoing as illustrated in Ex-
hibit 1.4. In the aftermath of financial scandals and the 2007 to 2009 global
financial crisis, the focus on FSF prevention and detection has become more
important as regulators, investors, and companies seek better understand-
ing of corporate malfeasance and misconduct. However, nonfraud forensic
accounting services such as litigation consulting, valuation, and expert wit-
nessing are gaining considerable attention in recent years.
Exhibit 1.4
FBI Forensic Accounting Cases
Case Details
American Twenty persons were charged with participation in a health
Therapeutic care fraud scheme resulting in $200 million in damages. One
Corporation doctor was sentenced to 15 years in prison and the case has set
a precedent for the FBI, Department of Justice, and the Florida
government in dealings with health care fraud.
Raj Rajaratnam The founder of the Galleon Hedge Fund, with $7 billion in asset
worth, was found guilty of insider trading and sentenced to 11 years
in prison. Goldman Sachs, IBM, Intel, Polycom, and many others
were involved in this scheme. Galleon went defunct after this fraud,
and many other employees of various firms were sentenced.
Crime occurs across countries and continents, so forensic accountants have

opportunities for careers worldwide. Even though technology has brought
the world closer together, technology has not changed cultural differences or
human beings’ responses to pressure, incentives, and opportunities to engage
in fraudulent and wrongful actions. The role of information technology has
greatly increased in the detection of fraud and the committing of fraud. Fo-
rensic accountants need to possess a different skill set from that of traditional
accountants. They need to be analytical, detail-oriented, skeptical, and ethi-
cal. Forensic accountants provide a wide range of services, including financial
data analysis, evidence integrity analysis, computer application design, writing
reports, compiling information, testifying as an expert witness, eliciting other
experts’ assistance, maintaining documentation, making damage assessment,
tracing illicit funds, locating hidden assets, exercising due diligence reviews,
gathering forensic intelligence, and conducting business valuation.
The ACFE’s 2016 report to the nations indicates that the median loss
caused by the occupational fraud cases was $160,000; the most common
form of fraud was FSF, causing a median loss of $975,000; corruption

schemes were in the middle, comprising just under one-third of cases and
causing a median loss of $200,000; and asset misappropriation schemes
were the least costly, causing a median loss of less than $125,000.19 More
than 80 percent of fraud cases were committed by individuals in one of
six departments: accounting, operations, sales, executive/upper manage-
ment, customer service, or purchasing, and about 85 percent of fraudsters
had never been previously charged or convicted for a fraud-related of-
fense.20 The ACFE has updated its report to the nations on occupation,
fraud, and abuse annually in the past several years. The ACFE’s 2018
report focuses on five critical areas of occupational fraud. These five areas
include the methods and means by which occupational frauds are com-
mitted and detected, the characteristics of the organizations that are vic-
timized, and people who commit occupational fraud and results of the
cases.21 The 2018 study shows the analysis of 2,690 cases of occupational
fraud, and results are similar to those of 2016 study, with 89 percent
of occupational fraud committed being related to asset misappropriation
with the median loss of $114,000, 38 percent of cases pertaining to cor-
ruption with the median loss of $250,000, and 10 percent of cases being
related to FSF with the median of $800,000 loss per year.22
The long-term sustainability of the specialized field of forensic ac-
counting and fraud examination will depend on the ability to test (using
scientific methodologies) those tools and techniques currently used in the
field, as well as the ability to research new innovative ideas to address
fraud and forensic accounting issues, but also issues associated with law,
sociology, psychology, criminal justice, intelligence, computer forensics,
and application tools and techniques pulled from other forensic sciences.
The need for trained fraud and forensic experts continues to growth.
Contrasting Forensic Accounting with Conversional

Accounting and Auditing
Forensic and investigative accounting is a subfield of accounting with its own
set of purposes, specializations, skills, and requirements. However, there are
many similarities and differences between conventional accounting/auditing
and forensic accounting. Similarities are the common goal of identifying,
measuring, classifying, analyzing financial information, preparing reports,

and communicating results to interested users of these reports. The main dif-
ferences between a conventional accounting and forensic accounting are the
intended purposes and users. Conventional accounting is a process of identi-
fying economic events and business transactions, measuring, classifying, and
recognizing their financial impacts, preparing a set of financial statements re-
flecting results of operations and financial positions, and conveying such use-
ful, reliable, and relevant financial information to interested users of financial
statements including investors and other users of financial statements. Users
of financial reports use financial information in making decisions.
There are also some similarities and differences between traditional
auditing and forensic accounting. Auditors typically gather evidence rel-
evant to reported financial statements, evaluate its sufficiency and com-
petency, reach audit conclusions, and communicate their audit opinions
to users of financial statements. The audit opinions are intended to lend
more credibility to the reported financial statements. Auditors provide
reasonable assurance that the audited financial statements are free from
material misstatements whether caused by error or fraud. Auditors are
professional independent contractors who opine on financial statements
by maintaining their objectivity, independence, and impartiality from
their clients and do not compromise their professionalism in benefiting
one user at the expense of other users of financial statements.
Forensic accountants often use the same methods as traditional audi-
tors in gathering and evaluating both financial and nonfinancial informa-
tion in reaching conclusions about its relevance and reliability and use
such information in expressing professional opinions on issues pertaining
to judicial guidelines on evidence and the applicable law. In this respect,
forensic accounting is similar to conventional auditing. Forensic accoun-
tants use similar audit procedures in gathering and evaluating evidence
and use professional skepticism in expressing opinions. There are some
overlaps between the work of fraud forensic accounting, nonfraud forensic
accounting, and internal and external auditing as depicted in Exhibit 1.4.
However, the objectives of audit engagements are different from those of
forensic accounting.
The objectives of a traditional audit are to provide reasonable assur-
ance that audited financial statements are free from material misstatements
whether caused by error or fraud. The objectives of a forensic accounting

engagement are also to express an opinion on a set of financial and nonfi-
nancial information and communicate findings and make recommenda-
tions and testify to the findings.23 Exhibit 1.5 compares traditional internal
and external auditing with fraud and nonfraud forensic accounting. In fraud
forensic accounting, investigators investigate allegation of fraud, gather
evidence to substantiate the fraud allegation, and report on the findings.
In nonfraud forensic accounting, accountants serve as litigation consul-
tants, expert witnesses, or valuation experts in gathering evidence and opin-
ing on the disputed matters.
Exhibit 1.5
Contrasting External Auditing, Internal Auditing,
and Fraud and Nonfraud Forensic
and Investigation Practices
External Auditing
Internal Auditing Planning
Advisory & Consulting Risk Assessment
Services to organizations
to improve the Internal Controls
efficiency, effectiveness, Audit Evidence
and economy of
performance. Reviewing
Reporting
Non-Fraud Forensic Fraud Forensic

Accounting Accounting
Accounting and Legal Prevention and Deterrence
Matters Detection
Expert Witnessing Investigation
Valuation Remediation
Litigation Consulting
Professional guidelines and standards used by auditors and forensic ac-

countants are different. Audits of public companies in the United States,
post-SOX, should be performed in compliance with the auditing stan-
dards of the Public Company Accounting Oversight Board (PCAOB).24
Forensic accountants comply with all applicable laws, rules, regulations,
and standards, rules of evidence, criminal and civil procedures, and other
professional guidelines and pronouncements in conducting their foren-
sic accounting services. Forensic accounting and traditional financial
auditing have a different foundation. For example, the certified public
accountants (CPAs) who perform forensic accounting services should ob-
serve Consulting Services section 100 of “consulting Services: definitions
and Standards of the American Institute of CPA (AICPA) Professional
Standards.”25
Forensic accounting standards arise from courts and the precedents
(law) set by them. Financial accounting standards are developed by the
SEC and its designated professional organization, the Financial Account-
ing Standards Board (FASB) in establishing guidelines for the preparation
of financial statements of public companies. The accounting standards
provide guidelines for identification, classification, measurement, and
recognition of business transactions and for the preparation of related
financial statements (balance sheet, income statement, the statement of
cash flow, and the statement of owners’ equity). Auditing standards for
auditors of public companies are set forth by the PCAOB in the post-SOX
era to provide guidelines for auditors in lending more credibility to pub-
lished financial statements. Forensic accounting standards are tailored
to identification and prevention procedures. External auditors primarily
focus on discovery of material misstatements whether caused by error or
fraud, whereas forensic accountants focus on fraud prevention and detec-
tion. When auditors detect allegations of fraud through the normal prac-
tice of audit of financial statements, it becomes cumbersome for them to
prove that fraud occurred. External auditors typically employ and retain
forensic accountants to detect the alleged FSF. On the contrary, forensic
accountants consider fraud detection as their main goal, and when they
discover fraud, they have fulfilled their responsibility.
Audit procedures and processes are essential to any investigative ef-
fort, and they differ between forensic accountants and traditional auditors.
Both forensic accounting and auditing involve standard auditing proced-

ures, such as evidence gathering, future analytical tests, and sampling.
Forensic accountants also utilize several, unique areas to benefit the work-
load. These areas are criminalistics, forensic evidence, testimony from ex-
perts, and using computer technology to conduct forensic investigations.
Criminalistics is a process in which gathering and analysis of evidence
occurs. The evidence can range from fingerprints taken to computer and
handwritten documentation. Forensic accountants mostly use evidence
relating to computer and written documentation. This type of evidence
is defined as being physical and tangible in nature. The two above-
mentioned specialties of forensic accountants are applied through practice
and instruction; however, to apply these correctly, the accountant must
be knowledgeable in expert testimony. This requires the accountant to
have sufficient and competent evidence to present in court. The forensic
accountant works alongside lawyers to aid in the resolution of cases. In
recent years, computer technology has provided forensic accountants, the
ability to assimilate data and decipher it at an ever-increasing rate. This
process is referred to as digital forensics when using forensic investigation
on digital devices such as computers.
Conclusion
Forensic accounting is a growing and changing field that is both chal-
lenging and rewarding. Forensic accountants are commonly hired to
uncover fraud, discover fraudsters, minimalize the effects of fraud, and
try to prevent fraud in the future. They can also be utilized in other
cases such as divorce, terrorist activities, business valuations and crimi-
nal investigations. Forensic accountants must be able to detect fraud,
trace illicit funds, implement activities to prevent future fraud, and
provide an adequate burden of proof. Forensic accountants need to pos-
sess different skill sets, from traditional accountants to investigators and
digital forensic practitioners. They need to be technical, analytical, de-
tail-oriented, good communicators and ethical. This specific set of skills
for forensic accountants helps plead the case for higher education insti-
tutions to provide courses that will train future forensic professionals.
The need for formal and consistent educational programs focusing on
the indicators of fraud and nonfraud schemes is beneficial to all busi-

ness students. Moving forward, this will hopefully become a priority in
higher education to prepare all students, not just accounting students,
to become competent and ethical future leaders in the business world.
Action Items
1. Forensic accounting is a field of accounting with specific expertise,
knowledge, and skill sets.
2. Forensic accounting skill sets are in areas of technical skills (account-
ing, auditing, finance, law, psychology, and criminology), analytical
skills (data gathering and analyses), and soft skills (communication
and interviewing).
3. Forensic accounting is gaining considerable attention in the after-
math of the financial scandals at the turn of the twenty-first century
and the 2007 to 2009 global financial crisis.
4. Forensic accounting is a challenging, demanding, and rewarding
field of accounting.
Endnotes
1. Z. Rezaee, J. Wang, and B. Lam. January–June, 2018. “Toward the
Integration of Big Data into Forensic Accounting Education,” Journal
of Forensic & Investigative Accounting 10, no. 1.
2. Ibid.
3. Z. Rezaee, L. Crumbley, and R. Elmore. 2004. “Forensic Account-
ing Education: A Survey of Academics and Practitioners,” Advances
in Accounting Education Teaching and Curriculum Innovations 6,
pp. 193–232.
4. Ibid.
5. W.S. Hopwood, J.J. Leiner, and G.R. Young. 2008. Forensic Accounting
(1st ed., Boston, MA: McGraw-Hill Irwin).
6. L. Crumbley, L. Heitger, and S. Smith. 2015. Forensic and
Investigative Accounting (7th ed., Chicago, IL: Commerce Clearing
House).
7. Z. Rezaee, and R. Riley. 2009. Financial Statement Fraud: Prevention

and Detection (2nd ed., Hoboken, NJ: John Wiley & Sons).
8. D. James, and C. Ratley 2016. Report to the Nations on Occupa-
tional Fraud and Abuse (Austin, TX: Association of Certified Fraud
Examiners).
9. CNNMoney. 2013. Best Jobs in America. http://money.cnn.com/
pf/best-jobs/2013/snapshots/24.html
10. Ibid.
11. IBISWorld. 2019. IBISWorld Industry Report 54121c: Accounting
Services in the US, February 2019. Available at https://clients1.ibis-
world.com/search/default.aspx?st=Forensic%20Accounting%20Jobs
12. Bureau of Labor Statistics. 2016. Accountants and Auditors. https://
www.bls.gov/ooh/business-and-financial/accountants-and-auditors
.htm#tab-1
13. Rezaee and Riley. 2009.
14. Committee of Sponsoring Organizations of the Treadway Commis-
sion (COSO). 2010. Fraudulent Financial Reporting: 1998-2007: An
Analysis of U.S. Public Companies. www.coso.org
15. F. Vinluan. March 1, 2015. “Finding Growth in FVS,” Journal of
Accountancy. https://www.journalofaccountancy.com/issues/2015/mar/
cpa-forensic-and-valuation-services.html
16. FBI. March 9, 2012. FBI Forensic Accountants. https://www.fbi.gov/
news/stories/fbi-forensic-accountants
17. Ibid.
18. ACFE. n.d. Career Path—Forensic Accountant. http://www.acfe.com/
career-path-forensic-accountant.aspx, (accessed November 21, 2017).
19. Association of Certified Fraud Examiners (ACFE). 2016. ACFE
Report to the Nations, Downloads. https://www.acfe.com/rttn2016/
resources/downloads.aspx, (accessed October 7, 2017).
20. Ibid.
21. Association of Certified Fraud Examiners (ACFE). 2018. Report to
the Nations: 2018 Global Study on Occupational Fraud and Abuse.
https://www.acfe.com/uploadedFiles/ACFE_Website/Content/
rttn/2018/RTTN-Government-Edition.pdf
22. Ibid.
23. D. Gray. 2008. “Forensic Accounting and Auditing: Compared and

Contrasted to Traditional Accounting and Auditing,” American Journal
of Business Education 2, no. 2.
24. Public Company Accounting Oversight Board (PCAOB). 2018.
Auditing Standards. https://pcaobus.org/Standards/Pages/default.aspx
25. The American Institute of Certified Public Accountants (AICPA).
2018. Professional Standards: Forensic and Valuation Services Professional
Standards. https://www.aicpa.org/interestareas/forensicandvaluation/
resources/standards.html
CHAPTER 2
Forensic Accounting
Services and Skills
Executive Summary
Forensic accounting has advanced as an important and rewarding field
of accounting to prevent, detect, and correct financial scandals and other
types of fraud. In such an increasingly unstable economic and litigious
environment, there has been significant growth in the demand for and in-
terest in forensic accounting and investigative services. Forensic account-
ants provide litigation consulting, expert witnessing, valuation, and fraud
investigation services. This chapter presents forensic accounting fraud and
nonfraud services and skill sets required by forensic accountants to effect-
ively conduct their services.
Introduction
The existence and persistence of high-profile alleged FSF (e.g., Enron,
WorldCom, Parmalat, Satyam), as well as the investment Ponzi schemes
and credit crunch scandals have negatively affected the safety and sound-
ness of financial markets and investors’ confidence in public financial in-
formation. Forensic accountants perform a variety of fraud and nonfraud
services, including expert witnessing, valuation, and litigation consulting.
To effectively conduct their services, forensic accountants should have
knowledge, education, and expertise in accounting, marketing, finance,
management, psychology, criminology, and technology. This chapter pres-
ents fraud and nonfraud professional services commonly performed by for-
ensic accountants as well as technical, analytical, and soft skill sets required
for forensic accountants to effectively conduct their services.
Forensic Accounting Opportunities and Services

Forensic accounting is a field of accounting practice pertaining to fraud
and nonfraud services. Forensic accounting is a practice of using ac-
counting, marketing, finance, management, psychology, and criminology
along with technology and science in performing fraud and nonfraud
forensic accounting services. Exhibit 2.1 presents three general areas of
forensic accounting—litigation consulting, expert witnessing, and fraud
Exhibit 2.1
Forensic Accounting Practice
Forensic Accounting
Fraud Examination Litigation consulting

Expert Witnessing
(investigative services) (legal services and disputes)
Valuations and litigation

Occupational Fraud Legal Disputes
support
Shareholders’ and
Financial Statement Fraud Financial Disputes
stakeholders’ disputes
Asset-Theft Fraud Bankruptcy and insolvency Assistance Lawyers
Assistance Other
Consumer Fraud Divorce Disputes
Accountants (Accounting)
Computer Fraud Nonfinancial Disputes and

Mergers and Acquisitions
(IT Risk) Investigations
Risk Assessment Bribery Money Laundering
Cyberattacks
Fraud examination: a process of resolving fraud allegations, gathering and examining evidence,
writing reports, and testifying to findings so as to detect, prevent, and correct fraud
Litigation consulting: using skills in accounting, auditing, financing, law, and others to gather,
analyze, and evaluate evidence, as well as interpret and communicate findings
Expert witnessing: serving as a witness to educate jurors and interpret complex accounting
and financial issues
Forensic Accounting Services and Skills 27
investigation.1 Other specific areas of forensic accounting practices are

typically classified into general categories of fraud and nonfraud forensic
accounting practices and described in detail in this section.
Litigation and Expert Consulting
Litigation consultants assist lawyers in pretrial activities, disposition, and

discovery. Forensic accountants apply their knowledge, skills, and experi-
ence in accounting, business and finance, and criminology to educate
lawyers in the interpretation and understanding of financial and non-
financial information. Litigation consulting services are in demand to
determine liability and assess damages in business valuations, insurance
claims, malpractice, divorce settlements, and embezzlements and thefts
in the workplace. Litigation consultants assist attorneys in pretrial and
trial activities, disposition and discovery, and legal deliberations. This
type of forensic accountant applies skills, accounting, legal, auditing, and
financial knowledge, experience, and training to educate lawyers in the
interpretation and understanding of financial information and in audit-
ing matters.
Litigation consultants are often hired by attorneys to assist them in
evaluating cases and developing trial strategies. Litigation consultants
achieve their success by conducting mock trials or focus groups. While
performing this exercise, mock jurors are presented with evidence that
will be seen during the actual trial. The mock jurors are then surveyed
to see what items are the most impactful and what verdicts they are
leaning toward. This results in knowing how jurors may react to the
case and allows attorneys to know the best way to communicate their
case in court.2 Litigation consulting services are important and in de-
mand to determine liability and assess damages in business valuations,
malpractice, divorce settlements insurance claims, and embezzlements
and thefts in the workplace. The AICPA released definitions and stan-
dards for consulting services in 2003. The nine-page document has
five sections pertaining to relevant practices in consulting. The stan-
dards follow a code of ethics format and the scope of practitioners is
clearly outlined in the definition section.3 The guidance is summarized
is Exhibit 2.2.
Exhibit 2.2
AICPA Guidelines on Litigation Consulting
Guidance Pertinent Information

Introduction Services offered have changed because of the advancements
in practices and technology. Consulting services generally
involve advisory services, particularly to management.
Definitions 1. Practitioner: Any one member carrying out consulting
services for a client.
2. Consulting Process: Analytics applied to consulting.
3. Consulting Services: This includes advisory, consultation,
implementation, transaction, support, and product services.
Standards The standards follow the general standards rule. The rules
are: professional competence, due professional care, planning
and supervision, and sufficient relevant data, client interest,
understanding the client, and communication with the client.
Consulting Services Consulting services do not impair independence for attest
for Attest Clients clients.
Effective Date January 1, 1992.
Expert Testimony and Witnesses
Forensic accountants also serve as expert witnesses to educate jurors about

the technical aspects of accounting and financial reporting. Although litiga-
tion consulting and expert witnessing services are similar in the sense of
applying accounting education and practice to assist the characters of the
court (lawyers, jurors, judges) to better understand, use, and interpret fi-
nancial and nonfinancial information, the overriding difference is the way
the forensic assignment is conducted. Forensic accountants serving as expert
witnesses must keep professional skepticism and remain objective and neu-
tral to establish credibility with the opposing cross-examiner. The primary
objective of the cross-examiner throughout the court deliberation process is
to deter credibility by proving that the forensic accountant has given con-
tradictory statements. Litigation consultants, on the contrary, often work
under the supervision of a lawyer and as such have special privileges in which
specific details and evidence presented do not necessarily have to be revealed.
Several Supreme Court cases have set precedents regarding expert wit-
nessing. Two of note are Daubert vs. Merrell Dow Pharmaceuticals, Inc.
and The Kumho Tire Co. vs. Carmichael decision. Daubert vs. Merrell states
that courts must determine whether the logic and methods presented by
an expert are valid scientifically and if they can be applied to the case in
question. The Kumho Tire Co. vs. Carmichael case extended Daubert vs.
Merrell to all expert testimony. Testifying CPAs must detail their certifica-
tion, qualifications, reasoning, and methods. Experts must also qualify
their methodology’s reliability.4 Exhibit 2.3 presents two court cases rel-
evant to expert witnessing forensic accounting services.
Exhibit 2.3
Expert Witnessing Court Cases
Court Case Date Decided Description

Daubert vs. Merrell Dow June 28, 1993 1. Provided that cross-examination, a
Pharmaceuticals, Inc. swath of evidence, and clear burden
of proof is better in principle than
the general acceptance standard.
The Kumho Tire Co. March 23, 1999 1. Applies the principles in Daubert
vs. Carmichael vs. Merrell to other experts who are
not scientists.
2. The gatekeeping obligation applies
to every facet of expert testimony.
Fraud Investigation
Forensic accountants normally serve as fraud investigators to examine al-

legations of fraud. Fraud investigators examine financial and nonfinancial
data and other evidence to discover and report fraudulent activities. Both
financial statement auditing and fraud investigation are the process of
gathering competent and sufficient evidence to substantiate the quality,
reliability, completeness, transparency, and accuracy of financial reports.
Financial auditors provide reasonable assurance that financial statements
are free from material misstatements whether caused by errors of fraud,
whereas fraud investigators examine allegations of fraud by searching
for at least one event or transaction that could signal the possibility of
fraud. Furthermore, financial auditors focus primarily on audit of fi-
nancial statements and are more concerned with management fraud in
manipulating financial statements, while fraud examiners can be hired to

examine both fraud and nonfraud issues. Forensic accountants typically
deal with the following: fraud prevention and detection (antifraud poli-
cies, procedures, and practices), family law (net worth valuation, divorce),
fraudulent financial reporting (FSF) and white-collar crimes (larceny, de-
falcation, illegal acts, bribery, money laundering, corruption), economic
damages (civil litigations), risk assessment (bankruptcy risk), asset valu-
ations (bankruptcy, mergers, and acquisitions), and misappropriation of
assets (thefts, embezzlements). In performing these services, forensic ac-
countants should have technical skills including the ability to understand
accounting, finance, and law and to think critically, analytical skills of
using quantitative methods and conducting research and investigations,
and soft skills of communicating effectively and conducting interviews.
Business Valuation
Business valuation is the assessing of the fair value of a business or com-

pany. To accomplish this task, valuation services are provided by people
in the industry known as appraisers. The business valuation market has
grown and will continue to grow because of mergers, acquisitions, em-
ployees stock ownership, stock options, preferred stock, debt, and start-up
ventures, economic obsolescence and litigation, and better financing op-
portunities for businesses and individuals alike.5 Forensic accountants
serving as appraisers should have the appraisal and industry aptitude to
form credible valuation opinions.6 Forensic accountants are employed to
perform business valuation when sales, mergers, partner ownership, or
divorce rulings occur.
Forensic accountants in performing valuation services often use stra-
tegic valuation methods that consider asymmetric risks, management
flexibility, real options, realistic estimations and related assumptions, and
other factors relevant to the valuation services. Forensic accountants as val-
uation experts use a sophisticated, planned, properly executed, and well-
documented methodology that investigates all relevant factors. Business
valuation strategies and procedures go beyond just financial and market
analyses that often focus on financial statement and cash flow analyses and
take into consideration economic value-added, management, the market
and economic conditions, and multiple regression analyses. The types of

valuation services provided by forensic accountants are, but not limited to,
the following:
• Value of a private company that is going public through the Initial

