Significance of Forensic Accounting

A Case Study of Carillion

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Table of Contents
1. Introduction................................................................................................................................3
1.1 Research Background........................................................................................................3
1.2 Research Objectives...........................................................................................................3
1.3 Research Themes...............................................................................................................4
1.4 Significance of the study..........................................................................................................4
2. Carillion Case Background........................................................................................................4
2.1 Carillion and its Collapse.........................................................................................................4
2.2 Audit and Accounting Practices at Carillion.............................................................................5
3. Literature Review.......................................................................................................................6
3.1 Introduction..............................................................................................................................6
3.2 Theme 1: Principles of Forensic Accounting...........................................................................6
3.3 Theme 2: Legal Environment and Ethics in Forensic Accounting...........................................6
3.4 Theme 3: Forensic Accounting Techniques............................................................................7
3.5 Conclusion...............................................................................................................................7
4. Critical Analysis.........................................................................................................................8
4.2 Theme 1: Principles of Forensic Accounting...........................................................................8
4.3 Theme 2: Legal Environment and Ethics in Forensic Accounting...........................................9
4.4 Theme 3: Forensic Accounting Techniques..........................................................................10
5. Conclusion...............................................................................................................................12
6. References..............................................................................................................................13
1. Introduction

Forensic accounting has become an integral part in examination of frauds. Through this

types of accounting, professionals identify financial crimes and maintain integrity of

companies. It involves assessment of financial accounts and statements and other risk

management strategies that helps in effective evaluation of potential fruads and

financial crimes.

1.1 Research Background

With the increasing complexity of financial transactions, forensic accounting has

become a crucial tool for companies to maintain transparency and integrity in their

financial operations (Gupta, 2022). To evaluate the finances of a person or company,

forensic accounting makes use of accounting, auditing, and investigation abilities. This

type of accounting is often used in legal proceedings and can help to uncover financial

crimes such as embezzlement, money laundering, and tax evasion.

1.2 Research Objectives

The following study on forensic accounting is based on a case study on the downfall of

Carillion Plc. The primary objectives considered in the study for establishing the themes

as as follows:

● Understand and evaluate the key principles of forensic accounting.

● Assess the legal environment of forensic accounting.

 ● Discuss the ethics in relation to forensic accounting practices.

● Analyse the techniques and procedures used in forensic accounting to examine

fraudulent activities and financial irregularities.

1.3 Research Themes

From the research objectives established in the previous sections, the themes of the

study are as follows.

Theme 1: Principles of Forensic Accounting

Theme 2: Legal Environment and Ethics in Forensic Accounting

Theme 3: Forensic Accounting Techniques

1.4 Significance of the study

Forensic accounting has gained immense popularity due to the increasing need for

transparency and accountability in the business world (Groşanu et al., 2020). It plays a

crucial role in preventing and detecting fraud within organisations. Therefore, it has

become a necessity to study more on this subject and build upon existing theories.

2. Carillion Case Background

2.1 Carillion and its Collapse

Carillion was a British multinational construction and facilities management company

that went into compulsory liquidation in January 2018 (Patil, 2023). The collapse of the
company left thousands of employees without jobs and caused major disruptions to

ongoing projects in the UK and abroad. Carillion’s collapse had a significant impact on

the UK economy and raised questions about the role of ethics and corporate

governance in private companies.

2.2 Audit and Accounting Practices at Carillion

The collapse of Carillion in 2018 has raised questions about the effectiveness of audit

and accounting practices in the UK. The company's financial statements were signed off

by auditors and regulators despite its mounting debt and failing projects (Wong, 2019).

According to the Financial Reporting Council (FRC), Carillion's accounting practices

were found to be completely unacceptable and showed a cavalier attitude to

management accounting. The FRC also criticised the company's auditors, KPMG, for

failing to challenge Carillion's management on their accounting methods.

There were many key issues with Carillion’s auditing and accounting practices. Firstly,

the company was misrepresenting profits in accounts, wherein the company booked

profits before they were released. Moreover, Carillion stopped showing information of

their huge debt and low cash availability in their financial reports (Loxley, 2018). The

company kept their financial vulnerability hidden for a long time, which eventually led to

its downfall. Nevertheless, the Carillon case has raised major concerns about auditing

and accounting practices and the need to increase usage of forensic accounting to

detect such financial frauds in the future.

3. Literature Review

3.1 Introduction

The literature review chapter is discussed to provide a critical overview on the relevant

concepts related to the research subject. This section of the study will critically evaluate

theories and provide a theoretical framework for the research themes in reference to

existing literature.

3.2 Theme 1: Principles of Forensic Accounting

Forensic accounting is emerging as a sub-category of accounting. According to (Fadilah

et al., 2019), principles of forensic accounting include identifying fraudulent activities,

tracing funds, and evaluating financial statements to uncover irregularities that may be

indicative of fraud or other financial crimes. Whereas (Akinbowale et al., 2020) states

that forensic accounting principles include maintenance of high standards of integrity

and professionalism and promoting forensic accounting values. These principles

establish a culture of accountability and responsibility among professionals, fostering a

sense of trust and respect within the auditing process.

3.3 Theme 2: Legal Environment and Ethics in Forensic Accounting

Forensic accounting involves the application of accounting and investigative skills.

According to (Oyedokun et al, 2020), forensic accounting is a highly specialised field

that requires a thorough understanding of the legal environment and ethical

considerations. Professionals in this field must adhere to strict codes of conduct and

maintain a high level of integrity in order to provide accurate and reliable financial

analysis for legal proceedings. Whereas as per the Benford Law, ethics is an integral

part of forensic accounting as it involves the application of accounting skills to legal

matters, and requires a high level of credibility (Aggarwal and Dharni, 2020). Thus,

maintaining ethical standards is necessary in forensic accounting practices.

3.4 Theme 3: Forensic Accounting Techniques

Forensic accounting techniques involve the application of accounting, auditing, and

investigative skills to analyse financial information. According to (Roszkowska, 2020)

forensic accounting techniques are investigative methods used to detect and prevent

financial fraud, embezzlement, and other financial crimes. These techniques involve

analysing financial records, interviewing individuals involved in the transactions, and

conducting audits to uncover any discrepancies or irregularities. As per (Oyedokun et

al., 2020), forensic accounting techniques also include systematic financial statement

analysis