Public Offering process
• Value of an investment opportunity to assess real options or
asymmetric risks
• Value of an operating business and assessment of expansion or
discontinuing products and services
• Value of a division or line of productions
• Value of assets and liabilities in the case of divorce disputes
• Value option decisions for buy or rent properties
• Value of investments in information technologies such as block
chain risks
• Value investment portfolio
• Value of a franchise and franchisee
• Value of start-up and emerging growth companies
Other Nonfraud Forensic Accounting Services
Forensic accountants offer nonfraud services in addition to fraud inves-

tigations. Examples of these services include divorce litigation, economic
damage quantification, and mergers and acquisitions. Divorce litigation
is a big market and forensic accountants are on the forefront. During
divorce litigation, forensic accountants use investigative skills to identify
hidden assets or equity. These include personal assets, collectibles, collec-
tions, stock, and property. After the forensic accountant aids in locating
these items, assessment of the long-term impact on divorce is also con-
sidered. This is often done by thorough review of tax returns, credit card
statements, and other records. 7
Another area where forensic accountants work in is economic damage.
Economic damage can be defined as the loss of income and earning cap-
acity. To figure out the amount of loss or reduction in capacity, economic
damage quantification must be done. This is a process in which lawyers,
agents, and forensic accountants corroborate in the areas of fraud, dispute,
and injury to reach quantitative results. The methods used to find results
include the benchmark approach, the contract method, and the profit
method. Each revolves around the examination of performance metrics
and correlate the results with the degree of harm. This allows forensic ac-
countants to show proof of wrongdoing during litigation. 8
Mergers and acquisitions (M&A) are common in the business world
and forensic accountants can be called upon to evaluate M&A trans-
actions. When mergers and acquisitions occur, practitioners often deter-
mine the effect of professional skill sets on the process. The professionals
involved in the transaction should be skilled in completeness of exhibits
and disclosure and accuracy of the entire business deal. To evaluate the
aforementioned correctly, forensic accountants are knowledgeable in vir-
tual data storage, visualization software and material, and the Confiden-
tial Information Memorandum (CIM), which is a marketing technique
used to attract buyers.9
Forensic Risk Assessment and Management
Risk has different notions and is defined in different ways and contexts.
Global business is constantly changing and becoming more unpredict-
able, complex, and volatile. In this challenging business environment,
forensic accountants can be hired to identify risks, assess their determi-
nants and consequences, and minimize their detrimental effects. Organ-
izations incur different types of risks to attain their mission, including
capital structure risk, credit risk, liquidity risk, interest rate risk, strat-
egy risk, and financial and exchange risk. Forensic accountants are well
trained to assist organizations in assessing and managing risks and maxi-
mize their rewards and minimize their detrimental effects. Forensic ac-
countants can use the Enterprise Risk Management (ERM) in assessing
risks and in turning challenges into opportunities. ERM is a continuous
process of identifying, assessing, and disclosing risks that challenge the
company, their potential losses, and possible rewards. The Committee
of Sponsoring Organizations (COSO) in 2004 defined ERM as “. . . a
process, effected by an entity’s board of directors, management and other
personnel . . . designed to identify potential events that may affect the
entity, and manage risk to be within its risk appetite . . .”10
Dispute Resolution
Dispute resolution is the process of ending grievances between parties. In

forensic accounting, a range of acceptable methods are used by practitio-
ners to resolve a dispute, conflict or claim. During the dispute resolution
process, forensic accountants often investigate commercial damages and
valuations by reviewing financial transactions, reporting on interviews,
and debating expert reports. Dispute resolutions are generally a tedious
process requiring forensic accountants to act as mediators between par-
ties. A mediator is an individual or party who aids opposing parties in
reaching an agreement. In addition to the above-mentioned traditional
investigation methods, technology has brought upon new ways to ex-
amine litigation. New methodology resulting from the advancement of
technology includes retrieval of deleted information, review of electronic
data transmissions (calls and e-mails), verification of metadata, and ex-
amination of the electronic audit trail.11 The Circle of Conflict, developed
by Christopher W. Moore, details a process for mediators.12 The process
contains four quadrants, each representing primary, secondary, and third
parties, respectively. The inner circle of the quadrants represents issues
and options that are viable to each quadrant. This diagram is intentioned
to depict opportunities that arise from disputes. 13
Skill Sets of Forensic Accountants

A survey study sponsored by the Forensic Valuations Services Section of
the American Institute of Certified Public Accountants (AICPA) in 2009
reveals characteristics and skills of forensic accountants described in this
section.14 Successful forensic accountants need to have three sets of tech-
nical, analytical, and soft skills as explained in the following subsections.
Technical Skill Sets
Forensic accountants need to be familiar with broad accounting knowledge,

the law, and investigative techniques within specialized areas of forensic
accounting. Forensic accountants performing financial and investigative
fraud services should understand accounting standards, policies, and prac-
tices, accounting information systems, auditing standards, procedures and
practices, use of research methodology, computer technology and digital

forensics, fair value estimation, business valuation, and economic damages.
The various legal tasks a forensic accountant undergoes include testifying
as witness in trial, understanding the legal system, whether in a specific
area of expertise such as credit card fraud, or its entirety. The FBI has a
large presence in investigating white-collar crime and fraud schemes, and
forensic accountants are recruited by the FBI for their familiarity with the
legal, investigative process.
Forensic accountants must go through extensive schooling to under-
stand these processes. An example curriculum for a student aspiring to
become such an accountant includes courses such as Forensic Account-
ing: Litigation Support and Expert Witnessing. Other courses offered by
many universities include Fraud Examination and Computer Forensics
and IT Auditing.15 All of these courses teach students about investigative
techniques, the legal process, accounting knowledge, and criminology that
forensic accountants partake in daily. Some of these technical skills are anti-
fraud education and practice, careers in forensic accounting, compliance
with applicable laws and regulations, corporate governance, expert testi-
mony and expert witness techniques, FSF, legal elements of fraud, principles
of ethics and corporate code of conduct, professional standards pertaining
to forensic accounting, and types of fraud (e.g., employees, management).
Analytical Skill Sets
Analytical skill sets are often referred to as digital forensics, information

technology (IT), Big Data, data analytics, and the ability of forensic ac-
countants to effectively perform their services. Forensic accountants should
possess analytical skills of using research methodology and data analytics
in gathering and evaluating evidence. The 2009 AICPA survey suggests
that the majority (more than 60%) of surveyed attorneys, CPAs, and ac-
counting professors rank being analytical, ethical, and detailed-oriented
as essential characteristics and traits of forensic accountants.16 The use of
IT, Big Data, data analytics, and time series analyses is very important in
digital forensics. There has been an increase in the use of data analytics
in the twenty-first century. With the rise of Big Data, forensic account-
ants are having to become increasingly adaptable for future challenges.
According to the 2014 Survey on International Trends in Forensic and

Valuations Services, conducted by the AICPA, the biggest challenge in
the field of forensic accounting today is electronic data analytics; 85 per-
cent of survey responses indicated as much. The evolution of Big Data
requires forensic accountants to not only accumulate a lot of data but also
be able to decipher and understand it.17
IT skill sets including Big Data and data analytics skills, experience, and
knowledge have become increasingly important for forensic accountants. IT
advances (e.g., block chain, cloud computing, electronic social media, ana-
lytics) provide forensic accountants with an unprecedented amount of data
and information availability. Big Data is typically viewed as high-volume,
high-velocity, and high-variety information that is typically processed elec-
tronically to improve decision-making.18 Forensic accountants typically have
access to the huge amount of both structured (e.g., financial information
general ledger or transaction data) and unstructured data (e.g., financial dis-
putes, valuation information, e-mail, voice or free-text fields in a database)
and semi-structured data (e.g., nontraditional data sources such as third-
party watch lists, news media, free-text payment descriptions) to effectively
perform their forensic and investigative services.
Ernst & Young (EY) reports two factors relating to cyberattacks and
digital fraud have increased the use of Big Data and data analytic tools by
forensic accountants.19 First, the existence and persistence of cyberattacks
in recent years have caused significant disruption of critical operations,
transfer of funds, and misappropriation of intellectual property/confiden-
tial personal data and other critical digital assets. Second, ever-increasing
fraud risks because of insider threats triggered by unauthorized trading,
espionage, or IT sabotage cause malicious insiders to manipulate or de-
stroy data and perpetrate fraud. Big Data enables forensic accountants to
perform technological, cultural, analysis and use methodology opportun-
ities in capturing and analyzing both structured financial information and
unstructured nonfinancial information. The use of Big Data and data an-
alytics enables forensic accountants to integrate nontraditional sources of
financial information and nonfinancial information into audit processes.
Forensic accountants use Big Data and data analytics to improve the
quality of their investigation, reduce the costs, and enhance profitabil-
ity. For example, forensic accountants can utilize database-to-database
verification with independent trading partners. Forensic accountants can

use automatic data collection and rule-based analysis techniques to identify
errors, irregularities, and fraud. Big Data can change forensic accounting in
the following areas: First, population-level investigations are possible and
feasible over traditional sampling tests because of the digitization of trans-
action data and reduced costs of data analysis. Second, the role of forensic
accountants with the emergence of Big Data will move from statement-
level investigation and opinion to data-level investigation and report. Third,
forensic accountants are able to use text analytics to manage unstructured
or semi-structured data, such as text in the management discussion and
analysis sections of financial reports. Finally, forensic accountants face a less
challenging task in asserting the existence of tangible assets where records
are complemented with pertinent audio, video, and textual information.
Soft Skill Sets
Soft skills are very important to forensic accountants to communicate

their findings effectively and in interviewing suspected fraudsters and in
testifying in court. Soft skill sets include communication, psychology,
interviewing, testifying, and problem-solving ability of forensic

accountants to effectively perform their services. Soft skills including
communication and interview skills are essential for forensic accoun-
tants. Forensic accountants serving as expert witnesses often testify be-
fore the courts and write their expert reports that are subject to intensive
scrutiny by cross-sectional trials and in depositions. Litigation consul-
tants need to write reports that can effectively stand cross-examinations
in trials. Because of the nature of the job, forensic accountants must be
well organized and be able to communicate their findings in an efficient
and effective manner. Accountants must develop a way to communi-
cate with other experts outside of the accounting and finance fields of
study. Commonly, being too technical with others can lead to a lack of
understanding and can produce undesired results, especially for technical
legal matters. Interviews are a procedure in investigations that requires
information to be extracted in an objective and through manner by not
accusing the suspect. When suspects feel accused, they may decide not to
divulge critical information, and thus, it is important to make sure the
suspect is comfortable with talking.20
Forensic accounting services often require dealing with nerves of people

under pressure. Thus, forensic accountants need to remain calm, relaxed,
and approachable to soothe those nerves and foster cooperation. During
investigations and disputes, integrations and interviewees, individuals may
feel accused when they have done nothing wrong, and therefore, forensic
accountants should have the necessary soft skills to create a cordial and
congenial environment of calmness, cooperation, and respect. Forensic ac-
countants can effectively perform their services and accomplish effective in-
terviews by being objective, organized, and being candid and transparent
by discussing the investigation process upfront. Forensic accountants should
develop effective listening skills to give opportunity to interviewees to talk
freely and listen and observe their body language. Creative thinking, prob-
lem solving, and critical thinking are important skills for forensic accounting.
Forensic accountants should be able to think quickly, recognize the changes,
and adapt to the changes during an investigation. Understanding fraudsters
and suspects, their ways of thinking, intent, and motivations is important in
investigating fraud. Forensic accountants in investigating fraud may need to
obtain a confession that requires collecting documentary evidence and con-
ducting interviews. The process of obtaining confession requires the ability
to assess deception from honesty and truthfulness and the knowledge and
skills to analyze eye movements and body language rooted in psychology.
The AICPA 2009 survey regarding essential characteristics and traits of
forensic accountants state the following skills as important in the order of
raking by surveyed attorneys, academics, and practicing accountants (CPAs):
being analytical, detail-oriented, ethical, responsive, insightful, inquisitive,
intuitive, persistent, skeptical, evaluative, confident, as well as functioning
well under pressure, generating new ideas and scenarios, making people feel
at ease, team playing, and being adaptive.21 In summary, the required skill
sets for successful forensic accountants are as follows: accounting, audit-
ing, knowledge of the legal system, criminology, investigative techniques,
data analytics, detail-oriented, organized, focused, critical thinking, effective
commutation, and creative thinking. Relevant to technical, analytical, and
soft skill sets, Exhibit 2.4 summarizes and contrasts the American Account-
ing Association operating manual for forensic accounting, auditing, and
financial reporting sections. I nformation p resented in this exhibit contrasts
the education knowledge, along with the teaching and research objectives of
auditors, financial accountants, and forensic accountants.
Exhibit 2.4
Contrasting Education Mission and Objectives
of Auditors, Forensic Accountants,
and Financial Accountants*
Financial
Auditing Forensic Accounting Accounting
Mission To foster “The mission of the The Financial
intellectual Forensic Accounting Accounting and
capabilities, Section (FAS) of the Reporting Section
resources, and American Accounting mission is to improve
institutional Association is to foster the effectiveness and
structures excellence in the teaching, efficiency of education,
to support research, practice, research, and
innovation, continual professional professional practice.
critical education (CPE)
analysis, and courses and curriculum
improvement development of forensic
of auditing accounting services by
and assurance creating opportunities.”
services
practice and
professional
standards.
Teaching To foster 1. Discover new ways 1. Disseminating and
and intellectual to educate forensic evaluating teaching
Education capabilities, accountants methods and
Objectives resources, and 2. Proper means to materials.
institutional exchange ideas 2. Creating
structures to for educational opportunities
support the improvement for interchange
development, 3. Aid forensic and cooperation
peer evaluation, accountants in proper between academics
and sharing of methodology and skill and practitioners.
educational sets
materials, 4. Question forensic
curricula, accounting practice
teaching 5. Cooperation with other
methods, and practitioners
professional 6. Recruitment for the
development forensic accounting
in auditing profession
and assurance 7. Unification of practice
services. and academic endeavors
8. CPE for members
Financial
Auditing Forensic Accounting Accounting
Research To encourage 1. Strategic direction for 1. To encourage,
Objectives theoretically forensic accounting facilitate, and
based, yet research publicize research
practice- 2. Strengthen forensic in financial
relevant, accounting academia accounting and
research 3. Share forensic reporting
scholarship accounting research 2. To communicate
in the many findings outside interests,
aspects of academia intentions, and
external and 4. Create opportunities actual work-in-
internal auditing for individuals to process in the area
utilizing the strengthen research 3. To identify areas in
PCAOB’s skills need of research
standards- 4. To provide
setting agenda opportunities for
and Standing public exposure
Advisory Group of research results
meetings, and through American
the topics Accounting
covered therein Association
as substantive meetings (annual,
motivation for regional, and
creative and special meetings
innovative devoted solely to
research that financial accounting
seeks to make and reporting)
a practical and publications
difference to (including working
the regulation papers and a
and practice of separate journal for
auditing. financial accounting
and reporting, if
warranted)22
Sources: American Accounting Association, Financial Accounting, Auditing and Forensic

Accounting Sections. http://aaahq.org/
Conclusion
Forensic accounting is a rewarding, demanding, and challenging field
of accounting. Forensic accountants perform both fraud and nonfraud
services presented in this chapter. Fraud services consist of FSF examin-
ation, employee fraud, embezzlement, and theft and misappropriation
of assets investigation. Nonfraud forensic accounting services consist of

litigation consulting, expert witnessing, valuation, and dispute resolution.
To effectively fulfill their responsibilities and thoroughly conduct their
services, forensic accountants should obtain technical, analytical, and soft
skill sets discussed in this chapter.
Action Items
1. Forensic accounting is a rewarding and demanding career.
2. Forensic accounting services are fraud investigation, litigation consult-
ing, expert witnessing, valuations, risk assessment, economic damages
among others.
3. Forensic accounting is a process of gathering, analyzing, and evaluating
evidence, making decisions and conclusions, and effectively communi-
cating the results of forensic accounting services.
4. Forensic accountants should possess technical, analytical, and soft
skill sets to effectively perform their professional services.
Endnotes
1. Z. Rezaee, L. Crumbley, and R. Elmore. 2004. “Forensic Account-
ing Education: A Survey of Academics and Practitioners.” Advances
in Accounting Education Teaching and Curriculum Innovations 6,
pp. 193–232.
2. American Psychological Association. 2016. How Did You Get that Job?
http://www.apa.org/monitor/2016/06/job-studebaker.aspx, (accessed
February 8, 2018).
3. The AICPA. 2003. Statement of Standards for Consulting Services.
https://www.aicpa.org/interestareas/forensicandvaluation/resources/
standards/downloadabledocuments/sscs.pdf
4. D.L. Crumbley, and K.A. Russell. 2004. “So You Want to Be an Expert
Witness,” Journal of Accountancy. https://www.journalofaccountancy
.com/issues/2004/oct/soyouwanttobeanexpertwitness.html, (accessed:
February 16, 2018).
5. Investopedia. 2018. Business Valuation. https://www.investopedia
.com/terms/b/business-valuation.asp, (accessed February 23, 2018).
6. Z. Rezaee. 2001. Financial Institutions, Valuations, Mergers, and

Acquisitions (2nd ed., Hoboken, NJ: John Wiley & Sons, Inc.).
7. McKinley Irvin. October 16, 2017. How Might a Forensic Accountant
Benefit My Divorce Case? https://www.mckinleyirvin.com/family-
law-blog/2017/october/how-might-a-forensic-accountant-benefit-
my-divor/, (accessed October 2, 2018).
8. MMD Forensic Accountants. n.d. What Is Economic Damage Quan-
tification? https://mdd.com/what-is-economic-damage-quantifica-
tion/, (accessed October 2, 2018).
9. McGovern & Greene LLP. n.d. Mergers & Acquisitions. https://www
.mcgoverngreene.com/forensic-accounting/mergers-acquisitions
.html, (accessed October 2, 2018).
10. Committee of Sponsoring Organizations of the Treadway Commission
(COSO). September, 2004. Enterprise Risk Management—Integrated
Framework (New York, NY: COSO).
11. Kroll. June 1, 2013. Dispute Resolution: The Role of Forensic Account-
ants and Computer Forensics. https://www.kroll.com/media/pdf/
articles/AsianMena_Counsel_v11.pdf, (accessed August 30, 2018).
12. Deloitte. 2017. The Role of the Forensic Accountant in Mediation. https://
www2.deloitte.com/ie/en/pages/finance/articles/role-of-forensic-
accountant-in-mediation.html, (accessed September 4, 2018).
13. Ibid.
14. American Institute of Certified Public Accountants (AICPA). 2009.
Characteristics and Skills of the forensic accountant. https://www.aicpa
.org/InterestAreas/ForensicAndValuation/Resources/PractAids
Guidance/DownloadableDocuments/ForensicAccountingResearch
WhitePaper.pdf
15. Missouri State University. n.d. Accountancy Courses. https://www
.missouristate.edu/registrar/catalog/courses_ac.htm, (accessed Nov-
ember 5, 2017).
16. AICPA. 2009. Characteristics and Skills.
17. AICPA. 2014. The 2014 AICPA Survey on International Trends in
Forensic and Valuation Services. Available at https://rodburkert.com/
wp-content/uploads/2015/08/FVS-International-Trends-2014.pdf
18. M. Vasarhelyi, A. Kogan, and B.M. Tuttle. 2015. “Big Data in Ac-
counting: An Overview,” Accounting Horizons 29, no. 2, pp. 381–396.
19. Ernst and Young (EY). 2016. Global Forensic Data Analytics Survey 2016.
Shifting into Higher Gear: Mitigating Risks and Demonstrating Returns.
http://www.ey.com/gl/en/services/assurance/fraud-investigation---
dispute-services/ey-shifting-into-high-gear-mitigating-risks-and-
demonstrating-returns, (accessed January 4, 2017).
20. M.L. Murphy. December 3, 2014. “Top Soft Skills for Forensic
Accountants,” AICPA. https://www.aicpastore.com/Content/media/
PRODUCER_CONTENT/Newsletters/Articles_2014/FVSNews/
skillsforforensicaccountants.jsp, (accessed November 7, 2017).
21. AICPA. 2009. Characteristics and Skills.
22. FARS. Financial Accounting and Reporting Section. http://aaahq.org/
fars, (accessed June 25, 2018).
CHAPTER 3
Forensic Accounting
Profession
Executive Summary
Forensic accounting has advanced as a distinct profession with the account-
ing and business profession. Several professional organizations have devel-
oped certifications in forensic-related services, from fraud examination to
valuation investigation and determination. These certifications demon-
strate educational credentials, expertise, experience, and ethical consider-
ations of forensic accountants. This chapter presents several professional
certifications relevant to forensic accounting practices and services.
Introduction
The existence and persistence of financial scandals, financial crises, and re-
lated FSF reinvigorated interest in education and practice of forensic ac-
counting and FSF examination. Forensic accounting is gaining considerable
attention as the American Accounting Association (AAA) has added a new
educational and research section on “Forensic Accounting” and the SEC has
strengthened its FSF divisions and trained its staff in the area of forensic
accounting and FSF, all international public accounting firms have estab-
lished a forensic accounting department, and forensic accounting and fraud
examination is becoming one of the fundamental components of business
schoolscurriculum in recent years. Several professional organizations have
established certifications in forensic accounting practices. These forensic-
related certifications demonstrate forensic accountants’ commitments and
professionalism. These certifications require practicing forensic accountants
to obtain education, work experience, and continuing professional education
(CPE) as well as complying with codes of professional ethics. This chapter
presents certifications and professional ethics relevant to forensic accounting.
Initiatives to Promote Forensic Accounting

Several global initiatives have been taken in recent decades, to promote foren-
sic accounting and thus to combat fraud. When a company is not effective in
generating sustainable performance, management is under more pressure to
manage earnings. Opportunities to engage in FSF are higher when the com-
pany is not doing well financially and unable to invest in effective corporate
governance and internal controls. Emerging corporate governance reforms,
securities laws, and best practices are intended to identify and minimize po-
tential conflicts of interest, as well as the incentives, and opportunities to en-
gage in FSF. The American Institute of Certified Public Accountants (AICPA)
issued Statement of Auditing Standards No. 82 (SAS No. 82)1 and then SAS
NO.99, “Consideration of Fraud in a Financial Statement Audit” in 2002.2
Sarbanes-Oxley Act of 2002 was passed by Congress to combat FSF.
Exhibit 3.1 presents information about organizations that currently
focus on providing education and training for forensic accountants, and
some of these professional organizations and their role in promoting fo-
rensic accounting are described in the following paragraphs. The Forensic
Accounting section of the AAA is dedicated to the continual improvement
of forensic accounting research and education, through the encourage-
ment, development, and sharing of (1) the promotion and dissemination
of forensic and investigative academic and practitioner research; (2) the
relevant and innovative curricula with an emphasis on effective and ef-
ficient instruction; (3) the exploration of knowledge-organization issues
related to forensic accounting programs; and (4) the creation and presen-
tation of CPE courses to members and professionals.
The International Forensic Accounting Association (IFAA) offers
membership to individual accountants and accounting firms. The IFAA
aids those in need of a forensic accountant with the ability to (1) search
for criteria within their location; (2) correspond with those who meet
their criteria; (3) participate in the forensic accounting forums to learn
about the field and their situation by experts; and (4) find the right ac-
countant to conduct forensic accounting services. National Association
of Certified Valuation Analysts’ (NACVA) Financial Forensics Insti-
tute (FFI) was established in partnership with some of the nation’s top
minds and authorities in forensic accounting, law, economics, valuation
theory, expert witnessing, and support fundamentals. It began with the
Forensic Accounting Profession 45
idea of establishing an association for certified public accountants (CPAs)

and business professionals that could support their needs in providing
intangible asset valuation and financial litigation consulting services.
This organization provides training and CPE courses to members and
nonmembers.
The National Association of Forensic Accountants (NAFA) provides
training and certification to CPAs in various fields of forensic accounting
and provides availability and access to the services of those who have achieved
NAFA CERTIFIED status. NAFA is the oldest association of CPAs special-
izing in forensic/investigative accounting organization as well as the fast-
est growing. The International Institute of Certified Forensic Accountants
(formerly the Association of Chartered Certified Forensic Accountants),
founded in 2015, is a global organization that administers the forensic ac-
counting exams and grants certification to candidates who pass the exam.
The International Institute of Certified Forensic A ccountants is a member of
the International Federation of Forensic A ccountants and Auditors (IFFAA).
The American Institute of Certified Public Accountants (AICPA) released
its proposed new professional standards for CPAs who perform forensic ac-
counting services. The new proposed Statement on Standards for Forensic
Services No. 1 (SSFS 1) was published in December 2018 and is intended to
provide more focused and tailored authoritative guidance to CPAs who per-
form forensic services.3 The proposal would take effect for new engagements
accepted on or after May 1, 2019, with early adoption permitted.
Exhibit 3.1
Organizations that Currently Focus
on Providing Forensic accounting and Antifraud
Education and Training
Name Description Website
Association The ACFE is the world’s largest antifraud http://www.acfe
of Certified organization and premier provider of antifraud .com/
Fraud training and education. Together with nearly
Examiners 55,000 members, the ACFE is reducing
(ACFE) business fraud worldwide and inspiring public
confidence in the integrity and objectivity
within the profession.
(Continued )

American The Forensic and Investigative Accounting http://aaahq.org/
Accounting Section of the AAA is dedicated to the fia/index.html
Association continual improvement of forensic accounting
(AAA) research and education, through the
Forensic encouragement, development, and sharing of:
Accounting 1) The promotion and dissemination of forensic
and and investigative academic and practitioner
Investigation research. 2) The relevant and innovative
Section curricula with an emphasis on effective and
efficient instruction. 3) The exploration of
knowledge-organization issues related to forensic
accounting programs. 4) The creation and
presentation of continuing professional education
(CPE) courses to members and professionals.
International The IFAA offers membership to individual http://www.forensic
Forensic accountants and accounting firms. IFAA accountingassocia
Accounting offers assistance to those in need of a forensic tion.com/
Association accountant with the ability to 1) search for
(IFAA) particular criteria within their location;
2) correspond with those who meet their criteria;
3) participate in the forensic accounting forums
to learn about the field and their situation by
experts; and 4) find the right accountant to assist.
Institute The IFP is a powerful coalition dedicated to http://www.theifp
for Fraud multidisciplinary research, education, and .org/
Prevention prevention of fraud and corruption. The IFP’s
(IFP) primary mission is to improve the ability of
business and government to combat these crimes
and to educate the general public on effective
methods of recognizing and deterring them.
National The NACVA supports the users of business http://www.nacva
Association and intangible asset valuation services and .com/
of Certified financial forensic services, including damages,
Valuation determinations of all kinds, and fraud detection
Analysts and prevention, by training and certifying
(NACVA) financial professionals in these disciplines.
NACVA training includes CPE credit and is
available to both members and nonmembers.
The The IACVA was founded in 2000 to provide http://www.iacva
International worldwide support to professionals who .org/
Association of perform either valuations (for businesses,
Consultants, securities, and intangible assets of all kinds)
Valuators or are engaged in fraud deterrence. IACVA is
and Analysts the first and only international association to
(IACVA) provide such support.

Financial FFI was established in partnership with http://www.nacva
Forensic some of the nation’s top minds and .com/certifications/
Institute authorities in forensic accounting, law, C_cffa.asp
(FFI) economics, valuation theory, expert
witnessing, and support fundamentals to
offer practitioners with tools and techniques
to prevent, detect, investigate and prosecute
complex financial and commuter-related
frauds.
National The NAFA provides training and http://www
Association CERTIFICATION to CPAs in various .nafanet.com/index
of Forensic fields of forensic accounting and provides .htm
Accountants availability and access to the services of those
(NAFA) who have achieved NAFA-CERTIFIED
status.
Forensic FASNA was chartered as a network of http://www.fasna
Accountants certified public accounting firms in 1997 .org/
Society for the purpose of providing claims
of North adjustment services to the insurance
America industry. Over the years, litigation support
(FASNA) and special investigations were added
as they are often interrelated with our
insurance services.
International The IICFA, founded in 2015, is a global http://iicfaglobal
Institute of organization that administers the Chartered .com/
Certified Certified Forensic Accountant (CCFA) and
Forensic the Certified Global Forensic Accountant
Accountants (CGFA) exams and grants certification to
(IICFA) candidates who pass the exam. The IICFA is a
member of the IFFAA.
Information The ISACA provides certifications in the Isaca.org
Systems technology and IT governance fields. It
Audit and currently offers the Certified Information
Control Systems Auditor (CISA), the Certified in Risk
Association and Information Systems Control (CRISC),
(ISACA) and Certified Information Security Manager
(CISM).
Forensic The Forensic Accounting Section of the http://aaahq.org/fia
Accounting American Accounting Association’s mission is
Section to foster excellence in the teaching, research,
of the practice, and curriculum development of
American forensic accounting services and continuing
Accounting professional education (CPE) courses.
Association
Professional Certifications in Forensic Accounting

and Investigative Practices
Every profession has its certification of competency, compliance, and
ethical conduct. Exhibit 3.2 presents several certifications relevant
to practice of forensic accounting and investigative-related services.
Exhibit 3.2 contains a list of many of the premier certifications, and
while not all-inclusive, it is extensive. Academics, students, and practi-
tioners often ask about the value of professional certifications in general
and their importance to them. The accounting profession worldwide
has evolved, adapted over time to many factors, and has been shaped by
a variety of internal and external influences. One of the most influential
factors contributing to the professionalism and refinement of the ac-
counting profession is the certification program.
This section provides evidence of the value of professional certi-
fications in general and forensic-related certifications to encourage
practicing forensic accountants and candidates to obtain their certifi-
cation in different fields of accounting and auditing. Being in forensic
accounting without being certified does not mean a whole lot. There
are several forensic-related certifications in accounting, with the CPA,
typically regarded as the mother of all certifications and the highest
mark of designation in the global accounting profession. However,
many other certifications such as chartered accountants (CA), certified
management accountants (CMA), certified internal auditors (CIA),
certified fraud examiners (CFE), and Certified Government Financial
Managers (CGFM) may be more relevant to the forensic accounting
career in different fields of accounting. The discussion of some on the
professional accounting certifications and their education, examina-
tion, experience, and CPE requirements are discussed in the following
paragraphs.
Education
Education requirements are typically a prerequisite for almost all pro-

fessional exams and vary across certifications. For example, the AICPA
requires 150 semester hours of college education for a candidate to be
Exhibit 3.2
Professional Certifications Relevant to Forensic Accounting and Investigative-Related Services
Requirements Sponsoring Organization
Test Passing
Certifications Education Experience Exam Length Score Name Website
Certified Public Determined by Determined by Auditing and attestation 4 parts, 75% American www.aicpa
Accountant the state board of the state board of Financial accounting and 14 hours Institute of .org
(CPA) accountancy accountancy reporting Certified
Regulation Public
Business concepts Accountants
Certified Fraud Bachelor’s degree 2 years of Fraudulent transaction 4 parts 75% Association www.cfenet
Examiner or its educational professional Legal elements of fraud (125 m/c of Certified .com
equivalent experience for Fraud investigation questions Fraud
certification Criminology and ethics each), Examiners
10 hours
Certified Internal Bachelor’s degree 2 years of 1. The internal audit activity’s 4 parts 75% Institute www.theiia
Auditor (CIA) or its education internal auditing role in governance, risk, and (125 m/c of Internal .org
equivalent experience or its control questions Auditors
equivalent for 2. Conducting the internal each),
certification audit engagement 14 hours
3. Business analysis and
information technology
49
4. Business management skills
(Continued )

50
Test Passing
Certified Bachelor’s degree 2 years of 1. Governmental environment 3 parts. 500/700 Association www
Government with 24 credit professional- 2. Governmental accounting, 115 of .agacgfm.org
Financial hours of courses level experience financial reporting, and questions Government
Manager in financial in government budgeting 2 hours and Accountants
management or financial 3. Governmental financial 15 minutes
related topics management management and control
Certified No specific degree 5 years of 1. IS audit process 1 part, 75% Information www.isaca
Information requirement professional IS 2. IT governance (200 m/c Systems .org
System Auditor auditing, control, 3. Systems and infrastructure questions) Audit and
or security work lifecycle management 4 hours Control
experience for 4. IT service delivery and support Association
certification 5. Protection of information assets
6. Business continuity and
disaster recovery
Chartered Complete Pass a series of The Institute www.icaew
Accountant 450 days of examinations, of Chartered .com
(CA) England— training, work experience Accountants
Associate of 3 to 5 years. in England
Chartered and Wales
Accountant (ICAEW)
CA England— Complete Pass a series of The ICAEW www.icaew
Fellow Chartered 450 days of examinations, .com
Accountant training, work experience
of 3 to 5 years.
At least 10 years
of membership,
Complied with
continuing
professional
development.
Certified Forensic Bachelor’s Degree. 3 years of work No exam is mandatory; you None 30%–49% International http://
Investigation If you have a experience. must take a masterclass in gives you Institute of www.iicfip
Professional CPA, ACCA, or digital forensics or forensic partial Certified .org/index
CA and 8+ years investigation instead. exemption Forensic .php/2012-06-
of work history, from Investigation 09-14-
you do not have to requirements. Professionals 47-03/thecfip/9-
take the exam. 50% and uncate
above out gorised/
of 310 and 235-
complete a certified-
masterclass forensic-
to become investigation-
accredited. profes
sional-cfip
51
(Continued )

52
Test Passing
Forensic CPA Must have a 20 hours 1. Criminal Interrogation and 5-part 70% Forensic https://www
CPA or a CA. continuing Confessions exam, 100 CPA Society .fcpas
If CPA also is a education each 2. Corporate Fraud Handbook multiple- .org/
CFF (Certified year. 3. Financial Investigation and choice
in Financial Fo- Forensic Accounting questions
rensics), they are 4. Forensic and Investigative per part
exempt from the Accounting
exam and auto- 5. Principles of Fraud
matically become Examination
a FCPA after filing
paperwork
Certified Must have a Pass qualification I. Governance 4-hour exam 100 out of Advanced http://www
Investment degree and take and certification II. Fundamentals with 100 150 Education for .imca.org/
Management course from exams and III. Portfolio Performance and multiple- Investment
Analyst a registered have 3 years’ Risk Measurements choice and Wealth
education provider minimum work IV. Traditional and Alternative questions Professionals
experience in Investments and 10
finance field V. Portfolio Theory and prochoice
Behavioral Finance questions.
VI. Investment Consulting
Process
Master Analyst 36 hours Pass one exam, 1-part, National http://www
in Financial with 20 matters multiple- Association .nacva.org/
Forensics or 2,500 hours of choice of Certified
experience questions, Valuators
5 hours and Analysts
CPA A university 1. 30 hours of 1. Finance Chartered www
degree with preapproved 2. Tax Professional .cpacanada.ca
specific business programs 3. Assurance Accountants
course credits 2. Flexible route 4. Performance Management Canada
demonstrating
competence
and having
relevant work
experience
Certified Forensic Bachelor’s degree, Must currently 1. Forensic Accounting 100 70% American www.abfa.us
Accountant 3 Professional hold the CPA 2. Fraud multiple- Board of
References, designation with 3. Litigation Services choices and Forensic
Forensic — State Board of 4. Cybersecurity Issues true or false Accounting
background Accountancy, 5. Valuations questions
current CPA 6. Open Book
(Continued )
53

54
Test Passing
Certified Risk Candidates Work experience 1. Organizational governance 2 parts, 600+ Institute www.theiia
Management must hold an depends on related to risk management Part 1 of the of Internal .org
Assurance Associate’s the degree 2. Principles of risk management CIA exam. Auditors
(CRMA), degree or obtained. processes Separate
Institute higher to be Master’s: 3. Assurance role of the Internal CRMA
of Internal approved into 12 months Auditor exam of 100
Auditors one of the IIA’s Bachelor’s 4. Consulting role of the multiple-
certification 24 months Internal Auditor choice
programs. Associate’s: questions.
60 months
Chartered Global Must be a regular A minimum The unique format of the case 3 hours, I t is peer- American In- https://www
Management member of the of 3 years of study exam is set to mirror a three to reviewed and stitute of Cer- .cgma.org/
Accountant, AICPA. relevant, work- real business environment. It six tasks scored anony- tified Public
American based experience simulates what management related to a mously by Accountants
Institute of CPAs accountants do in the workplace hypothet- management
through the use of a fictionalized ical business accounting
organization based on a real case experts. A
business or industry. specific pass-
ing grade has
not yet been
established.
Core Forensic Need CFF candidates 1. Forensic Engagement The Core American https://www
Accounting 75 hours of forensic must have a Management 1 and 2 Forensic Institute of .aicpastore
Certificate accounting- minimum of 2. Evidence Identification and Knowledge Certified .com/Forensic
related continuing 1,000 hours Gathering and Specialized Public Valuation
professional of business 3. Discovery Forensic Accountants and
development experience 4. Effective Interviewing Knowledge Litigation
(CPD). All hours in forensic Techniques exams are Services/
must have been accounting 5. Forensic Accountants Role in online and Engage
obtained within within the 5-year Deposition and Testimony proctored ments/
the 5-year period period preceding 6. Forensic Engagement remotely via core-
preceding the the date of the Reporting Requirements and webcam and forensic-
date of the CFF CFF application. Preparing Sustainable Reports audio (either accounting-
application. Refer to the CFF laptop or USB certificate/
Application Kit external) PRDOVR~
for examples anytime PC-166500/
of business 7 days a week PC-166500
experience. throughout the .jsp?_ga=2
year. .64304047
.12580095
63.152070
795
(Continued )
55

56
Test Passing
Specialized Need 75 hours of FF candidates must
C 1. Bankruptcy 1 and 2 he Core
T merican
A https://www.aicpastore
Forensic forensic have a minimum of 2. Electronic Data Analysis Forensic Institute .com/Forensic Valuation
Accounting accounting- 1,000 hours of busi- 3. Business Damages Concepts, Knowledge of Certi- andLitigationServices/
Certificate related CPD. All ness experience in and Calculations and Special- fied Public FVSPractice
hours must have forensic accounting 4. Individual Damages ized Forensic Accountants Management/
been obtained within the 5-year Concepts and Calculations Knowledge specialized-forensic-
within the period preceding the 1 and 2 exams accounting-certificate/
5-year period date of the CFF appli- 5. Intellectual Property are on- PRDOVR~PC-167000/
preceding the cation. Refer to the Damages Concepts, and line and PC-167000.jsp?_ga=2.4
date of the CFF CFF Application Kit Calculations 1 and 2 proctored 5103460 .13541582
application. for examples of busi- 6. Mergers and Acquisitions remotely 44.15207 08364-33
ness experience. 7. Family Law and Divorce via webcam 9126305.15 20708364
Engagements 1, 2, and 3 and audio
8. FSF, Corruption, and Asset (either lap-
Misappropriation 1 and 2 top or USB
9. Fraud Provisions and external)
Engagements 1 and 2 anytime 7
10. Valuation Practices in days a week
Forensic Engagements 1 throughout
and 2 the year.
This list is not all-inclusive; there are other certifications in accounting.

eligible to take the CPA exam. This is typically 30 semester hours beyond
the bachelor’s degree in accounting. These additional 30 semester hours are
generally taken at the graduate level in the areas of accounting, auditing,
international business, information technology, communication, critical
thinking, and ethics. All professional certifications in accounting require
a bachelor’s degree in accounting or business with concentration in ac-
counting as part of their education requirements. Education requirements
are normally classified into (1) technical skills such as financial account-
ing, auditing, management accounting, taxes, and statistical courses and
(2) soft skills such as courses in critical thinking, corporate governance,
ethics, organization behavior, and communication. Almost all professional
accounting certifications presented in Exhibit 3.2 require CPE to maintain
the certification. CPE requirements are explained in the following section.
Examination
All professional accounting certifications require candidates to take an

exam to prove understanding of common body of knowledge in the
designated certifications. The content, coverage, and length of the test
vary across certifications as indicated in Exhibit 3.3. For example, the
AICPA Board of Examiners in administrating the CPA exam currently
requires a 14-hour computer-based examination covering auditing, fi-
nancial reporting, regulation, and business concepts. Certification exams
typically consist of: objective questions (multiple-choice), simulation
problems, and written questions. The 2018 CPA examination has four
parts, FAR (Financial Accounting and Reporting), REG (Regulation),
Auditing and Attestation (AUD), and Business Environment and Con-
cepts (BEC). Each section takes 4 hours to complete and a differing num-
ber of multiple-choice questions and task-based simulations dependent
on the section. Exhibit 3.3 breaks down the sections and explains the
requirements for the uniform CPA Examination.
The CPA exam takes a total of 16 hours to complete all four sections
in a strictly monitored testing environment. Each section also requires the
test taker to make a 75 percent to pass. If this score is not obtained, the
individual must retake that section. Once a section is passed, the remain-
ing three sections must be passed within 18 months. After the 18-month
Exhibit 3.3
CPA Exam Sections
Sections Requirements
AUD 4 tested areas: Ethics and Must make a 75% Exam is 72 choice
principles, risk assessment to pass the section 4 hours problems and
and audit planning, further total 8 Task-Based
procedures and gathering Simulations
evidence, and making
conclusions
FAR 4 tested areas: Standards Must make a 75% Exam is 66 choice
and Frameworks, Financial to pass the section 4 hours problems and
accounts, Transactions, 8 Task-Based
and Governmental Simulations
REG 5 tested areas: Ethics and Must make a 75% Exam is 76 choice
procedures, law, individual to pass the section 4 hours problems and
taxation, partnership and 8 Task-Based
corporation taxation, and Simulations
property taxation
BEC 5 tested areas: CGOVP, Must make a 75% Exam is 62 choice
Economics, Finance, IT, to pass the section 4 hours problems. 4
and Supply Chain Task-Based
Simulations
and 3 written
essays
period, if all the remaining sections are not passed, the first passed section
expires and must be taken again. AUD and FAR have four tested areas
and REG and BEC have five tested areas, for total of 18 areas on the
examination.4
The Certified Fraud Examiner (CFE) certification requires a bach-
elor’s degree or its educational equivalent and 2 years of professional ex-
perience for certification. The total time of the exam is 10 hours and it
comes in four parts across the following subjects:
1. Fraudulent transaction
2. Legal elements of fraud
3. Fraud investigation
4. Criminology and ethics
The Certified Internal Auditor (CIA) certification also requires a

bachelor’s degree or its educational equivalent. You must have 2 years of
internal auditing experience or its equivalent for certification. The total
time for the exam is 14 hours. The exam consists of four parts covering
the following:
1. Internal auditors’ role in corporate governance, risk management,

and internal control assessment
2. Consulting and advisory activities of internal auditors
3. Conducting the internal audit engagement
4. Business analysis and information technology
5. Business management skills
Experience
Most accounting professional certifications require work experience as

either prerequisite for being eligible to take the exam or to become certi-
fied. For example, many states that license CPAs to practice accounting
require the candidate who has attained the education level and passed the
uniform CPA examination to have a certain work experience under su-
pervision of a CPA before obtaining a CPA license to practice accounting.
The required work experience is normally between 1 and 2 years. While
the AICPA has certain rules, states have varying experience requirements.
Texas, for example, requires nonroutine work. This can be considered any
work under someone who has a CPA license. Some states, like California,
have more strict work experience requirements. It requires candidates to
work in audit, tax, or consulting.5 For instance, the Certified Fraud Ex-
aminer, Certified Internal Auditor, and Certified Government Financial
Manager designations all require 2 years of general professional experi-
ence, internal auditing experience, and professional-level experience in
government financial management, respectively.
Continuing Professional Education
CPE programs are intended to ensure that practicing accountants keep

abreast with developments in their profession. The effectiveness of CPE
programs depends on their coverage of emerging issues affecting the ac-

counting profession. The accounting profession has recently been faced
with increased scrutiny demanding changes in: business sustainability, cor-
porate governance reforms, possible convergence in both accounting and
auditing standards, risk assessment, and electronic accounting and audit-
ing process. To meet these challenges, accountants should keep pace with
advances and update their technical and soft skills. One way to obtain,
secure, and document the required skills is through the CPE programs.
According to the ACFEs, there are various types of credit across the
two classifications of unlimited hours and 10-hour maximum. Partici-
pant credit (instruction in an online or formal class), college course credit,
in-house training, and self-study credit (one must pass a final exam to
receive CPE credit) are of the unlimited variety. This means there is no
cap as to how many hours of this variety qualify. Instructor credit (teach-
ing a course), meeting credit, and author credit have 10-hour maximums
for each. While still a 10-hour credit, the Fraud Magazine CPE Service is
different, in that from any five issues of Fraud Magazine (not older than
two years) one may take the quiz listed on the back of each issue. If one
passes all five quizzes, one will receive 10 hours of CPE credit.6
The effectiveness of CPE programs depends on their coverage of
emerging issues affecting the accounting profession. All accounting pro-
fessional organizations, including the AICPA, Institute of Management
Accountants, and Institute of Internal Auditors, require CPE for their
practicing members. The mandatory CPE courses are intended to im-
prove the professional competency and enhance members’ knowledge
base, but in many cases, they focus more on compliance than real compe-
tency. In summary, prior CPE-related literature suggests that
1. management accounting education should address both policy is-

sues regarding ethics and governance, techniques and procedures,
and knowledge and skills of management accountants;
2. management accounting education should be practical and should
include topics that require extensive training in theory including
ethics and corporate governance; and
3. ethics courses in state CPE programs have grown significantly in
recent years.
Professional Ethics
To maintain their certification and to stay in good standing, practicing

accountants should absorb their code of professional conduct and fre-
quently report ethical continuing education and certify compliance with
the code of professional conduct. Accountants need to conduct them-
selves ethically, serve their organizations to the best of their ability, and
act in the best interest of their organizations and the public. The AICPA
Code of Professional Conduct is applicable and adoptable for all prac-
ticing accountants including forensic accountants performing fraud and
nonfraud services and provides guidelines and rules in performing their
professional responsibilities.7 The purpose of continuing education is to
enable accountants to focus on sound education which includes ethics
and corporate governance. In addressing accountants’ judgment, one
should realize that (1) accountants do not work in isolation, but rather as
team players, where their work ethics and behaviors are influenced by the
ethics and conduct of coworkers, superiors, and even subordinates within
the company; and (2) like other human beings, they can be pressured and
motivated when the opportunity is given and thus be tempted to engage
in unethical behavior (e.g., manipulation of financial reports). Forensic
Accountants should comply with all codes of professional conduct rel-
evant to their practices, including those of the AICPA; the Securities and
Exchange Commission (SEC); the Department of Justice (DOJ); the De-
partment of Labor (DOL); the Public Company Accounting Oversight
Board (PCAOB); the federal, state, and local taxing authorities; the As-
sociate of Certified Fraud Examiners (ACFE); the Government Account-
ability Office (GAO); and international, national, and local valuation
authorities among others.
Implications for the Accounting Profession and Forensic

Accountants
The forensic accounting function can be viewed as a value-added

function of producing reliable financial reports that are essential in
business decision-making. The auditing profession worldwide has tra-
ditionally been regarded as a watchdog of corporate financial reporting
and a gatekeeper of the financial reporting process. The sustainabil-

ity of the accounting profession and forensic accounting depends on
the soundness, effectiveness, integrity, and robustness of its credentials
and certifications. Best practices of the global accounting profession
including certification requirements of education, examination, expe-
rience, professional ethics, and CPE, as discussed in this section, are
relevant to the accounting profession and forensic accountants and can
ensure sustainability of this traditionally respected accounting profes-
sion while encouraging the most talented, bright, and ethical college
students to join this most rewarding forensic accounting profession.
Any inappropriate grandfathering entrance to the forensic accounting
profession without meeting and exceeding certification requirements
of education, examination, experience, CPE, and ethics will be detri-
mental to the effectiveness, competency, integrity, and sustainability of
the profession.
Conclusion
Several global initiatives have been taken in recent decades to promote fo-
rensic accounting. Many professional organizations such as the AICPA,
the ACFE among others have developed professional certifications and
codes of professional ethics for practicing forensic accountants. These
certifications presented in this chapter demonstrate forensic accountants’
commitments and dedications to advance forensic accounting as a distinct
profession with demanding and rewarding career. Practicing forensic ac-
countants should obtain certifications relevant to their areas of practice,
maintain their CPE, and comply with all applicable rules, regulations, and
requirement of certifications as well as related codes of professional ethics
presented in this chapter.
Action Items
• Obtain certification relevant to your forensic accounting practice.
• Observe codes of professional ethics relevant to your forensic ac-
counting practice.
• Comply with all applicable laws, rules, and regulations relevant to

your forensic accounting practice.
• Maintain CPE to stay in a good standing with requirements of
your certifications.
Endnotes
1. American Institute of Certified Public Accountants (AICPA). Statement
on Auditing Standards No. 82, Consideration of Fraud in a Financial
Statement Audit (New York, NY: AICPA).
2. AICPA. 2002. Consideration of Fraud in a Financial Statement Audit.
Statement on Auditing Standards No. 99 (New York, NY: AICP).
3. American Institute of Certified Public Accountants (AICPA). 2018.
Exposure Draft: Statement on Standards for Forensic Services
No. 1 (SSFS 1). Available at https://www.aicpa.org/interestareas/
forensicandvaluation/resources/standards/exposure-draft-statement-
on-standards-for-forensic-services.html
4. AICPA. September 30, 2016. Uniform CPA Examination BLUE-
PRINTS. https://www.aicpa.org/content/dam/aicpa/becomeacpa/
cpaexam/examinationcontent/downloadabledocuments/cpa-exam-
blueprints-effective-20180101.pdf, (accessed December 1, 2017.).
5. Crush the CPA Exam. 2019. CPA Requirements by State. https://crush
thecpaexam.com/cpa-license-requirements/, (accessed September 4,
2018).
6. ACFE. Association of Certified Fraud Examiners—Earning CPE: Types
of CPE Credit. https://www.acfe.com/maintaining-cpe-types.aspx,
(accessed April 20, 2018).
7. American Institute of Certified Public Accountants (AICPA).
2018. Code of Professional Conduct. https://www.aicpa.org/research/
standards/codeofconduct.html
CHAPTER 4
Forensic Accounting
Guidelines and Standards
Executive Summary
Forensic accountants in conducting their professional services should
comply with a set of applicable laws, rules, regulations, and professional
standards. Practicing forensic accountants are subject to several profes-
sional responsibility standards and ethical codes of conduct. Responsibil-
ities of forensic accountants are governed by authoritative guidelines of
several professional organizations and government agencies. This chap-
ter presents authoritative guidelines for professional responsibilities and
codes of conduct for forensic accountants.
Introduction
Forensic accountants should perform their professional services in com-
pliance with standards and codes of conduct established by authoritative
bodies relevant to their practices. Forensic accountants should observe
authoritative guidelines of professional organizations that they belong to
and government agencies and other authoritative bodies that license them
to practice. Forensic accountants should observe and comply with many
laws, rules, regulations, and standards applicable to their professional ser-
vices and practices. For example, CPAs who perform forensic accounting
services should observe the AICPA professional responsibilities and code
of conduct. Forensic accountants who perform valuation services should
follow the National Association of Certified Valuators and Analysts
(NACVA) professional standards. Many public and private organizations’
professional standards are applicable to forensic accountants and this
chapter discusses their relevance and importance to forensic accounting
practices. This chapter presents professional standards and codes of con-

duct of these organizations that influence forensic accounting practices as
well as forensic accounting best practices, education, and research.
Standards and Authoritative Guidance

for Forensic Accountants
Authoritative guidance issued by several public and private professional
organizations influence forensic accounting practices.
Court Systems
Forensic accountants investigate forensic cases including alleged fraud

incidents, perform forensic analyses, gather sufficient, competent, and
persuasive evidence, reach conclusions, and testify to their findings in com-
pliance with applicable laws, rules, regulations, and guidelines including
court deliberations. Thus, forensic accounting practices are influenced by
court guidelines. Forensic accounting services of expert witnessing, fraud
investigation, and litigation consulting among others require application of
specialized knowledge and investigative skills in gathering, analyzing, and
evaluating evidential matters, ascertaining their compliance with a set of
guidelines, and interpreting and communicating findings in the courtroom,
boardroom, or other legal or administrative venues that are suitable for use
in a court of law.1
There are many court systems in the United States, including the
federal court system and 50 state court systems with their own struc-
tures and procedures.2 Legal cases and forensic accountants’ investigation
of these cases often start at a lower court and may advance to a higher
court and possibly the federal court system. Thus, forensic accountants
in performing fraud, litigation, valuation, and expert witnessing services
among others should be familiar with all state and federal court systems.
In general, there are two types of court systems, state courts and federal
courts. Many of investigative and legal issues are initiated and resolved in
state trial courts that could be city or municipal courts, county or circuit
courts, or regional trial courts. These state trial courts can address differ-
ent types of cases with limited jurisdiction or specific jurisdiction. Lower
Forensic Accounting Guidelines and Standards 67
court decisions can be appealed and be retailed by a higher-level court

of appellate courts and/or further be heard by the state Supreme Court.
The state Supreme Court decisions are final with a state court system and
can be appealed to the U.S. Supreme Court. Court systems in the United
States based on their structure and hierarchy are Supreme Court, District
Courts of Appeal, Circuit Courts, and County Courts.
Federal courts are typically divided into districts and circuits with at
least one federal district court in every state, whereas federal circuit courts
include more than one district. The U.S Supreme Court is the highest
level of federal courts and its legal interpretations are the ultimate court
decisions. The nine justices of the U.S Supreme Court are nominated by
the president, approved by the U.S. Senate, and tenured until they resign
or die. Forensic accountants should understand and follow the judicial
processes and decisions of the legal system in the United States, which is
based on the adversarial process. This adversarial process dictates that all
parties in a legal dispute have an equal opportunity to present their case
to a neutral jury or judge, with an equal chance to win subject to the same
set of rules to ensure the fairness of the process.
Professional Standards
Forensic accountants are required to follow the Professional Code of Con-

duct set out by many professional organizations. The following subsections
describe many of these guidelines. For example, the AICPA’s code of con-
duct consists of the following areas: Objectivity and Independence, Due
Care, Scope and Nature of work, Integrity, and Responsibility to the Pub-
lic. First, all actions taken must be in the public’s best interest. This is called
the public interest principle. The public contains groups such as creditors,
investor clients, and governmental agencies. Second, the due care principle
is required in observance of ethical and professional standards. It also re-
quires the member of the AICPA’s ability to adhere to quality control and
responsibility for actions taken. Third, the Scope and Nature of work prin-
ciple pertains to a member of the AICPA using the Code of Professional
conduct to determine the level of service for clients. Fourth, the Integrity
principle is designed to enhance the public’s trust in the member providing
professional service. Finally, the Objectivity and Independence principle
demand that members strictly avoid conflicts of interest and relationships

that may subject the member to objective impairment.3
Outside of the AICPA Code of Professional conduct, several other
organizations have written its code of conduct for Forensic Accountants.
These organizations are the ACFEs, the American Accounting Association
(AAA), the International Forensic Accounting Association (IFAA), the
International Institute of Certified Forensic Accountants (IICFA) and the
American Board of Forensic Accounting. Each organization’s code of con-
duct resembles the AICPA’s guidance, as it is the main board in the United
States. The IFAA and IICFA are international organizations for forensic
accountants and their codes of professional conduct are very much similar
to their counterparts in the United States (e.g., AICPA, ACFE).
AICPA, AU-C Section 240 is a set of rules concerning the auditor’s dut-
ies when encountering fraud in an audit. The AICPA states that the primary
purpose of AICPA is to expand upon existing Sections 315 and 330 that
deal with risk of material misstatement and audit procedures, respectively.
The document also states that in fraud investigations, the main requirement
for the auditor is to be professionally skeptical; an auditor is skeptical when
observing data regarding material misstatement. Valuation standards are set
by the AICPA and cover the scope and engagement of practitioners perform-
ing valuations. VS 100 pertains to business ownership and intangible assets,
while VS 9100 are interpretations of VS 100. The AICPA is used heavily
during litigation, which is of importance to forensic accountants. The areas
that fall under litigation are disputes, dissolution, and bankruptcy.4
Nonauthoritative Guidelines
The AICPA offers nonauthoritative guidelines through its website. The

guidance is very thorough; however, and covers most relevant areas of
forensic accounting. The AICPA is the only organization that offers
nonauthoritative guidance to practitioners in America. In Canada, The
Chartered Professional Accountants (CFA) must follow the 2006 Stan-
dard Practices while conducting investigations and engagements. Similar
to public accounting, the standards must be applied to ensure integrity
and disclosure of accurate information to the public. The CFA web-
site contains seven sections—planning and accepting and engagement,
information analysis, documentation and reporting, testimony, and ap-

plying the standards to the practice. These practices are authoritative, as
opposed to most standards in the United States, which are nonauthorita-
tive. The CFA standards are set by the Investigative and Forensic Account-
ing (IFA) committee. The standards provide guidance in seven major
areas—standard practices, engagement acceptance, planning and scope of
work, information collection and analysis, file documentation, reporting,
and expert testimony.5
Forensic Accountant Code of Ethics
Ethics in general is defined as an honorable behavior and “ethics includes:

action, foreseeable consequences and people, with their virtues or lack of
virtues, involved in any human activity.”6 The principles of accounting
theory and practice were founded upon the basis of moral principles and
ethical values; therefore, upholding a high standard of ethics is expected
of forensic accountants engaged in professional activities. The concept
of ethics in business as related to forensic accountants can be hard to
define because individuals have their own moral compass and they often
think differently, and every business has its own set of standards. Busi-
ness ethics consist of a set of codes of: business conduct, laws, rules, regu-
lations, and best practices. Business ethics focuses on upholding ethical
values in business, including values like honesty, integrity, trust, fairness,
and objectivity, whereas noncompliance with these standards can lead
to cases of unethical behavior and sometimes even illegal behavior. For-
ensic accountants should investigate for the truth and report the truth
on the basis of their investigation. They should avoid any conflicts of
interests and advocacies, should not compromise their objectivity and
professional responsibilities, hold the highest standards of integrity and
ethics, share their skills, knowledge, and experience with other forensic
accountants in a professional manner, express their opinions on the basis
of the evidence gathered, and keep abreast of the latest developments
in their profession through continuing education, seminars, workshops,
and other studies.
The above-mentioned rules are also addressed by several organizations
such as the American Accounting Association (AAA), American Institute
of Certified Public Accountants (AICPA), Association of Certified Fraud

Examiners (ACFE), and the National Association of Certified Valuators
and Analysts (NACVA). Exhibit 4.1 presents these organizations and
their codes of ethics relevant to forensic accounting practices. The most
common codes of ethics and professional standards are as follows:
1. Integrity/Objectivity/Impartiality
2. Competency/Training/Proper skills
3. Confidentiality/Public trust
4. Independence/Duty to the Public
5. Conflicts of Interest/self-dealings
6. Transparency/Fair presentation
7. Good faith/Due diligence
8. Authority/Proper conduct
9. Professional Judgment/ Skepticism
10. Fairness/Mutual respect
Exhibit 4.1
Codes of Conduct for Forensic Accountants
Association Ethics Code Website
of Conduct
Association of The ACFE demands that its • Integrity and http://www
Certified Fraud members follow the highest Objectivity .acfe.com/
Examiners moral code and ethical • Professional code-of-
(ACFE) procedures when conducting Competence ethics.aspx
business. • Due Professional
Examples of some rules Care
include • Understanding
• Committing to with Client or
professional conduct Employer
and being mindful of • Communication
professional duties and with Client or
responsibilities Employer
• Act without bias in court • Confidentiality
procedures and testimony
• Keep private information
secure
• Continually improve skills
and effectiveness to offer
the best possible service.

of Conduct
American • The AICPA has set forth • Integrity http://pub
Institute of many principles that • Objectivity .aicpa.org/
Certified practicing individuals • Independence codeofcon
Public must follow. duct/ethics-
Accountants Examples include resources/
(AICPA) • Duty to the public et-cod.pdf
Audit Quality • Impartiality and fairness
Center when examining and
using evidence
• A defined scope of the
work being done
American A waiver is required to • Due Diligence http://aaahq
Accounting be signed by all AAA • Honesty .org/Portals/
Association members. The code includes • Integrity 0/documents/
(AAA) • Due Diligence • Good Faith about/Policies
Forensic • Honesty • Competence &Procedures
Accounting • Integrity • Authority Manual/FIN
and • Good Faith • Judgment %201.1%20
Investigation • Competence • Confidentiality Code%20of
Section • Authority • Higher Education %20Ethics
• Judgment %20Policy
• Confidentiality .pdf
International The code of ethics has five • Integrity https://
Institute of sections. These are • Objectivity iicfaglobal
Certified • Integrity • Competence and .com/
Forensic Ac- • Objectivity Due Care membership/
countants • Competence and Due Care • Confidentiality code-of-
• Confidentiality • Proper Conduct ethics/
• Proper Conduct
National NACVA has very similar • Integrity and http://web
Association rules to those of the AICPA. Objectivity .nacva
of Certified Some rules include • Professional .com/TL-
Valuation • Adequate preparation Competence Website/
Analysts for the job Measured in • Due Professional PDF/
(NACVA) education, experience, Care NACVA_
skill, and so on • Understanding and Standards_
• Keeping client Communications FINAL.pdf
information confidential • Planning and
and secure Supervision
• Planning all actions • Sufficient Relevant
taken and ensuring best Data
practices are established • Confidentiality
• Acts Discreditable
• Client Interest
• Documentation
• Financial Interest
(Continued )

of Conduct
National NACVA has very similar • Integrity and http://web
Association rules to those of the AICPA. Objectivity .nacva
of Certified Some rules include • Professional .com/TL-
Valuation • Adequate preparation Competence Website/
Analysts for the job Measured in • Due Professional PDF/
(NACVA) education, experience, Care NACVA_
skill, and so on • Understanding and Standards_
• Keeping client Communications FINAL.pdf
information confidential • Planning and
and secure Supervision
• Planning all actions • Sufficient Relevant
taken and ensuring best Data
practices are established • Confidentiality
• Acts Discreditable
• Client Interest
• Documentation
• Financial Interest
American • I shall investigate for the • Objectivity http://abfa
Board of truth. • Neutrality .us/forensic-
Forensic • I shall report only the truth. • Accurate accountant-
Accounting • I shall avoid conflicts of Representation of code-of-
advocacies. Experience ethics/
• I shall conduct myself • Ethical Conduct
ethically.
• I shall seek to preserve
the highest standard of
my profession.
• As a forensic accountant,
I shall not have a monetary
interest in any matter in
which I am retained.
• I shall share my
knowledge and
experience with other
forensic accountants in a
professional manner.
• I shall avoid conflicts
of interest and will
continue my professional
development throughout
my career through
continuing education,
seminars, and other studies.

of Conduct
• As a forensic accountant,
I will express my expert
opinion only on the basis
of my knowledge, skill,
education, training, and
experience.
• The light of knowledge
shall guide me to the
truth, and with justice the
truth shall prevail.
Regulations Relevant to Forensic Accounting

The question that has currently and repetitively being asked is that
whether forensic accounting should be regulated.7 With many certifica-
tions relevant to forensic accountants including certified fraud examiners,
certified forensic specialists, certified financial crime specialists, certified
forensic accountants, certified forensic financial analysts among others
discussed in the previous chapter, it is perhaps time to regulate forensic
accounting practices. The regulation of forensic accounting is expected to
improve the quality of fraud and nonfraud services performed by forensic
accountants. Thus, the following subsections present laws, rules, regula-
tions, and standards relevant for forensic accountants.
Foreign Corrupt Practices Act of 1977 (FCPA)
The Foreign Corrupt Practices Act (FCPA) was released in 1977 in re-
sponse to several high-profile fraudulent schemes in the mid-1970s.8 The
FCPA itself pertains to disallowing upper management from engaging
in business activities with foreign agents that would aid in acquiring and
disposing of business through payment of illegal monies. To make the
FCPA as effective as possible, the Department of Justice (DoJ) requires
all U.S. upper management to abide by the rules contained within the
act. In 1998, another amendment was added to the FCPA that required
foreign companies that conducted business within the United States to be
subject to the same rules and regulations that U.S. firms had to follow. As
part of keeping track of all business processes, the DoJ also mandates that
firms disclose and document all accounting activities in accordance with

accounting provisions stated within United States Code 78m.9 Code 78m
deals with the periodical reports issued by securities firms during a normal
business year.10
Despite the FCPA being put into practice in 1977, there are concerns
about its effectiveness. On November 9, 2017, Steven R. Peiken of the
SEC shared his thoughts in a speech at the School of Law at the University
of New York. In the speech, there was a highlight regarding Halliburton’s
vice president violating FCPA guidelines.11 A counter to these concerns
has been presented by the Big 4 (Deloitte, PricewaterhouseCoopers, Ernst
& Young, and KPMG) accounting firms through forensic services. For ex-
ample, PricewaterhouseCoopers has 3,000 specialists that focus on the For-
eign Corrupt Practices Act (FCPA). The firm claims that forensic services
help implement strategies that mitigate the risk of FCPA violations.12
A framework was introduced by the DoJ in 2016 that listed rules that
companies must follow. These rules are13
• Firms must voluntarily report FCPA violations

• Firms that committed an FCPA violation must cooperate with
the DoJ
• Firms should act swiftly to repair the damage caused by the viola-
tion and must work to enact barriers to prevent another such event
from happening in the future14
The Sarbanes-Oxley Act of 2002 (SOX)
The wave of financial scandals of Enron, Global Crossing, WorldCom,

Tyco among others in the early 2000s eroded public trust and investor
confidence in public financial information and the financial markets.15
The turn of the twenty-first century was a challenging and rather difficult
year for corporate America as evidenced by the stock market’s swift decline,
a significant number of earnings management and financial restatements,
a rash of corporate and accounting scandals, and a resulting loss of confi-
dence in public financial information and financial markets. The Sarbanes-
Oxley Act (SOX) of 2002 was passed in July 2002 to improve investors’
confidence that had been eroded because of the reported financial scandals
of high-profile companies (e.g., Enron, WorldCom, Global Crossing,

Qwest).16
The act was intended to rebuild investor confidence and protect invest-
ors by improving the reliability, completeness, accuracy, and transparency
of corporate disclosures, including financial reports.17 Many provisions of
SOX pertain to financial reporting, including Sections 302 and 404, which
require public companies’ management to certify financial statements and
report on the effectiveness of the company’s internal control over finan-
cial reporting (ICFR) and require auditors to attest to and report on both
financial statements and ICFR. Section 301 requires that the audit com-
mittee oversee the work of management and the independent auditor as
related to ICFR. The audit committee’s oversight of Section 404 is essential
as mandatory ICFR is becoming an integral part of financial reporting.
SOX provisions directed the SEC to issue rules and Interpretive Guidance
and the PCAOB to issue Auditing Standards No. 2 and 5 in requiring the
use of the Integrated Financial and Internal Control Reportingconcept.18
The provisions of SOX that were not previously practiced by public com-
panies and that are intended to benefit all companies include the following:
• Creating the PCAOB to regulate and oversee the audit of public

companies and to improve the ineffective self-regulatory environ-
ment of the auditing profession;
• Improving corporate governance through more independent and
vigilant boards of directors, particularly effective and mandatory
audit committees for public companies;
• Enhancing responsibilities of executives of public companies by re-
quiring certification of financial statements by both CEO and CFO;
• Improving internal control reporting for public companies by re-
quiring certification of ICFR by both CEO and CFO.
• Enhancing the quality, reliability, transparency, and timeliness of
financial disclosures through executive certifications of both finan-
cial statements and internal controls;
• Prohibiting nine types of nonaudit services considered to have an
adverse effect on auditor independence and objectivity;
• Regulating the conduct of auditors, legal counsel, and financial
analysts, and their potential conflicts of interest;
• Increasing civil and criminal penalties for violations of security

laws; and
• Rebuilding public trust and investor confidence in public financial
reports and financial markets.
The primary focus of SOX is to improve the quality, reliability, and

transparency of public financial reports, quality of the audit process, and
the effectiveness of corporate governance. These provisions of SOX have
implications for forensic accounting practices. High-quality financial in-
formation can contribute significantly to the integrity and efficiency of the
capital markets. Financial reporting provisions of SOX and SEC-related
rules include the following:
• Certification of financial statements and internal controls by CEOs

and CFOs;
• Disclosure of off–balance sheet transactions;
• Disclosure pertaining to the use of non-GAAP (generally accepted
accounting principles) financial measures;
• Disclosure of material current events affecting companies;
• Mandatory internal control reporting by management;
• A study of principles-based accounting standards;
• Convergence of accounting standards;
• Recognition of adequate funding for the FASB as an accounting
standard-setting body; and
• The oversight function of the FASB by the SEC.
A fundamental objective of SOX was to enhance the reliability and

integrity of audit functions and the audit process as well as the cred-
ibility of audit reports provided in financial statements and to improve
investor confidence in the auditing profession. Provisions of SOX and
SEC-related rules addressing audit functions include the following:
• Creation of the PCAOB to oversee the accounting profession;

• Adoption of new rules related to auditor independence;
• Issuance of new rules related to improper influence on auditors;
• Issuance of new rules pertaining to retention of records and audit
evidence relevant to review and audit of financial statements;
• The oversight function of the PCAOB by the SEC; and

• Attestation of and report on Internal Control over Financial Re-
porting (ICFR).
The following are some important provisions of the SOX that have rel-
evance to forensic accounting practices: The SOX (Sec. 301) explicitly re-
quires that every public company establish procedures for the confidential,
anonymous reporting by employees of concerns regarding questionable ac-
counting, internal control, or auditing matters. Yet, the act leaves great flex-
ibility to companies in their implementation of this requirement. Under the
SOX (Sec. 301), audit committees of public companies are responsible for
establishing and overseeing procedures for employees to confidentially and
anonymously report concerns regarding questionable accounting, internal
control, or auditing matters. This regulatory requirement is consistent with
the belief that the availability of an anonymous channel to report question-
able accounting matters can enhance an organization’s internal control by
fostering communication and bringing FSF to light as early as possible.
Anonymous reporting channels may be particularly useful in encourag-
ing the reporting of wrongdoing by organizational members because ano-
nymity should minimize personal “costs” of reporting, such as retaliation and
other potential penalties. A benefit of such channels is that employees often
discover FSF before other monitors (e.g., internal auditors, external audit-
ors, and/or regulators) and, consequently, often have the ability to inform
the organization earlier than others. In this regard, the 2018 Report to the
Nations issued by the Association of Certified Fraud Examiners (ACFE) re-
ports the results of a survey of their members indicating that “tips” including
unanimous information obtained from employees and nonemployees were
more effective in identifying and discovering fraud than any other methods
and mechanisms (40 percent).19 The other two main methods were internal
audit and management review, at 15 percent and 13 percent, respectively. As
a result of detection, corruption is the most prevalent scheme in every area
of the globe. In total, fraudulent behavior inflicted approximately $7 billion
in losses, with 22 percent of cases causing losses of more than $1 million.20
Many provisions of SOX pertaining to financial reporting, the audit process,
and corporate governance are relevant to forensic accounting practices as
discussed earlier and summarized in Exhibit 4.2.
Exhibit 4.2
Important Provisions of the
Sarbanes-Oxley Act (SOX) 2002
Provisions Summary
Public Company An independent Not-for-Profit that sets rules regarding
Accounting Standards audit, quality control, independence, and ethical
Board (PCAOB) conduct. The PCAOB is subservient to Security and
Exchange Commission rulings and oversight.
Auditor Independence Cannot perform nonattest services with audit services
with partners required to do a 5-year rotation.
Corporate Members of audit committee are on the board, engage
Responsibility in counsel, and bear responsibility for oversight of public
accounting firms.
Enhanced Financial Executives, particularly CEOs and CFOs, must adhere to
Disclosure strict financial reporting guidelines and disclosure.
Trading, Disclosure, and Prohibits insider trading, requires disclosure of all
Conflicts of Interest transactions, and prevents conflicts of interest.
Corporate Misconduct Securities fraud is a crime with a 25-year, federally
and Crime appointed, sentence.
Financial Reform and Consumer Protection Act of 2010

(Dodd-Frank Act)
The existence and persistence of financial crisis in the United States and the
resulting global economic meltdown is commonly viewed as serious since
the Great Depression. The global competitiveness of U.S. capital markets
to a significant extent depends on the reliability of financial information in
assisting investors to make sound investment decisions, cost-effective regula-
tion in protecting investors, and efficiency in attracting global investors and
companies. The U.S. free enterprise system has transformed from a system
in which public companies including banks and other financial institutions
were traditionally owned and controlled by small groups of investors to a sys-
tem in which businesses are owned by global investors. The United States has
achieved this widespread participation by adopting sound regulations, main-
taining high-quality disclosure standards and enforcement procedures that
protect the interests of global investors. Recent financial regulatory reforms
including the SOX and the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (DFA) are intended to protect global investors and
consumers.21 Dodd-Frank Act is named after Senate Banking Committee
Chairman Christopher Dodd (D-CT) and House Financial Services Com-
mittee Chairman Barney Frank (D-MA) and its provisions pertain to banks,
hedge funds, credit rating agencies, and the derivatives market.
Investor confidence in public financial information and the financial
markets is the key driver of global competition, financial stability, and
economic growth. Investors are confident when stock prices are on an
upward trend and the news about future stock performance is optimistic.
The Dodd Frank Act (DFA) is intended to restore investor confidence
in corporate America and its financial system and financial services pro-
vided through the banking system. Reliable and transparent financial in-
formation contributes to the efficient functioning of the capital markets
and the economy. In recent years, investment banks and the major bro-
kerage firms have grown rapidly and generated record revenue. Failures
of the five major financial institutions of Goldman Sachs Group Inc.,
Bear Stearns Co., Morgan Stanley, Lehman Brothers Holdings Inc., and
Merrill Lynch & Co and subsequent government costly bailout of these
firms raise serious concerns about the value-adding activities of financial
services firms, their ethics and governance as well as the professional ac-
countability of their board of directors, senior management, internal and
external auditors, and other corporate governance participants. The lack
of public trust and investor confidence in corporate America, the Wall
Street and its financial dealings and reports, has continued to adversely
affect the vibrancy of the capital market as bailout banks and subsequent
continuous excessive executive compensation have left us with a legacy of
mistrust. This challenged policy makers and regulators to establish and
enforce more effective and efficient regulatory reforms as well as business
leaders to change their culture, behavior, and attitudes to restore confi-
dence and trust in the Wall Street.
Provisions of the Dodd Frank Act (DFA) that are relevant to forensic
accounting practices are summarized as follows:
1. Broadening the supervisory and oversight role of the Federal Reserve

Board to regulate all entities that own an insured depository institu-
tion and other large and nonbank financial services firms that could
threaten the nation’s financial system.
2. Establishing a new Financial Services Oversight Council to iden-

tify and address existing and emerging systemic risks threatening the
health of financial services firms.
3. Developing new processes to liquidate failed financial services firms.
4. Establishing an independent Consumer Financial Protection Bu-
reau to oversee consumer and investor financial regulations and their
enforcement.
5. Creating rules to regulate over-the-counter derivatives.
6. Coordinating and harmonizing the supervision, standard-setting
and regulatory authorities of the SEC and the Commodities Futures
Trading Commission.
7. Mandating registration of advisers of private funds and disclosures of
certain information of those funds.
8. Empowering shareholders with a say on pay of nonbonding votes on
executive compensation.
9. Increasing accountability and transparency for credit rating agencies.
10. Creating a Federal Insurance Office within the Treasury Department.
11. Restricting and limiting some activities of financial firms, including
limiting bank proprietary investing and trading in hedge funds and
private equity funds, as well as limiting bank swaps activities.
12. Maintaining consistency in adhering to international financial and
banking standards.
SEC Enforcement Actions
The SEC was created by Congress to ensure proper disclosure of fi-

nancial information by public companies. The SEC has taken enforce-
ment actions against firms that are identified as having violated the
financial reporting requirements of the Securities Exchange Act of 1934.22
The SEC Enforcement Manual (SEC 2010b) provides guidance to employees
about the handling of complaints, tips, and referrals (leads) r eceived concern-
ing violations of SEC requirements. The SEC obtains leads for investigation
from several sources: (1) public complaints and tips from short sellers and
others; (2) the reporting requirements of federal, state, and local law enforce-
ment agencies under the Bank Secrecy Act; (3) the enforcement staff of the
PCAOB; (4) the enforcement of “blue sky laws” by state securities regulators;
(5) complaints and other information from members of Congress on behalf
of constituents whom they represent; and (6) trading-related referrals from

domestic self-regulatory organizations (SEC 2010b).
SEC staff members from the Division of Corporation Finance exam-
ine financial statements and other filings for routine screening criteria
violations and for suspicious subjective factors. When the initial inves-
tigation exposes factors that warrant further investigation, an informal
investigation is conducted, and persons with relevant information are in-
vited to provide pertinent documents and testimony. The SEC need not
formally notify the target firm during this investigation, thus protecting
firms that are cleared by the informal investigation. If strong evidence of
a securities law violation is uncovered during the informal investigation,
then the SEC may pursue a formal investigation. If the SEC informs the
target of the formal investigation, the 1934 Act Release No. 5092 requires
disclosure to shareholders by the firm, and the investigation may become
public. The SEC policy is to make its enforcement activities public only
when it files a formal complaint alleging securities law violations and seeks
settlement with the enforcement target. The formal investigation grants
subpoena power to compel testimony and the production of documents.
The issuance of an Accounting and Auditing Enforcement Release
(AAER) by the SEC signifies that a failure has occurred in the systems
that are put in place by companies to prevent opportunistic behavior by
company management. AAERs result when companies and/or their aud-
itors accept an administrative action, such as a fine or other reprimand,
and agree not to engage in the behavior that brought about the SEC in-
vestigation rather than formally plead guilty to a misdeed. Even though
these AAERs are not legally considered an audit failure, they can be in-
terpreted as evidence of an audit failure as well as evidence of a corporate
governance failure. The discovery of firm-specific corporate governance
and audit weaknesses would help auditors, investors, forensic account-
ants, and regulators assess the likelihood that management will engage in
self-serving activities that would lead to the issuance of an AAER.
The SEC has issued AAERs during or at the end of an investigation
against a company, an auditor, or an officer for alleged accounting and/or
auditing misconduct since 1982.23 These releases provide varying degrees of
detail on the nature of the misconduct, the individuals and entities involved,
and their effect on the financial statements that could be of much interest to
forensic accountants. The AAERs dataset as of September 2018 consists of
3,052 SEC AAERs (1,214 firm misstatement events) issued between May 17,
1982 and September 1, 2018. It contains 3941 firm misstatement events that
affect at least one of the firms’ quarterly or annual financial statements. The
dataset consists of three data files: The Details, Annual, and Quarterly files.
The Detail file contains

• Firm name and its identifiers
• AAER numbers (e.g., 1 to 3,180) pertaining to each firm
• A description of the reason the AAER was issued
• The balance sheet and/or income statement accounts affected by
the violation
• One observation per firm misstatement event.
The Annual and Quarterly files are compiled from the Detail file and
are formatted by reporting period when the misstatement occurred.
The Annual and Quarterly files contain

• AAERs with alleged financial misstatements
• Firm name and identifiers
• The year and/or quarter-end when the misstatements occurred
• Information on whether earnings or revenues are understated
• One observation for each year or quarter affected by the violation
Exhibit 4.3 presents the timeline of SEC investigation as

reflected in AAERs. This timeline starts with Model Imperial Inc. on
January 5, 2000 and ends with RSM LLC. 3943, on June 14, 2018.
Exhibit 4.3
Sample of the selected SEC Accounting and Auditing
Enforcement Releases (AAERs) 2000–2018
Date Event ID
June 14, 2018 RSM LLC, AAER 3943
June 6, 2016 Michael Mona, Jr., AAER 3942
Date Event ID
May 4, 2018 David Leboe, CPA AAER 3941
May 4, 2018 Kevin McAller, CPA AAER 3940
May 4, 2018 Winter, Kloman, Moter & Repp. AAER 3939
April 30, 2018 Panasonic Corporation AAER 3938
April 24, 2018 Altaba Inc. AAER 3937
April 23, 2018 The Dun & Bradstreet Corporation AAER 3936
March 13, 2018 KPMG AAER 3927
March 13, 2018 Deloitte & Touche AAER 3928
March 13, 2018 BDO LLP AAER 3926
July 27, 2017 Halliburton Company and Jeannot Lorenz AAER 3884
January 19, 2017 Homestreet Inc and Darrell Van Amen AAER 3852
January 18, 2017 General Motors Company AAER 3850
December 6, 2016 KPMG LLP AAER 3834
November 17, 2016 JP Morgan Chase & Co. AAER 3824
October 20, 2016 FMC Technologies, Jeffrey Favret, and Steven Croft AAER
3816
October 18, 2016 Ernst & Young LLP, Crag Fronckiewicz, and Sarah Adams
AAER 3814
September 30, 2016 GlaxoSmithKline plc AAER 3810
September 28, 2016 Anheuser-Busch AAER 3808
September 19, 2016 Ernst & Young AAER 3803 and 3802
March 1, 2016 Qualcomm Inc. AAER 3751
February 9, 2016 Monsanto AAER 3741
December 2, 2015 Grant Thornton AAER 3718
January 28, 2015 First National Community Bancorp Inc AAER 3622
December 8, 2014 BKD, LLP AAER 3603
September 29, 2014 Bank of America Corporation AAER 3588
September 25, 2014 Mayer Hoffman McCann P.C. AAER 3587
April 8, 2014 CVS Caremark Corp. AAER 3549
September 19, 2013 JP Morgan Chase AAER 3490
April 24. 2013 Capital One Financial Corporation, Peter Schnall, and David
LaGassa AAER 3456
August 8, 2012 Pfizer AAER 3399
February 6, 2012 Smith & Nephew PLC AAER 3363
April 8, 2011 Johnson & Johnson AAER 3261
(Continued )

Date Event ID
February 28, 2011 KPMG Australia AAER 3248
November 4, 2010 Tidewater AAER 3207
October 21, 2010 Office Depot AAER 3199 and 3198
July 27, 2010 General Electric, Ionics, and Amersham AAER 3159
July 22, 2010 Dell, Michael Dell, Kevin Rollins, James Schneider, Leslie
Jackson, Nicholas Dunning AAER 3156
January 21, 2010 Assurant Inc. AAER 3109
August 12, 2009 Terex Corporation AAER 3035
April 1, 2009 Take-Two Interactive Software AAER 2957
March 4, 2009 Krispy Kreme Doughnuts AAER 2941
August 8, 2008 Prudential Financial AAER 2860
June 17, 2008 NEC Corporation AAER 2839
June 6, 2008 Citigroup AAER 2838
October 15, 2007 Nortel Networks Corporation AAER 2740
September 27, 2007 Federal Home Loan Mortgage Corporation AAER 2728
August 7, 2007 First BanCorp AAER 2664
May 8, 2007 Motorola AAER 2607
January 12, 2007 Lattice Semiconductor Corp.
September 27, 2006 Lantronix AAER 2485
June 30, 2006 Greentech USA and Roland Breton AAER 2455
April 27, 2006 Ingles Market Incorporated AAER 2422
April 12, 2006 Dollar General AAER 2411
February 7, 2006 Cummins AAER 2370
January 4, 2006 McAffe AAER 2360
September 22, 2005 Bio One Corporation AAER 2317
June 23, 2005 Healthsouth Corporation AAER 2263
April 18, 2005 The Coca-Cola Company AAER 2232
February 5, 2005 Elan Corporation AAER 2181
January 19, 2005 PricewaterhouseCoopers LLP AAER 2169
November 19, 2004 Robotic Vision Systems AAER 2137
November 4, 2004 Morgan Stanley AAER 2132
August 25, 2004 Aurora Foods AAER 2089
August 4, 2004 Bristol-Myers Squibb Company AAER 2075
Date Event ID
May 5, 2004 Moore Stephens Chartered Accountants (United Kingdom)
and Peter D. Stewart, A Partner, Sanctioned by Institute of
Chartered Accountants in England and Wales for Failures in
Connection with Audits of Financial Statements Filed with
the SEC; AAER 2002
January 16, 2004 Corrpro Companies, Inc. AAER 1944
November 10, 2003 WorldCom Inc. AAER 1909
July 16, 2003 Xaibe, Inc. and Lowell Nicholas AAER 1814
April 1, 2003 Thomas & Betts Corporation, et al. AAER 1747
January 13, 2003 Anika Therapeutics, Inc., J. Melville Engle and Sean F.
Moran AAER 1699
September 19, 2002 Motorcar Parts and Accessories, Inc. and Peter Bromberg
AAER 1629
July 17, 2002 Avon Products, Inc. AAER 1595
June 21, 2002 Rite Aid Corporation AAER 1579
June 3, 2002 Microsoft Corporation AAER 1563
March 27, 2002 Kimberly-Clark Corporation and John W. Donehower
AAER 1533
January 15, 2002 BellSouth Corporation AAER 1495 and 1494
December 6, 2001 Pinnacle Holdings, Inc. AAER 1476
October 2, 2001 Millionaire.com and Robert L. White AAER 1462
June 19, 2001 Arthur Andersen LLP AAER 1405
February 5, 2001 Secure Sign, Inc. (formerly YourBankOnline.com)
AAER 1366
December 21, 2000 International Business Machines Corporation AAER 1356
September 19, 2000 Pier 1 Imports, Inc. AAER 1303
June 30. 2000 Allegheny Health, Education and Research Foundation
AAER 1283
January 5, 2000 Model Imperial, Inc. AAER 1214
Exhibit 4.4 shows that two events are associated with disclosure of al-
leged FSF. The first event is when the allegation of FSF was initially
publicly disclosed (public disclosure) and the second event is when
the SEC or the DoJ officially and publicly disclose their enforce-
ment against public companies for the allegation of FSF (enforcement
disclosure).
86
Exhibit 4.4
The Timeline for Financial Statement Fraud (FSF) and the SEC Actions
Public Disclosure
of SEC
First Public Disclosure
Investigation
of alleged FSF
Stage 1 Stage 2 Stage 3
Time
Occurrence of FSF Discovery of FSF Disclosure and

Enforcement of
Beginning End FSF
of FSF of FSF
Occurrence Period Discovery Period Discovery and

Enforcement Period
Revelation Period
Conclusion
Forensic accountants in practicing forensic accounting services must
comply with their professional standards and codes of conduct of sev-
eral authoritative bodies and governmental agencies. This chapter pre-
sented authoritative guidelines applicable to forensic accountants. Many
professional standards applicable to forensic accountants are integrity
and objectivity, skepticism, confidential information, competency, and
due professional care. Professional responsibility standards and codes of
conduct were discussed in this chapter. The demand for and interest in
forensic accounting education and research are expected to continue to
increase as more scholars conduct research in fraud and nonfraud-related
issues and universities offer courses and programs in forensic accounting.
Action Items
1. Comply with applicable professional responsibility standards.
2. Observe applicable codes of conduct and professional ethics.
3. Understand all rules and regulations relevant to practice of forensic
accounting.
4. Comply with all applicable laws, rules, regulations, standards, and
best practices.
Endnotes
1. AICPA. 2017. Forensic Accounting.https://www.aicpa.org/interestareas/
forensicandvaluation/resources/litigation.html
2. The United States Courts. 2018. http://www.uscourts.gov/
3. AICPA. August 31, 2017. AICPA Code of Professional Conduct. http://
pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf, (accessed
December 5, 2017).
4. AICPA. 2007. Statements of Standards for Valuation Services. https://
www.aicpa.org/interestareas/forensicandvaluation/resources/standards/
downloadabledocuments/ssvs_full_version.pdf
5. Chartered Professional Accountants of Canada. n.d. Standard Practices.
https://www.cpastore.ca/Catalogue/ShowSampleToc.aspx?productID
=1&spID=8&expID=345608949~1
6. J. Fotrodona, D. Mele, J.M. Rosanas. 2017. “Ethics in Finance and

Accounting: Editorial Introduction,” Journal of Business Ethics 140,
no. 4, pp. 609–613.
7. D. Huber, and E. Charrier. 2015. Is It Time to Regulate Forensic Account-
ing? https://hal.archives-ouvertes.fr/hal-01277534/document
8. The Foreign Corrupt Practices Act (FCPA). 1977. Anti-Bribery and
Books & Records Provisions of the FCPA. https://www.justice.gov/sites/
default/files/criminal-fraud/legacy/2012/11/14/fcpa-english.pdf
9. Department of Justice. 2017. Foreign Corrupt Practices Act. https://
www.justice.gov/criminal-fraud/foreign-corrupt-practices-act
10. Legal Information Institute. 2017. 15 U.S. Code 78m- Periodical and
Other Reports. https://www.law.cornell.edu/uscode/text/15/78m
11. S. Peiken. November 9, 2017. Reflections on the Past, Present, and
Future of the SEC’s Enforcement of the Foreign Corrupt Practices Act.
https://www.sec.gov/news/speech/speech-peikin-2017-11-09
12. PricewaterhouseCoopers. 2017. FCPA, Anticorruption & Compliance:
PwC Forensic Services. https://www.pwc.com/us/en/services/forensics/
anti-bribery-corruption-program-integrity.html
13. Ibid.
14. Department of Justice. April 5, 2016. The Fraud Section’s Foreign
Corrupt Practices Act Enforcement Plan and Guidance. https://www
.justice.gov/archives/opa/blog-entry/file/838386/download
15. Much of the discussion about rules and regulations, particularly the
SOX of 2002 and DOF of 2010 comes from Z. Rezaee. 2018. Corporate
Governance in the Aftermath of the 2007–2009 Global Financial Crisis,
Vol. 1–4, Business Expert Press.
16. Z. Rezaee. 2007. Corporate Governance Post-Sarbanes–Oxley (Hoboken,
NJ: John Wiley & Sons).
17. Sarbanes–Oxley Act of 2002 (SOX). The Public Company Accounting
Reform and Investor Protection Act. www.sec.gov/about/laws/soa2002.
pdf.
18. Ibid.
19. Association of Certified Fraud Examiner (ACFE). 2018. Report to
the Nations. https://www.acfe.com/report-to-the-nations/2018/
20. Ibid.
21. Dodd–Frank Wall Street Reform and Consumer Protection Act (DOF).
H.R.4173. Available at https://www.congress.gov/bill/111th-congress/
house-bill/4173/text
22. Securities and Exchange Commissions (SEC). Accounting and Au-
diting Enforcement Releases (AAAERs). http://www.sec.gov/divisions/
enforce/friactions.shtml
23. Ibid.
CHAPTER 5
Forensic Accounting
Practices, and Education
and Research
Executive Summary
Forensic accounting has advanced from a narrow focus on fraud inves-
tigation to a profession with certification, education, and research in
performing a variety of fraud and nonfraud services. Forensic account-
ants should possess education, knowledge, experience, and expertise in
accounting, auditing, business, finance, law, psychology, and criminology.
This chapter presents the structure of the legal system relevant to forensic
accounting practice as well as forensic accounting education and research.
Introduction
Forensic accounting is considered as an important and rewarding field of
accounting to investigate fraud and nonfraud incidents. In such an increas-
ingly unstable economic and litigious environment, there has been significant
growth in the demand for and interest in forensic accounting and investigative
fraud and nonfraud services. To effectively perform litigation consulting, ex-
pert witnessing, valuation, and fraud investigation services, forensic account-
ants should understand the structure of the legal system as well as forensic
accounting best practices and education and research presented in this chapter.
Structure of the Legal System

This section provides an overview of the legal, judicial, and regulatory
environment in which a forensic accountant may practice. It introduces
the basics of civil and criminal laws, dispute resolution, and federal and
state rules of evidence and procedure applicable to forensic accounting
practices. It also provides a description of the federal and state courts and
an introduction to other applicable laws, rules, regulations, guidance, and
agencies relevant to forensic accounting practices.
Civil Litigation Processes
The process for civil litigation and related lawsuits generally starts with dis-
agreements and disputes among parties including individuals, businesses,
or government and nongovernment entities. Civil lawsuits typically pro-
ceed through systematic steps: pleadings, discovery, trial, and appeal in the
absence of voluntarily settling at any time before reaching trial or the use
of arbitration.1 Civil litigation statistics show, on the federal level, that 409
civil filings occurred with a median case time of 10.1 months (measure of
filing to conclusion) during the first 3 months of 2018. The total number
of civil cases in 2018 amounted to 277,010. The most common type was
prisoner petitions, which contained 53,965 cases. The remaining top five
were personal injury/product liability, civil rights, other civil, and contracts
with 44,563, 40,371, 34,153, and 24,802 total cases, respectively.2
Pleadings
The civil litigation process begins here with the filing of papers by each
party involved in a lawsuit. In this portion, each side gets to explain its side
of the dispute. Pleadings are composed of two core components: the com-
plaint and the answer. The complaint describes what the defendant did or
failed to do that was the direct cause of harm and injury to the plaintiff
and the legal basis for holding the defendant responsible for that harm.3
The answer is a phase in which the defendant is given a specific
amount of time to file an answer to the complaint. During this period,
the defendant may reply by filing a counterclaim, which is when a de-
fendant claims that the plaintiff caused injury and must pay damages. In
some cases, a request for clarification, amendments to factual allegations
or legal theories, or dismissal can be achieved. After any replies are stated,
the court now has the parameters for which issues can be resolved.4
Forensic Accounting Practices, and Education and Research 93
Discovery
Discovery begins after a lawsuit is filed and stops shortly before the trial.
During this period, parties seek information, about facts and issues, from
one another as well as third parties. These requests are formally issued
and may be questions, document requests, admission (admitting or deny-
ing facts) requests. Because of discovery being an important part of legal
proceedings, there are various methodologies that can be applied. First,
a deposition is a statement made from court under oath. The purpose
of depositions is to give the opposing party and idea of the content of
the upcoming trial. It can be given orally, via tape, or in writing. Along
with the depositions, interrogatories may be conducted, which are writ-
ten questions for the other party to answer.5
Trial
Forensic accountants take part in civil trials. In a civil trial, there are many
phases, including pretrial, jury duties, examination of evidence, and mo-
tions. In the pretrial phase, the complainant files for the case to be heard
in court and the defendant is the firm being charged with the offense. The
defendant can admit guilt or deny the accusation. In the court, the jury is
selected before the proceedings begin by the judge. This process is called voir
dire, meaning to speak truthfully. This is done so that bias is not brought into
the court proceedings. If the juror does not meet this criterion, another juror
is selected. After selection of the jury, the trial commences. During the trial,
evidence is examined both directly and in parallel. Before the examination,
evidence must be determined to be either direct or circumstantial in nature.
Direct evidence is clear and usually involves the obvious including weap-
ons, admittance of guilt, and eyewitness accounts. Circumstantial evidence
is much more difficult to facilitate as it involves an inference of fact. This type
of evidence includes the crime scene and expert testimony.
The court uses various methods to question and verify evidence in
court proceedings. Direct examination involves both types of evidence
mentioned in the previous paragraph. The witnesses must keep opinions
out of the statements made to avoid a biased testimony. Cross-examination
is a by-product of direct examination and involves the defendant’s lawyer
pondering evidence to test its credibility. At the end of the trial, a motion
is given. This motion determines whether the trial is over, and the jury
can examine all the evidence and make the verdict.6
Appeal
To begin the appeal process, a notice of appeal must be filed with the
court if it is allowed. Because of forensic accountants being involved in
civil cases, the appeal can be done by either party (defendant or plaintiff).
An appeal is usually done before trial proceedings commence, but it can
be done after the trial is over. The party appealing must write a brief,
which is a documented statement discussing why the party believes the
decision was factually incorrect. An oral rebuttal to the decision is accept-
able in some cases. After the case is appealed, judges may form a dissent-
ing opinion, which is a disagreement with the majority, or a concurring
opinion, which agrees with the majority. If the appeal is unsuccessful, it
can be appealed to a higher court. If it is not, the verdict stands. If the
appeal is successful, it will return to the lower courts to be retried. This
is allowed because the US Constitution protects against double jeopardy,
which means being tried repeatedly for the same crime.7
Alternatives to Litigation
Businesses may want to avoid normal court proceedings but still find a
resolution to the problem. The process to address this issue is called Al-
ternative Dispute Resolution (ADRs). There are many types of ADRs, in-
cluding mediation and arbitration. Mediation is peaceful and designed to
arrive at an agreement, as opposed to general litigation proceedings. This
bypasses a jury and other forms of legal proceedings and lawyers are not
required. An arbitration always involves lawyers with subpoena power;
each side can present a case.8
Alternatives to litigation are usually used when pursing a case through
normal court proceedings would be more costly than beneficial (cost–benefit
analysis). It is important to note that sometimes courts may require ADRs,
which is less common than individuals deciding to pursue this form of legal
reprieve. According to the United States Department of Justice, in 2017,
there was a 75 percent success rate for individual-instigated ADRs and a

55 percent success rate for court-ordered ADRs. The year 2017 had a com-
bined 77 percent achieved benefit from resolved cases, which tied with the
year 2014 for the highest in a 5-year period.9
Criminal Proceedings
The above-mentioned processes for civil trials are identical for criminal
proceedings except for the pretrial. In a criminal pretrial, the process
changes on the basis of how serious the offense is. For example, felonies
are more punishable by federal law, as opposed to misdemeanors, which
are generally locality-based offenses. Every other crime lower than the
preceding two, is usually punishable by fines.10According to the Depart-
ment of Justice, in 2016, there were 66,961 criminal cases at year end.
Of those cases resolved, 50,973 defendants were found guilty, 148 were
found not guilty, and 2,582 were dismissed. Broken down by crime type,
the top three crimes were drug offenses, violent crime, and white-collar
crime, each totaling at 11,731, 11,688, and 4,791, respectively. The De-
partment of Justice releases criminal court statistics every fiscal year.11
Forensic Accounting Fraud Standards and Practices

Several auditing standards provide guidelines for forensic accountants
and external auditors to assess risk of financial reporting fraud and dis-
cover Financial Statement Fraud(FSF). These standards are the Statement
on Auditing Standards (SAS) No. 99 entitled “Consideration of Fraud in
a Financial Statement Audit” and the International Standard on Auditing
(ISA) No. 240 entitled “The Auditor’s Responsibility Relating to Fraud in
an Audit of Financial Statements.”
These auditing standards emphasize the importance of evaluating
fraud risk from the view of fraud-triangle factors and the use of brain-
storming sessions to assess fraud risks and evaluate how fraud could be
perpetrated. However, SAS 99 (AICPA 2002) does not provide detailed
instructions on how auditors should consider fraud schemes in risk assess-
ment and how auditors adjust audit programs to respond to the assessed
fraud risk. SAS 99 (AICPA 2002, p. 31) states, “The auditor may identify
events or conditions that indicate incentives/pressures to perpetrate fraud,

opportunities to carry out the fraud, or attitudes/rationalizations to jus-
tify a fraudulent action.”12 The existence of these conditions, or events,
are commonly referred to as “fraud risk factors” that provide signals,
symptoms, and possible red flags that fraud could exist.13
SAS 99 (AICPA 2002) states that when management has incentives
or pressures to perpetrate fraud, opportunities to carry out the fraud, and
attitudes or rationalizations to justify a fraudulent action, it might intend
to commit fraud. Therefore, the first phase of fraud is normally the as-
sessment of the presence of risk factors in the fraud triangle. When these
factors are present in the business environment of a company, there is a
higher likelihood that management will commit fraud. Given the inten-
tion to commit fraud, management must then decide how to perpetrate
it. Since the management attempts to falsify financial statements, the first
step in perpetrating fraud could be to decide which accounts and how
they should be manipulated. For example, when management notices
that the company cannot meet the projected net income for the period, it
might decide to overstate sales revenue to increase the net income.
ISA 240 pertains to the auditor’s looking for fraud in financial state-
ments. ISA 240 was developed from a need to prevent and detect fraud
in 2004 through the risk of material misstatement (RMM). The RMM
is the likelihood that material misstatements enter into the accounting
information process, were undetected by the system of internal controls,
and are not discovered by auditors. As a result, when there is likelihood
for fraud, the risk is higher. The auditor must use professional judgment
and skills to use the RMM for ISA 240 standards. The requirements for
professional judgment include skepticism, processes designed to manage,
assess, and mitigate risk, and auditors discussing the audit with each other
on a consistent basis.14
ISA 240 is a set of standards; however, when it comes to forensic
accounting, the standards vary by case according to the laws, the require-
ments of the investigation, and the evidence compiled. For these reasons,
a forensic accountant needs to know ISA 240 from the perspective of the
external audit team and management. This will allow the accountant to
identify areas of possible manipulation of the standards that may lead to
fraudulent activities.15
Normally, if management has not used any evidence to conceal

account schemes, the fraud might be detected by an auditor through
regular audit procedures. Therefore, the assertion that fraud occurred
without the use of evidence schemes is linked to evidence gathered by
regular audit procedures. However, if there is a risk that management has
used evidence schemes to conceal fraud, auditors should assess what spe-
cific evidence schemes could have been used. Therefore, the last level of
assertions is the occurrence of specific evidence schemes. Auditors should
perform special procedures to assess the risk of specific evidence schemes
being used. As mentioned previously, it should be noted that the special
audit procedures do not have to be new procedures, but those that are
designed and performed for the special purpose of examining whether the
audit evidence has been manipulated by management.
In recent years, the PCAOB has encouraged the Auditing Section of
the AAA to sponsor a series of literature syntheses on Financial Reporting
Fraud (FRF). These syntheses were aimed at compiling findings of aca-
demic studies on FRF and providing insights into their policy, practical
and educational implications for regulators, practitioners, and academics.
The first FRF synthesis was conducted by Hogan et al. (2008) and con-
cluded that the rationalization element of the fraud triangle has received
the least amount of attention in academic literature.16 The second syn-
thesis was conducted by Trompeter et al. (2013), which further advanced
the fraud triangle in the areas of antifraud measures and legal elements
of fraud, such as fraud schemes, concealment, and conversion.17 These
syntheses address all components of FRF by focusing on the capability
and compliance elements of the FRF model in further occurrences and
deterrence of fraud.
Forensic Accounting Fraud-related Cases

Throughout the twenty-first century, forensic accounting grew as an
industry, mostly because of the development of new technologies that
make committing fraud easier. There have been several prevalent cases
that have occurred during 2017 that were reported by the IRS, Big 4, and
the FBI. One example, provided by the Internal Revenue Service (IRS),
involves a man named Masud Sarshar, who stored millions of US dollars
in Israeli bank accounts. He had an account in Bank Lumei and two other
banks, which he connected to his business, Apparel Limited, Inc. He hid
23.5 million in these banks to avoid paying tax to the IRS by not disclos-
ing his income on his 2006 to 2012 tax returns.18
The FBI, situated in the United States, places high value on investi-
gating and solving white-collar crime. In the 2016 Fiscal Year, the FBI,
in its report on Health Care Fraud and Abuse Control Program, high-
lighted several cases that it solved using its Strike Force team. The first
case, Regent Management Services L.P., a nursing company, was receiving
kickbacks from several companies regarding ambulatory transportation
services. These kickbacks were given in trade for very prominent Medi-
care and Medicaid transportation referrals. The Strike Force (SF) found
out about this and charged Regent Management Services a fine total-
ing $2.7 million in 2015. As a resolution to this case, Regent had to
enter into a Corporate Integrity Agreement, a contract established by the
HHS-OIG, for 5 years. This is the first case in U.S. history in which any
medical company was held responsible for the kickbacks. Another case
took place in June 2016, in which the FBI SF team found that Irving
Holdings, one of the biggest taxicab firms in the United States, gave the
State of Texas government a false affidavit pertaining to 10 North Texas
business’ and individuals. The total payout was $1.1 million.19
Exhibit 5.1 summarizes many high-profile and profound fraud cases that
have happened in the past 20 years. The most notable is the Enron scandal,
which is the largest accounting scandal to date, amounting to $74 billion over
4 years. As a result, Congress established the PCAOB which resulted from
the SOX. Now the SEC has established new regulations regarding securities
and FSF. There were several cases that happened in 2007, including Qwest,
UBS, and Mc’Afee. Collectively, the companies were fined $69 million and
many CEOs were let go. Most of the cases in Exhibit 5.1 pertain to financial
statement or securities fraud, and as a result, disclosure of the cases to the
public is mandated by law. The effectiveness of SOX can be questioned as
a result of several of these high-profile crimes. The passed legislation, which
promised to reduce fraud, has not held true. The overall fraud rate has not
had a significant change since 2002. This is made evident by Exhibit 5.1,
which displays many damaging cases after the SOX era.
Exhibit 5.1
The Most Profound Fraud Cases
Fraud Description
Qwest • Insider Trading
communications • Year committed 2007
international • Sold more than $100 million in Qwest stock while in
possession of material nonpublic information regarding Qwest
financial health
• Ordered to pay fine $19 million, CEO was ordered to serve
6 years in prison
Adelphia • Accounting Financial Fraud
Communications • One of the most extensive frauds ever to take place in public
Corporation • Defrauded company’s shareholders and creditors out of
millions of dollars
• CEO and CFO were sentenced to 15 and 20 years in prison.
• Family of founder was forfeited in excess of $1.5 billion.
Enron • Largest accounting scandal in history.
• Many executives were charged with felonies and went to
prison.
• Counts included securities fraud, money laundering, making
false statements to banks, securities fraud, money laundering,
and so on.
• Shareholders lost $74 billion in the 4 years before the
company’s bankruptcy.
• Enron filed for bankruptcy on December 2, 2001 under
Chapter 11, with assets of $63.4 billion; it was the largest
corporate bankruptcy in U.S. history until WorldCom’s 2002
bankruptcy.
Reebok • Insider Trading
• Year committed 2006
• Massive insider trading scheme that resulted in more than
$6.7 million in illicit gains
• An associate at Goldman Sachs, an investment banking
analyst at Merrill Lynch and several other defendants were
convicted and pled guilty.
UBS • Insider Trading
• Year Committed 2007
• An executive director at UBS, a former in-house attorney at
Morgan Stanley devised and participated in a scheme that
provided them with $8 million of illegal profits.
• 8 of the 13 defendants have pled guilty.
(Continued )

Fraud Description
Mc’Afee Inc. • Securities Fraud
• Year committed 2007
• Company overstated its revenue and earnings.
• Company was ordered to pay $50 million in penalties.
TYCO • Undervaluing acquired assets, over acquired liabilities
international Ltd. • Year fraud was committed 2000–2004
• The proposed final judgment ordered TYCO to pay $11 in
disgorgement and a $50 million in civil penalty.
The French Bank • Société Générale is the 3rd largest Corporate and Investment
Société Générale bank in the Eurozone by net banking income and the 6th
largest French company by market capitalization
• On January 24, 2008, the bank announced that a single
futures trader at the bank had fraudulently lost the bank
4.9 billion euros (an equivalent of $7.2 billion), the largest
such loss in history.
• Junior Trader caused bank $7 billion in losses.
MADDOFF • Bernard L. Madoff conducted the largest Ponzi Scheme in the
history of Wall Street (Madoff Investment Securities LLC)
• Securities fraud, wire fraud, mail fraud, money laundering,
perjury, making false statements
• The amounts missing from clients’ accounts including
fabricated gains were $65 billion.
• He was sentenced to the maximum allowed 150 years in
prison, and was ordered to pay $18 billion in restitutions; his
family and he were fined $170 billion.
Hedge—Fund • Two hedge-fund managers, Paul Greenswood and Stephen
Fraud Walsh, misappropriated at least $553 million of investors’
money and used it to finance personal expenses.
• Alleged victims included famous names as Carnegie Mellon
that invested $49 million, and University of Pittsburg
$65 million.
• Iowa public employees’ retirement invested about 2% of its
portfolio or $339 million in the fund.
• Executive faced criminal charges including securities
charge.
HealthSouth • Former chairman and executive of the company Richard
Corporation Scrushy artificially inflated company’s earning for at least 6
years through an accounting scam.
• He was ordered to pay a staggering $2.88 billion in civil
charges.
• It is the largest financial penalty ever levered against a single
executive.
Fraud Description
Parmalat • Falsified accounting documents to show a bank account with
€3.95 billion to cover up losses and debts
• A fraud investigation was launched, and the company went
bankrupt.
• The CEO was charged with financial fraud and money
laundering and was sentenced to 10 years in prison.
Satyam • Made fake customer records in order to inflate revenue and
obtain fraudulent loans and advances
• Share prices plummeted, the chairman resigned, and the
company restated its financial records for the 2002–2008 period.
• The former chairman was charged with several offenses. The
SEC fined Satyam and its former auditor Price Waterhouse
Coopers’ Indian affiliates a total of $16 million after probing
the scandal.
Olympus • Inappropriately covered losses on its investment dating to the
1990s by using value-inflated acquisitions.
• Olympus’ share price fell by about 75% and investigations were
made into the company in the United States, Britain, and Japan.
• The company’s chairman and two former executives were
arrested in Tokyo and could serve jail term. Eight executives
will also take pay cuts of between 30% and 50%.
Iran’s largest case • This case resulted in the arrest of more than 50 suspects,
of bank fraud including some government officials.
• At least 39 defendants were charged with fraudulent criminal
activities, and four of them were sentenced to death.
Forensic Accounting Best Practices

Forensic accountants are typically well trained and educated to perform
risk and vulnerability assessment associated with global corruption, fraud,
allegations of financial misstatements and mismanagement, and antifraud
investigation and prevention. Best practices of forensic accounting suggest
that forensic accountants conduct full and extensive fact-finding and inves-
tigations in performing litigation consulting, expert witnessing, and anti-
corruption and fraud examination services. Forensic accountants’ hands-on
training, on-the-job experience, and application of best practices enable
them to assist their clients with forensic accounting services including
• Antifraud and anticorruption examination

• Corporate consulting and investigations
• Examination of allegations of corporate fraud or financial misstate-

ment and mismanagement
• Foreign Corrupt Practices Act investigation and consulting
• Investigation of whistle-blower allegations
• Cybersecurity assessment
• Responding to regulators’ inquiries and requests
• Troubleshooting and prevention and detection of problems before
they occur
In performing the above-mentioned services among others, forensic

accountants should sharpen their skills in the following:
• Identification of the elements of fraud, both civil and criminal

• Assessment of an organization environment and culture, including
governance, ethics, risk management, and antifraud policies and
procedures
• Identification of fraud schemes, their red flags, symptoms, and de-
tection techniques
• Application of a comprehensive and robust fraud risk assessment
methodology
• Evaluation of fraud risk and ways to mitigate this risk
• Assessment of the need for internal controls and fraud risk management
• Classification of the types of persons most likely to commit fraud
and their motivations and rationalization
• Assessment of the importance of managing fraud risk from in and
outside the business
• Definition of the roles and responsibilities of corporate gatekeepers
for detecting, deterring, and investigating fraud
• Identification of rules, regulations, and professional standards gov-
erning prevention and detection of Financial Reporting Fraud.
• Discussion of elements of Financial Reporting Fraud.
• Description of fraud triangle of incentives/pressure, opportunities
and rationalization
• Application of antifraud policies and best practices
• Identification of fraud schemes and scenarios relevant to numer-
ous industries, including banking, insurance, stock exchanges, and
government
• Discussion of professional standards pertaining to prevention and

detection of both employees’ and management fraud
• Performance of forensic accounting and investigative audit
procedures
• Encouragement of effectual “brainstorming sessions” discussing
fraud possibilities
• Identification of risk exposures and designing of remediation re-
sponses to fraud risk
• Performance of a fraud risk assessment
• Discussion of securities fraud and money laundering
Antifraud policies and programs should address corporate culture,

control structure, and fraud procedures.
1. Corporate culture—corporate culture should create an environment

that sets an appropriate tone at the top that promotes ethical behavior
and reinforces antifraud conduct, demanding “doing the right thing
always.” The corporate culture provides incentives for everyone in the
company, from directors to officers and employees, to act competently
and ethically.
2. Control environment—an effective control environment could re-
duce opportunities for individuals to engage in fraudulent activities.
Authoritative guidelines including Section 404 of SOX, SEC-related
implementation rules, and PCAOB auditing standards Nos. 2 and
5 emphasize the importance of effective internal controls in the pre-
vention and detection of FSF.
3. Antifraud procedures—adequate fraud-related procedures should
be developed and performed to ensure prevention and detection of
potential fraud.
Forensic Accounting Research

Forensic accounting research conducted by academic scholars and practi-
tioners are intended to promote and advance forensic accounting research
in all areas of forensic accounting services, including fraud examination,
valuations, litigation consulting, and expert witnessing. Exhibit 5.2 presents
a synopsis of forensic accounting published articles in the past two decades.
104
Exhibit 5.2
Forensic Accounting Research
Time Dependent Explanatory
Author(s) Data Source(s) Period Purpose Variables Variables Findings
Aksoy International Journal 2012 Using upper management Fraud in Executive manager Fraud is a significant
Tamer of Business and feedback to determine issues Turkey perspective issue in Turkey
Kahyaoglu Social Science and causes of fraud
Sezer
Albrecht, Steve Journal of Forensic 2004 Research connection Fraud Corporate executives, Stewardship theory
Albrecht, Conan Accounting between management agency theory, leads to higher fraud
Albrecht, Chad theories and FSF stewardship theory in comparison with
agency theory.
Asare, Wright Contemporary 2004 Risk assessments’ effect on Fraud Risk assessment, Fraud risk assessment
Accounting planning for fraud Planning program planning tools was not associated with
Research program effectiveness.
Brazel, Joseph Behavioral & 2012 Analysis of financial and Fraud Auditor’s reaction, Auditors do not
Jones, Keith Experimental nonfinancial measures in an detection analytical procedures, consider nonfinancial
Prawitt, Douglas Accounting audit nonfinancial measures measures.
Chidambaram Fordham Business 2010 To determine, through SEC Corporate CEO and Director Connections affect
NK Research Papers enforcement actions, the fraud connections fraud.
Kedia causes of corporate fraud
Simi
Prabhala
Nagpurnanand
Clements, Shawver Journal of Forensic 2017 Use the Rest model to Fraudulent Morals, Ethics, Whistle-blowing is
& Investigative determine where accountants Behavior Whistle-blowing affected by pressures.
Accounting will blow the whistle on Detection
fraudulent behavior
Dalnail, Journal of Advanced 2014 Link between statement Fraudulent FSF, financial ratios Debt to equity ratio is
Kamaluddin, Management analysis and reporting fraud Financial the highest predictor
Sanusi, Kahiruddin Science Reporting of fraud.
Donelson, Ege, American 1999–2016 Discover how much internal Financial Internal control Weak internal control
McInnis Accounting control affects fraud risk Reporting increases the risk for
Association, Fraud financial fraud.
Auditing: A journal
of practice and
theory, August 2017
Fairweather Journal of Forensic 2017 Using Benford’s law to detect Potential Benford’s law, No cost difference
William and Investigative and collect data related to Fraud Receiver Operating in investigating
Accounting fraud Characteristic curve fraudulent behavior vs.
(ROC) Curve not doing so
Fung Contemporary 2015 Use the Cumulative Prospect Fraudulent Incentives, prospect Fraud is higher among
Michael Accounting Theory to evaluate, detect, Financial theory high-risk losses and
Research and determine incentives for Reporting low-risk gains.
financial reporting fraud
Gonzalez, Kopp Journal of Forensic 2017 Examining personality traits Fraud Traits, dark triad Greed is the highest
& Investigative impact on fraud predictor of fraud.
Accounting
105
(Continued )

106
Griffin, Grundfest Stanford Law and 2002 Insider trading’s effect on Insider Fraud Insider selling Insider trading,
Economics fraud once known, has a
significant effect on
investors.
Grove, Hugh Journal of Forensic 2014 Use fraud models to improve Forensic Fraud models, ratios, Models were effective
Clouse, Mac & Investigative forensic analysis across Analysis warning signs of fraud
Accounting continents
Ham, Lang, Journal of 1986–2015 Analyze CFO narcissism’s Financial CEO narcissism Through lab analysis,
Seybert, Wang Accounting effect on financial reporting Reporting narcissism is directly
Research Quality related to financial
misreporting.
Huber, Dennis Research in 2013 To determine whether Forensic Regulations State-level legislation
Accounting regulation of the forensic accounting is best for regulation of
Regulation accounting profession is profession forensic accounting.
necessary
Kanapickiene, Rasa Procedia and 2015 Using financial ratios to Fraudulent Ratios, financial Profitability, liquidity,
Grundiene, Zivilie Elsevier detect fraudulent behavior behavior statements activity, and structural
ratios are the best ratios
used to detect fraud.
Karpoff, Lou Journal of Finance 2010 Short seller’s ability to detect Short selling Data Short sellers can
firm fraud fraud misrepresentation, identify fraud quickly.
short interest
Markelevich Contemporary 2013 To examine if the fees Fraudulent Audit fees, audit Higher non-audit(NA)
Ariel Accounting auditors charge are linked to firms engagements fees indicate higher
Rosner Research financial reporting fraud degrees of fraudulent
Rebecca behavior.
Mulig, Liz Journal of Forensic 2017 Using internal controls to Fraud Red flags Internal controls are
Prachyl, Cheryl & Investigative detect red flags needed to detect red
Accounting flags.
Rezaee Critical Perspectives 2005 Using the term “crime” to Financial CRIME (Cookies, Fraudulent behavior
Zabihollah on Accounting identify FSF Recipes, Incentives, damages investor
Monitoring, End confidence and
results) decreases investments.
Rezaee Descriptive 2002– 2016 Present a synthesis of Business Economic, governance, The goal of firm
Journal of research in business sustainability social, ethical, and value creation can
Accounting sustainability in the past environmental be achieved when
Literature, 2016 decade management creates
a shared value for all
stakeholders.
Rezaee, Hogan, American 2008 Academic Research’s effect FSF Academic research, SAS 99 is warranted,
Riley Jr., Velury Accounting on FSF incentives, pressures use of fraud detection
Association, tools are mixed, and
Auditing: A journal further exploration
of practice and theory, of fraud indicators is
November 2008 needed.
107
(Continued )

108
Skousen, Smith, SSRN 1997–2008 Show how the fraud triangle FSF Fraud Triangle and The fraud triangle has
Wright and SAS no.99 impact FSF SAS 99 a direct correlation
with FSF.
Wang, Chen, Chin, Journal of 2017 Investigate connection Fraudulent Managerial ability, Better management
Zheng Accounting and between political, business, reporting politics leads to less reporting
Public Policy and social drivers and fraud.
financial reporting fraud
Wuerges, Artur Corporate Law: Law 2011 Using logit models to Accounting Pressure, opportunity, SEC not fit to handle
Borba, Jose & Finance e-journal estimate the detection of fraud rationalization (fraud fraud on broad scale,
fraud triangle) increasing assets leads
to less fraud.
These published research studies cover theoretical, practical, and empiri-

cal aspects of forensic accounting. Many of these published articles provide
policy, practical, educational, and research implications and further our un-
derstanding of forensic accounting. Forensic accounting research summa-
rized in Exhibit 5.2 presents the journals, purposes, and research methods,
most commonly used variables constructed, and findings of these studies.
This is a synthesis and synopsis of high-profile studies in forensic account-
ing. Summarized articles suggest that fraud and quantitative methods make
up the higher portion of topics and research methods published in forensic
accounting journals.
In total, 25 articles from various journals were selected. Most of
the journals centered around business sustainability, financial reporting
fraud, and financial reporting quality. The consensus from the articles
selected is that internal control systems are needed to minimize finan-
cial fraud and maximize business sustainability. It is important to select
a few articles from the exhibit to explain this reasoning. The American
Accounting Association’s Journal of Auditing published an article in Au-
gust 2017 that discussed the impact of internal control on the fraud risk
equation. The conclusion from the study was that weak internal controls
led to an increase in financial reporting fraud. To reduce financial report-
ing fraud, the authors state that a high-quality internal control system is
needed. This would allow the company to detect, prevent, and correct
any potential or committed fraudulent behavior. Another document, re-
leased by the Journal of Accounting Research, investigated a CEO’s relative
narcissism and its impact on financial reporting. The authors found that
narcissism affects financial reporting.
Two Earnest Young surveys (2014, 2016) report the trends toward
the use of information technology (IT) in general and Big Data/analytics
in particular in forensic accounting practices. First, there is an increas-
ing use of forensic data analytics. Second, cyber breaches (illicit trans-
ferring of funds, disrupting critical operations, or stealing intellectual
property/confidential personal data and other critical digital assets) and
insider threats (malicious insiders stealing, manipulating, or destroying
data, fraud, IP theft, unauthorized trading, espionage or IT sabotage)
are emerging as the fastest growing fraud risks faced by forensic account-
ants. Forensic accountants increasingly use Big Data (analytics) in their
practices to deal with the datasets exceeding the typical constrains of a

traditional spreadsheet.20 As traditional rules-based relational database
techniques, such as matching, sorting, filtering, and query design, often
result in false positives or missed fraud detection opportunities, forensic
accountants nowadays incorporate data visualization, predictive analytics,
behavior analytics, content analytics, social network analysis, geospatial
analytics, and numerous advanced antifraud techniques.21
Forensic accounting education and practice have gained attention
from research scholars. One survey examined both academics and prac-
titioners in the United States and provided evidence of the importance
of forensic accounting education and practice and its integration into
the business curriculum.22 Another survey examined the update avail-
ability of forensic accounting education in the United States and other
English-speaking countries and found that in the United States, there are
422 universities and colleges offering forensic accounting courses, with
97 of them providing forensic accounting programs; while in Canada
and other English-speaking countries, there are 25 universities and col-
leges offering forensic accounting courses, with 23 forensic accounting
programs among 186 Canadian and other English-speaking universities
and colleges.23
Several academic studies promote integration of forensic accounting
into the business curriculum. For example, a recent research examined
availability of forensic accounting education in the Western countries in-
cluding the United States and found that in the United States, there are
422 universities and colleges offering forensic accounting courses, with 97
of them providing forensic accounting programs.24 There are 25 universi-
ties and colleges offering forensic accounting courses, with 23 forensic
accounting programs in Canada and other English-speaking countries.25
There is a lack of diversity in forensic accounting research topics
and methods, with the keen focus on fraud and FSF and fraud inves-
tigation, with less emphasis on other topics of forensic accounting such
as expert witnessing and litigation consulting. Many of the published
articles identify gaps between practice and research in forensic account-
ing and encourage research in emerging topics using diverse methods
that contribute to the literature and are valuable to forensic account-
ants. The emerging research topics in forensic accounting are, but not
limited to, cybersecurity attacks and threats, financial misstatement and

mismanagement, bankruptcy and insolvency, valuations and fair value
estimation, economic damage calculations, digital forensic and com-
puter forensic techniques, financial reporting fraud and securities fraud,
the role of gatekeepers in preventing and detecting FSF, antibribery and
anti-money laundering, government inquiries and foreign corrupt prac-
tices, insurance and personal injury claims, and the use of Big Data and
Data Analytics in forensic accounting.
Forensic Accounting Education

Forensic accounting is an exciting field that started in the business world.
Playing catch-up, educational institutions are trying to implement classes
to fill the demand for educated professionals. Although it is becoming
increasingly more popular in the field of education, there is still a lack of
standardized forms of education and skillset taught across the board. The
greatest obstacle in offering a more comprehensive forensic curriculum
is the perception of a lack of room for it. Electives within accounting
degrees are becoming fewer and fewer, so offering more forensic classes
would take away from other required courses. However, fraud is discov-
ered mostly from internal sources, so students need to be aware of the
red flags of various fraud schemes if they are going to be working for a
company. This shows a need for all students to take forensic accounting
classes, not just future auditors.
Forensic accountants are regarded as experts in deterring, preventing,
and detecting FRF by researching for at least one irregular transaction or
event that may lead to a big financial scandal and fraud. Skills required for
being effective and successful forensic accountants are enormous, includ-
ing being team-oriented, having the ability to analyze problems and com-
plex situations, having adequate computer skills, possessing interpersonal
and communication skills, being creative and skeptical, and finally hav-
ing a keen curiosity and being persistent. A keen curiosity is needed to
keep forensic accountants on their toes and forcing them to look for red
flags, irregularities, and symptoms of fraud. Persistency is needed to con-
duct thorough investigation of connecting the dots. Forensic account-
ants should possess a working knowledge of accounting, the legal system,
112
Exhibit 5.3
Forensic Accounting Education
Course Course
Course Description Course Objective Requirements Prerequisites Text Book Assignments University
An examination of various Acquire a broad Advance ACCT 5112, N/A 1. Group assignment U of Arkansas
aspects of fraud prevention overview of the preparation ACCT 5122, and individual
and detection, including the nature and magnitude (reading and ISYS 3333 assignment
sociology of fraud, elements of of the problem of assignments)
fraud, types of fraud involving economic fraud. completed
accounting information, costs
of fraud, use of controls to
prevent fraud, and methods of
fraud detection
2. Internet readings,
Practitioner
journal readings
3. Academic research
journal readings
Accounting concern with 1. Education on 1. First principles 1. IRS Financial 1. Written North Dakota
detection and prevention of pervasiveness of of accounting Investigations: assignment State
fraud and white-collar crime. and the causes of courses A Financial
fraud and white- Approach to
collar crime. Detecting and
Resolving Crimes
2. Explore methods 2. Basic 2. Albrecht, et al. 2. Interview paper
of fraud detection, computer Fraud: Bringing
investigation, and proficiency Light to the
prevention. Dark Side of
Business (Irwin
Professional
Publishing 1995)
3. Chapter 6 of 3. Project
IRS book
1. Cover all of the major Wells, Joseph T., U of Texas at
methods employees use to Occupational Fraud Austin
commit occupational fraud and Abuse (Obsidian
Publishing Company,
Inc. 1997).
2. Student will learn why
fraud is committed, how it
will be deterred, and how
it will be investigated.
Include both litigation
support and fraud issues.
Provide students 1. Active Handouts Indiana U
an opportunity to participation
gain experience and discussion
in investigative 2. Good
(forensic) accounting. communication
skills
3. Testify in court
113
4. Role-playing
(Continued )

114
Course Course
Course Description Course Objective Requirements Prerequisites Text Book Assignments University
General survey reviewing Know the following Manning, 1. Text book reading Canyon
both the nature and scope of concepts: George A. (2000) 2. Research paper College
white-collar criminal activity The Economics of Financial
in the United States Crime Investigation
Financial Crime and Forensic
Expenditure Theory Accounting. Boca
Illicit Offshore Raton, Florida:
Activities CRC Press. ISBN
Net Worth Analysis #: 0849304350
Expenditure Theory
Organized Crime
Sources of
Information
Accounting and
Audit Techniques
Money Laundering
1. Increase fraud Robertson, J.C., 1. Reading of DePaul U
awareness. Fraud Examination textbook
2. Learn aspects of for Managers and 2. Discussion
fraud detection. Auditors (FEMA) 3. Paper
(Austin: Association
of Certified Fraud
Examiners)
3. Obtain insight on
fraud prevention
and identify
weaknesses in
internal control
systems.
Wells, Joseph T.,
Occupational Fraud
and Abuse (OFA)
(Austin: Obsidian
Publishing
Company)
1. Study and application 1. Understand the ACC 311 Occupational 1. Topic paper California
of the procedures and role of accountant Fraud and 2. Project State
techniques used in the in prevention, Abuse—Wells Polytechnic U
prevention, investigation, detection, and (1997)
and detection of fraud and investigation of Financial
white-collar crime. fraud. Shenanigans—
2. Study of social, ethical, legal, 2. The motivation Schilit (2002)
and political considerations for perpetrators of Selected Articles
that surround fraud fraud Provided by
3. The warning Instructor
signs of fraudulent
activity
115

criminology, and investigative techniques; they should also be detail

oriented and organized; they should think critically and have excellent
communication skills.
Effective antifraud policies and programs should be designed to pre-
vent and detect fraud. Antifraud programs should deter, prevent, and de-
tect all variations of fraud, from misrepresenting financial information
to misappropriating assets and employee fraud. Effective antifraud pro-
grams should also address the antifraud role of corporate governance par-
ticipants. Entities of all sizes and types are susceptible to both employee
fraud (e.g., misappropriate of assets, theft, embezzlement) and manage-
ment fraud (e.g., earnings management, FSF, manipulation of financial
reports). Effective antifraud programs—focusing on fraud awareness and
education in the workplace environment, whistle-blowing policies and
procedures of encouraging and protecting employees to report suspicious
behavior, adequate internal control procedures designed to prevent and
detect fraud and conduct surprise audits—can significantly reduce fraud.
The demand for and interest in forensic accounting, ethics, and corpor-
ate governance and antifraud practice and education has significantly
increased in the post-SOX era. Forensic accounting, ethics, and corpor-
ate governance have made significant improvements in the past two dec-
ades—yet, many have expressed concern over the corporate governance,
ethics, and forensic accounting education, as well as the training provided
in an effective antifraud program.
Forensic accountants are regarded as experts in deterring, preventing,
and detecting FRF by researching for at least one irregular transaction
or event that may lead to a big financial scandal and fraud. This one
transaction or event is typically referred as a “tip of the iceberg,” which
encourages forensic accountants to acquire specialized knowledge, skills,
education, and experience in identifying and evaluating this entire threat-
ening iceberg (fraud). Exhibit 5.3 presents forensic accounting education
in training the most competent and ethical forensic accountants possess-
ing skills. Exhibit 5.3 describes forensic accounting course description,
objectives, requirements, prerequisites, and course assignments and uni-
versities that offer these courses.
Many universities worldwide are now offering forensic accounting
education; the courses cover important topics relevant to the three areas
of forensic accounting practice of litigation consulting, expert witness-

ing, and fraud examination. Colleges and universities must do their
part by encouraging business, criminology, and law faculty to carry out
much-needed research in this important area and teach courses in fraud
and forensic accounting. Behavioral sciences—psychology, sociology,
criminology, and anthropology—are needed to support the interdisci-
plinary field of fraud examination and forensic accounting in theory
development and in practice, and in fraud prevention, deterrence, and
detection.26 A survey of forensic accounting education finds that the
(1) demand for and interest in forensic accounting education continue
to increase: (2) more universities are offering forensic accounting courses;
(3) forensic accounting education is beneficial and relevant to account-
ing and business students, the accounting profession, and business com-
munities; and (4) there are many of forensic accounting education topics
and universities chose among topics those that best fit their programs.27
Some universities worldwide are now offering forensic accounting
courses at either undergraduate or graduate levels to train most competent,
ethical, and professional future forensic accountants. Exhibit 5.4 presents
forensic accounting course offerings at undergraduate and graduate lev-
els, course title, and universities that offer forensic accounting courses
and programs and their URL addresses. Forensic accounting certificate
programs typically require several specialized courses in accounting, au-
diting, business, IT, psychology, law, and criminology. A few schools,
such as Georgia Southern University, Florida Atlantic University, the
University of West Florida, Carlow University and Edinboro University
in Pennsylvania, Franklin University and Tiffin University in Ohio, Rider
University in New Jersey, the University of Wollongong in Australia, and
Villa Julie College in Maryland, have created separate forensic account-
ing undergraduate or graduate degree programs. These degree programs
offer several fraud and nonfraud specific courses as either minor or major
in forensic accounting at the undergraduate or graduate level.
An important issue is the methods of integrating forensic accounting
into the business and accounting curriculum. Two suggested methods of
covering forensic accounting education are (1) integration of forensic ac-
counting through accounting and auditing courses and (2) offering of a
stand-alone forensic accounting course.28 The rationale for the first method
118
Exhibit 5.4
Forensic Accounting Course Offerings
Level Title University URL Address
Graduate AC 534 Fraud Risk Management U of Alabama http://www.cba.ua.edu/accounting/courses.html
Graduate ACCT 5433 Fraud Prevention and U of Arkansas http://www.uark.edu/depts/acctinfo/course/5433/F02syll.htm
Detection
Undergraduate 4950 Financial Fraud: Investigation California State U - Hayward http://www.csuhayward.edu/ecat/20012002/u-buad
and Detection (4) .html#section11
Undergraduate/ -ACTG 4520 Fraud Accounting U of Denver http://www.daniels.du.edu/accountancy/graduatecourselisting
Graduate -ACTG 3351 .asp?offset=0#
Undergraduate/ - 4235 Fraud Auditing and Forensic Louisiana State U http://www.bus.lsu.edu/accounting/courses.html
Graduate Accounting (3).
- 7235 Fraud Auditing (3).
Undergraduate ACC 430 Forensic Accounting and Hilbert College http://www.hilbert.edu/stage2/catalog/course_catalog.asp
Auditing
Undergraduate/ ACCT 410/ North Dakota State U http://www.ndsu.nodak.edu/ndsu/buckhoff/WebCourse/syllabus
Graduate 610 Fraud Examination .htm
Graduate ACCT 655 - FRAUD DETECTION: Widener U http://muse.widener.edu/SBA/
INVESTIGATION AND
PREVENTION
Undergraduate ACC 383 K.4 Fraud Examination U of Texas at Austin http://www.bus.utexas.edu/dept/accounting/syllabi/2003spring/
383k4-wells.doc
Graduate ACC 635 Fraud Audit Brigham Young U http://marriottschool.byu.edu/soais/courses/accounting.cfm
Undergraduate ACCT 461. Fraud Examination Central Washington U http://www.cwu.edu/~linnellg/catalog/02_pages47-68.html#acct
Graduate A 572 Indiana University http://www.iub.edu/~aisdept/busa572/heitger/index.htm
Undergraduate CJ455 - Overview of White Collar Canyon College http://www.canyoncollege.edu/cc/crim~jus/syllabus/cj455.htm
Crime
Undergraduate AC603 Fraud Auditing and Forensic Georgian Court College
Accounting
Undergraduate ACC 499 California State Polytechnic U http://www.csupomona.edu/~vspeden/SYL499SP02.doc
Graduate ACC 798 DePaul U http://fac.comtech.depaul.edu/accysyllabi/fall02/Clayton%20
ACC%20798%20syllabus%202002.doc
Graduate GSM 653y Willamette U http://www.willamette.edu/agsm/prospectus/elec3.html
Graduate ACC 5331 Baylor U http://business.baylor.edu/acc/default.aspx?pageID=95
Undergraduate ACCTG 4383 -- Fraud Auditing U of Central Oklahoma http://www.registrar.ucok.edu/cats/ACCTG.html
119

of infusing forensic accounting education into the accounting curricu-

lum throughout existing accounting and auditing courses is that all three
fields of forensic accounting (litigation consulting, expert witnessing,
and fraud examination) can shape all aspects of today’s business. Forensic
accounting topics can be integrated into existing upper-level accounting
and auditing courses to ensure coverage of all critical aspects of forensic
accounting. Most of the impediments to this integrated a pproach relate
to the fact that adding forensic accounting to existing accounting and
auditing courses may not be feasible and that faculty and students may
not feel comfortable in covering additional forensic accounting t opics to
their courses.
The second approach is to offer a stand-alone course in forensic ac-
counting at either the undergraduate or graduate level. Offering a sep-
arate forensic accounting can give the opportunity to accounting and
business programs to tailor forensic accounting education to their own
interest, specialization, and needs. The major impediments to offering a
separate forensic accounting course are lack of administrative support and
faculty interest and financial resources.
The topical coverage of forensic accounting education is i mportant
regardless of the method of delivery of forensic accounting (integra-
tion, separate course). The convergence of forensic accounting topics
in a separate course or the integration of those topics into upper-level
courses requires the classification of interrelated topics into smaller
subsets or modules. These modules can be used individually or in
groups to allow instructors to customize their forensic account-
ing syllabi. Forensic accounting topics can be arranged into several
modules. The first module can consist of fundamental forensic ac-
counting topics such as forensic accounting principles, standards,
services, fundamentals of fraud investigation and so on. The second
module can cover types of fraud, FSF, fraud prevention and deter-
rence programs, antifraud auditing standards, effective report writing,
and environmental and business red flags. The next module can focus
on corporate governance, fraud deference, prevention and detection
policies and procedures, financial reporting process and analysis,
earnings management, criminology and white-collar and economic
crimes, occupational fraud, security and privacy, cybersecurity, and

legal elements of fraud.
Another module can present careers in forensic accounting, litigation
consulting techniques, shareholder litigation, crime control techniques,
expert testimony and expert witness techniques, conflicts of interest in-
vestigating techniques, compliance with applicable laws and regulation,
business valuations and cost estimates, and rules of evidence, interview
skills and legal aspects of interviews, intellectual property fraud, cyber-
attacks, and cyber fraud. The following modules for forensic account-
ing education are suggested: (1) forensic accounting theories, principles,
tools, and techniques; (2) forensic accounting standards and proce-
dures; (3) financial reporting process; (4) fraud and fraud examination;
(5) investigation and law; (6) evidence-gathering procedures and analy-
sis; (7) litigation consulting; and (8) expert witness.
Universities based on the available resources, including faculty,
database, and facilities, can decide to offer a forensic accounting
course at either undergraduate or graduate level or both. R egardless
of infusion of forensic accounting education into several businesses
and accounting courses, offering of a stand-alone forensic accounting
course at either graduate or undergraduate level, relevant forensic
accounting topics should be classified into manageable modules.
Each module should cover at least 10 topics and can be arranged
on the basis of the classifications of forensic accounting services
(expert witnessing, litigation consulting, and fraud investigation)
or expertise and knowledge requirements (soft skills, technical
education, analytical skills). The coverage of forensic accounting
topics in a separate course, or the integration of them into business
and accounting courses, requires the classification of related topics
into teaching modules. The use of the module approach to forensic
accounting enables instructors to customize their syllabus by pro-
moting critical thinking, skepticism, and the flexibility to cover all or
selected modules in their courses. Exhibit 5.5 presents many forensic
accounting topics, which are classified into the three categories of
general, fraud-related, and non-fraud-related that can be included in
teaching modules.
122
Exhibit 5.5
Forensic Accounting Topics
General Fraud Related Nonfraud Related
Accounting information systems Aggressive financial reporting Admissibility of expert opinions
Accounting Lyceum Audit committees Antitrust
Analytical review and procedures Audit quality, effectiveness, and failures Bankruptcy
Bribery and corruption investigation Billing schemes Business valuations
Business interruption Check tampering Cost estimates
Civil and criminal procedures Common fraud schemes Concepts and tools of judicial procedures
Compliance with applicable laws and Cyber fraud Conflicts of interest investigating techniques
regulations Cooking the books Conversion investigative methods
Concealment investigative methods Civil and criminal fraud statutes Knowledge of the legal system
Conducting internal investigations Concealing fraud in accounting Litigation consulting techniques
Corporate abuse Detecting management and employee fraud Loss prevention investigation
Corporate governance Earnings management Loss prevention programs
Criminology and white-collar and economic Economic impacts of white-collar crimes Manipulation of related party transactions
crimes The Enron and other related cases Marital Dissolution
Crime control techniques Financial reporting process and analysis Modeling and discounting future damages
Document collection and analysis Financial reporting standards and principles Money laundering
Effective report writing FSF Occupational fraud
Elements of fraud, pressure, opportunity, and Finding assets and people Rules of evidence
rationalization Fraud auditing methodology Security and privacy
Environmental and business red flags Fraud detection and deterrence programs Resolution of allegations of misconduct
Environmental and personal red flags Fraud perpetrators and their motivations Rules of evidence
Expert witness and expert testimony Fraud prevention and fraud policies Skills required of the forensic accountant
techniques Fraud schemes Special-purpose Entities
Federal Rules of Evidence Fraud statistics Statistical sampling
Forensic accounting practices Fraud symptoms Tax consequences
Interrogation Fraud symptoms and computer-aided fraud auditing Techniques in locating hidden assets
Interview principles and methods to evaluate techniques The justice system
deception Fundamentals of fraud Trial and cross-examination
Interview skills and legal aspects of interviews Hidden assets Valuation Services
Overview of ethics Improper Revenue Recognition White-collar crime
Phases of forensic accounting Insider information and corporate disclosures
Principles of ethics and corporate code of Intellectual Property Fraud
conduct Internal control evaluation
Professional liability Inventory and asset theft
Professional standards pertaining to forensic Lapping
accounting Legal elements of fraud
On-book and off-book accounting and FSF
Investigation of financial crimes and legal elements
Kiting
Overview of fraud auditing and fraud investigation
Overview of the legal elements of fraud
Payroll and expense reimbursement
Red flags
Regulations of the accounting profession
Resolution of allegations of misconduct
Theft and skimming
Theory of fraud examination and prevention
123

Conclusion
Forensic accountants should possess education, knowledge, experience,
and expertise in accounting, auditing, business, finance, law, psychology,
and criminology. This chapter presents the structure of the legal system
relevant to forensic accounting practice as well as forensic accounting ed-
ucation and research. Business colleges and accounting programs should
integrate forensic accounting education into the business and account-
ing curricula for preparing and training future generations of forensic
accountants who are competent and ethical in conducting fraud and
nonfraud examination. Future research should also explore new methods,
technology, and advances in forensic accounting practices.
Action Items
1. Understand the structure of the legal system.
2. Apply forensic accounting research and education in practicing for-
ensic accounting.
3. Participate in forensic accounting courses and programs to meet pro-
fessional continuing education requirements.
4. Conduct research on fraud and nonfraud forensic accounting issues
that provide policy, educational, and practical implications.
Endnotes
1. Stoel Rives LLP. 2012. How Does a Lawsuit Work? Basic Steps in the
Civil Litigation Process. https://www.stoel.com/how-does-a-lawsuit-
work-basic-steps-in, (accessed December 7, 2017).
2. UScourts. 2018. Federal Court Management Statistics. http://www
.uscourts.gov/statistics/table/na/federal-court-management-
statistics/2018/03/31-1
3. Ibid.
4. Ibid.
5. American Bar Association. 2017. Discovery. https://www.american-
bar.org/groups/public_education/resources/law_related_education_
network/how_courts_work/discovery.html
6. American Bar Association. 2017. How Courts Work: Steps in a Trial.

https://www.americanbar.org/groups/public_education/resources/
law_related_education_network/how_courts_work/steps_in_a_
trial2.html
7. Ibid.
8. D. Radunz. 2017. Alternatives to Litigation. http://www.radunzlaw
.com/alternatives-to-litigation/
9. Department of Justice. 2017. Alternative Dispute Resolution at the
Department of Justice. https://www.justice.gov/olp/alternative-dispute-
resolution-department-justice
10. Ibid.
11. Department of Justice. 2016. United States Attorneys’ Annual Statistical
Report. https://www.justice.gov/usao/page/file/988896/download
12. American Institute of certified Accountants (AICPA). October,
2002. Statement on Auditing Standards No. 99: Consideration of
Fraud in a Financial Statement Audit. Available at https://www.aicpa
.org/Research/Standards/AuditAttest/DownloadableDocuments/
AU-00316.pdf
13. Ibid.
14. IFAC. December 15, 2009. International Standard on Auditing 240.
http://www.ifac.org/system/files/downloads/a012-2010-iaasb-
handbook-isa-240.pdf
15. PCAOB. February 22, 2007. Panel Discussion – Forensic Audit Pro-
cedures. https://pcaobus.org/News/Events/Documents/02222007_
SAGMeeting/Forensic_Audit_Procedures.pdf
16. C.E. Hogan, Z. Rezaee, R.A. Riley, and U.K. Velury. 2008. “Finan-
cial Statement Fraud: Insights from the Academic Literature,” Audit-
ing: A Journal of Practice & Theory 27, no. 2, pp. 231–252.
17. G.M. Trompeter, T.D. Carpenter, N. Desai, K.L. Jones, and R.A. Riley.
2013. “A Synthesis of Fraud-related Research,” Auditing: A Journal of
Practice and Theory 32(sup.1): 287–321.
18. Internal Revenue Service. 2018. Examples of International Investiga-
tions—Fiscal Year 2017. https://www.irs.gov/compliance/criminal-
investigation/examples-of-international-investigations-fiscal-year-2017,
(accessed October 31, 2017).
19. HHS. January, 2016. Health Care Fraud and Abuse Control Program
Annual Report for Fiscal Year 2016. https://oig.hhs.gov/publications/
docs/hcfac/FY2016-hcfac.pdf, (accessed November 21, 2017).
20. Ernst and Young (EY). 2014. Global Forensic Data Analytics
Survey 2014. http://www.ey.com/GL/en/Services/Assurance/Fraud-
Investigation---Dispute-Services/EY-Global-Forensic-Data-Analyt-
ics-Survey-2014, (accessed March 14, 2018)
21. Ibid.
22. Z. Rezaee, D.L. Crumbley, and R.C. Elmore. 2004. “Forensic Ac-
counting Education: A Survey of Academicians and Practitioners,”
Advances in Accounting Education 6, pp. 193–231.
23. M. Seda, and B.K. Peterson Kramer. 2014. “An Examination of the
Availability and Composition of Forensic Accounting Education in
the United States and Other Countries,” Journal of Forensic & Inves-
tigative Accounting 6, no. 1, pp. 1–46.
24. Ibid.
25. Ibid.
26. S. Ramamoorti. 2008. “The Psychology and Sociology of Fraud:
Integrating the Behavioral Sciences Component into Fraud and
Forensic Accounting Curricula,” Issues in Accounting Education. http://
proquest.umi.com.proxy1.ncu.edu/pqdweb?did=1613190661&sid=6
&Fmt=4&clientId=52110&RQT=309&VName=PQD, (accessed
September 22, 2010).
27. Rezaee, Crumbley, and Elmore. 2004.
28. Ibid.
About the Author
Dr. Zabihollah (Zabi) Rezaee, PhD,
CPA, CMA, CIA, CFE, CGFM, CSOXP,
CGOVP, CGRCP, CGMA, and CRMA is
the Thompson-Hill Chair of Excellence,
PhD coordinator and professor of accoun-
tancy at the University of Memphis and
has served a two-year term on the Stand-
ing Advisory Group (SAG) of the Public
Company Accounting Oversight Board
(PCAOB). He received his BS degree from the Iranian Institute of Advanced
Accounting, his MBA from Tarleton State University in Texas, and his PhD
from the University of Mississippi. He holds 10 certifications, including
Certified Public Accountant (CPA), Certified Fraud Examiner (CFE), Cer-
tified Management Accountant (CMA), Certified Internal Auditor (CIA),
Certified Government Financial Manager (CGFM), Certified Sarbanes-
Oxley Professional (CSOXP), Certified Corporate Governance Professional
(CGOVP), Certified Governance Risk Compliance Professional (CGRCP),
Chartered Global Management Accountant (CGMA), and Certified Risk
Management Assurance (CRMA). He served as the 2012–2014 secretary of
the Forensic Accounting (FIA) Section of the American Accounting Asso-
ciation (AAA) and is currently serving on Auditing Standards Committee
of the Auditing Section of the AAA. He was one of the finalists for the pos-
ition of the Faculty Trustee at the University of Memphis in 2016 and the
Ombudsperson position in 2017. He is the incoming editor of the Journal
of Forensic Accounting Research of the AAA (2019–2020). He has served as
expert witness and testified in federal courts.
Rezaee has published over 220 articles, made more than 230 presenta-
tions, and has written 11 book chapters. He has also published 12 books:
Financial Institutions, Valuations, Mergers, and Acquisitions: The Fair Value
Approach; Financial Statement Fraud: Prevention and Detection; U.S. Mas-
ter Auditing Guide 3rd edition; Audit Committee Oversight Effectiveness
128 ABOUT THE AUTHOR
Post-Sarbanes-Oxley Act; Corporate Governance Post-Sarbanes-Oxley: Regu-

lations, Requirements, and Integrated Processes; Corporate Governance and
Business Ethics and Financial Services Firms: Governance, regulations, Valu-
ations, Mergers and Acquisitions, and contributed to several other books.
His two recent books on Corporate Sustainability: Integrating Performance
and Reporting, published in November 2012, won the 2013 Axiom Gold
Award in the category of Business Ethics and Business Sustainability: Per-
formance, Compliance, Accountability, and Integrated Reporting was pub-
lished in October 2015 by Greenleaf Publishing. The book on Audit
Committee Effectiveness was published in three volumes by Business Expert
Press in July 2016. His most recent books are on Corporate Governance in
the Aftermath of the Global Financial Crisis, in four volumes, published by
Business Expert Press in March 2018 and Business Sustainability in Asia,
published by John Wiley and Sons in March 2019. Several of these books
are translated into other languages including Chinese, Persian, Korean,
and Spanish.
Index
Accounting and Auditing Certified Fraud Examiner (CFE), 3,
Enforcement Release (AAER), 48, 58
81–82 Certified Government Financial
sample of, 82–85 Managers (CGFM), 48
Adelphia Communications Certified Internal Auditor (CIA),
Corporation, 99 48, 59
Alternative Dispute Resolution Certified management accountants
(ADRs), 94–95 (CMA), 48
American Accounting Association Certified public accountants
(AAA), 3, 43, 46, 68 (CPAs), 20
operating manual, 38–39 Chartered accountants (CA), 48
American Board of Forensic Chartered Professional Accountants
Accounting, 68 (CFA), 68
American Institute of Certified Circle of Conflict, 33
Public Accountants (AICPA), Civil litigation processes, 92
33, 44, 45 alternatives to litigation, 94–95
Board of Examiners, 57 appeal, 94
Code of Professional Conduct, 61, 67 discovery, 93
nonauthoritative guidelines, 68–69 pleadings, 92
American Therapeutic trial, 93–94
Corporation, 16 Code of ethics, for forensic
Analytical skill sets, 34–36 accountant, 69–73
Antifraud procedures, 103 Committee of Sponsoring
Antifraud programs, 116 Organizations (COSO), 5, 32
Appeal, 94 Confidential Information
Association of Certified Fraud Memorandum (CIM), 32
Examiners (ACFE), 3, 61 Continuing professional education
Association of Chartered Certified (CPE), 59–60
Forensic Accountants. See related literature, 60
International Institute Control environment, 103
of Certified Forensic Conventional accounting, 18
Accountants Corporate culture, 103
AU-C Section 240, 68 Corporate Integrity Agreement, 98
Auditing and Attestation (AUD), 57, 58 Court systems, 66
Criminal proceedings, 95
Behavioral sciences, 117 Criminalistics, 21
Big Data, 35, 109. See also Analytical Cross-examination, 93–94
skill sets
Business Environment and Concepts Data analytics. See Analytical skill sets
(BEC), 57, 58 Daubert vs. Merrell Dow
Business valuation, 30–31 Pharmaceuticals, Inc., 28–29
130 INDEX
Deloitte, 7 Forensic accounting

Department of Justice (DoJ), 61, 73 guidelines and standards
Department of Labor (DOL), 61 action items, 87
Digital forensics. See Analytical conclusion, 87
skill sets introduction, 65–66
Digital forensics, 21 regulations relevant to, 73–86
Direct examination, 93 standards and authoritative
Discovery, 93 guidance for, 66–73
Dispute resolution, 33 introduction, 1–2
Divorce litigation, 31 by accounting firms, 8–14
Dodd-Frank Act (DFA). See also action items, 22
Financial Reform and books, 4–5
Consumer Protection Act of careers, 6–7
2010 conclusion, 21–22
provisions of, 79–80 with conversional accounting and
Drug offenses, 95 auditing, 17–21
Due care principle, 67 definition of, 2–5
status of, 5–17
Economic damage, 31–32 modules for, 121
Enron, 99 practices, and education and
Enterprise Risk Management research
(ERM), 32 action items, 124
Ernst & Young (EY), 7, 35 best practices, 101–103
Ethics, 69 conclusion, 124
Expert witnesses, 28 education, 111–123
court cases, 29 fraud-related cases, 97–101
External auditing, 19 fraud standards and practices,
95–97
FAR (Financial Accounting and introduction, 91
Reporting), 57, 58 research, 103–111
Federal Bureau of Investigation structure of legal system, 91–95
(FBI), 15 profession
Federal courts, 67 action items, 62–63
Federal, state, and local taxing conclusion, 62
authorities, 61 initiatives to promote, 44–47
Financial Accounting Standards Board introduction, 43
(FASB), 20 professional certifications in,
Financial Forensics Institute (FFI), 48–62
44, 47 services and skills, 26–27
Financial Reform and Consumer action items, 40
Protection Act of 2010, business valuation, 30–31
78–80 conclusion, 39–40
Financial Reporting Fraud (FRF), 97 dispute resolution, 33
Financial Statement Fraud (FSF), expert testimony and witnesses,
2, 95 28–29
timeline for, 86 forensic risk assessment and
Foreign Corrupt Practices Act management, 32
(FCPA), 73 fraud investigation, 29–30
INDEX
131
introduction, 25 International Association of

litigation and expert consulting, Consultants Valuators and
27–28 Analysis (IACVA), 46
other nonfraud forensic International Forensic Accounting
accounting services, 31–32 Association (IFAA),
skill sets of, 33–39 44, 46, 68
topics, 122–123 International Institute of Certified
Forensic Accounting: Litigation Forensic Accountants
Support and Expert (IICFA), 45, 68
Witnessing, 34 International Standard on Auditing
Forensic and investigative (ISA) No. 240 entitled,
accounting, 17 95, 96
Fraud International Trends in Forensic and
definition of, 3 Valuations Services, 35
forensic accounting, 19 Investigative and Forensic Accounting
forensic and investigation (IFA), 69
practices, 19
investigation, 29–30 Journal of Accounting Research, 109
Magazine CPE Service, 60 Journal of Auditing, 109
risk factors, 96
Fraud Examination and Computer KPMG, 7
Forensics and IT Auditing, 34 The Kumho Tire Co. vs. Carmichael
Fraudulent financial reporting decision. Daubert vs.
(FSF), 31 Merrell, 29
The French Bank Societe
Generale, 100 Legal system, structure of, 91–92
civil litigation processes, 92
Global business, 32 alternatives to litigation, 94–95
Government Accountability Office appeal, 94
(GAO), 61 discovery, 93
pleadings, 92
Health Care Fraud and Abuse Control trial, 93–94
Program, 98 criminal proceedings, 95
HealthSouth Corporation, 100 Litigation consultants, 27
Hedge–Fund Fraud, 100 AICPA guidelines on, 28
House Financial Services Committee
Chairman Barney Frank MADDOFF, 100
(D-MA), 79 MC’Afee Inc., 100
Mediator, 33
Information technology (IT). See Mergers and acquisitions
Analytical skill sets (M&A), 32
Institute for Fraud Prevention Moore, Christopher W., 33
(IFP), 46
Integrity principle, 67 National Association of Certified
Internal auditing, 19 Valuation Analysts’
Internal control over financial (NACVA), 44, 46, 65
reporting (ICFR), 75 National Association of Forensic
Internal Revenue Service (IRS), 97 Accountants (NAFA), 45, 47
132 INDEX
Nonfraud forensic and investigation Sarbanes-Oxley Act of 2002 (SOX),

practices, 19 5, 74–78
fundamental objective of, 77–78
Objectivity and Independence primary focus of, 76
principle, 67–68 provisions of, 78
Olympus, 101 Satyam, 101
Scope and Nature of work principle, 67
Parmalat, 101 Securities and Exchange Commission
Pleadings, 92 (SEC), 3, 61
PricewaterhouseCoopers (PwC), 7 Securities Exchange Act of 1934,
Prisoner petitions, 92 80–86
Professional certifications Semi-structured data, 35
continuing professional education, Senate Banking Committee Chairman
59–60 Christopher Dodd (D-CT), 79
education, 48, 57 Soft skill sets, 36–39
examination, 57–59 State trial courts, 66–67
experience, 59 Statement on Auditing Standards
in forensic accounting, 49–57 (SAS) No. 99 entitled, 95, 96
implications for, 61–62 Statement on Standards for Forensic
professional ethics, 61 Services No. 1 (SSFS 1), 45
Professional Code of Conduct, 67 Structured data, 35
Professional ethics, 61
Public Company Accounting Technical skill sets, 33–34
Oversight Board (PCAOB), Tip of the iceberg, 116
20, 61 Trial, 93–94
Public interest principle, 67 TYCO International Ltd, 100
QWEST communications UBS, 99

international, 99 Unstructured data, 35
U.S Supreme Court, 67
Raj Rajaratnam, 16
Reebok, 99 Violent crime, 95
REG (Regulation), 57, 58 Voirdire, 93
Risk of material misstatement
(RMM), 96 White-collar crimes, 31, 95
OTHER TITLES IN OUR FINANCIAL ACCOUNTING, AUDITING
AND TAXATION COLLECTION
Mark S. Bettner, Bucknell University; Michael P. Coyne, Fairfield University;
and Roby Sawyers, Editors
• Accounting History and the Rise of Civilization, Volume I by Gary Giroux
• Accounting History and the Rise of Civilization, Volume II by Gary Giroux
• A Refresher in Financial Accounting by Faisal Sheikh
• Accounting Fraud, Second Edition: Maneuvering and Manipulation, Past and Present
by Gary Giroux
• Corporate Governance in the Aftermath of the Global Financial Crisis, Volume I:
Relevance and Reforms by Zabihollah Rezaee
• Corporate Governance in the Aftermath of the Global Financial Crisis, Volume II:
Functions and Sustainability by Zabihollah Rezaee
• Corporate Governance in the Aftermath of the Global Financial Crisis, Volume III:
Gatekeeper Functions by Zabihollah Rezaee
• Corporate Governance in the Aftermath of the Global Financial Crisis, Volume IV:
Emerging Issues in Corporate Governance by Zabihollah Rezaee
• Using Accounting & Financial Information, Second Edition: Analyzing, Forecasting,
and Decision Making by Mark S. Bettner
• Pick a Number, Second Edition: The U.S. and International Accounting by Roger Hussey
• The Story Underlying the Numbers: A Simple Approach to Comprehensive Financial
Statements Analysis by S. Veena Iyer
• Forensic Accounting and Financial Statement Fraud, Volume II: Forensic Accounting
Performance by Zabihollah Rezaee
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Zabihollah Rezaee
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student and faculty member. (JFAR). Professor Rezaee has published over 220 articles and made
more than 240 presentations, written 11 books including the two
books on Corporate Governance and Audit Committees published
by the Business Expert Press. He has testified before the Federal
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Forensic Accounting and Financial Accounting, Auditing

EBOOKS FOR Fundamentals of Forensic Accounting

FORENSIC ACCOUNTING AND FINANCIAL STATEMENT FRAUD, VOLUME I

All rights reserved. No part of this publication may be reproduced, stored

First published in 2019 by

ISBN-13: 978-1-63157-148-0 (paperback)

Business Expert Press Financial Accounting, Auditing and Taxation

Collection ISSN: 2151-2795 (print)

Cover and interior design by S4Carlisle Publishing Services Private Ltd.,

First edition: 2019

Printed in the United States of America.

In this book, forensic accounting is defined as the practice of rigorous

Zabihollah (Zabi) Rezaee

Definition of Forensic Accounting

skills to collect, analyze, and evaluate evidential matters and to interpret

Author(s) Title Publisher Year Synopsis

Status of Forensic Accounting

Forensic accounting is a growing field of accounting. All “Big 4” account-

Litigation support, including expert testimony

Crime occurs across countries and continents, so forensic accountants have

form of fraud was FSF, causing a median loss of $975,000; corruption

Contrasting Forensic Accounting with Conversional

measuring, classifying, analyzing financial information, preparing reports,

whether caused by error or fraud. The objectives of a forensic accounting

Non-Fraud Forensic Fraud Forensic

Professional guidelines and standards used by auditors and forensic ac-

Both forensic accounting and auditing involve standard auditing proced-

the indicators of fraud and nonfraud schemes is beneficial to all busi-

7. Z. Rezaee, and R. Riley. 2009. Financial Statement Fraud: Prevention

23. D. Gray. 2008. “Forensic Accounting and Auditing: Compared and

Forensic Accounting Opportunities and Services

Fraud Examination Litigation consulting

Valuations and litigation

Asset-Theft Fraud Bankruptcy and insolvency Assistance Lawyers

Computer Fraud Nonfinancial Disputes and

Risk Assessment Bribery Money Laundering

investigation.1 Other specific areas of forensic accounting practices are

Litigation and Expert Consulting

Litigation consultants assist lawyers in pretrial activities, disposition, and

Guidance Pertinent Information

Expert Testimony and Witnesses

Forensic accountants also serve as expert witnesses to educate jurors about

Court Case Date Decided Description

Forensic accountants normally serve as fraud investigators to examine al-

manipulating financial statements, while fraud examiners can be hired to

Business valuation is the assessing of the fair value of a business or com-

and economic conditions, and multiple regression analyses. The types of

• Value of a private company that is going public through the Initial

Other Nonfraud Forensic Accounting Services

Forensic accountants offer nonfraud services in addition to fraud inves-

Forensic Risk Assessment and Management

Dispute resolution is the process of ending grievances between parties. In

Skill Sets of Forensic Accountants

Technical Skill Sets

Forensic accountants need to be familiar with broad accounting knowledge,

practices, use of research methodology, computer technology and digital

Analytical Skill Sets

Analytical skill sets are often referred to as digital forensics, information

According to the 2014 Survey on International Trends in Forensic and

verification with independent trading partners. Forensic accountants can

Soft Skill Sets

Soft skills are very important to forensic accountants to communicate

Forensic accounting services often require dealing with nerves of people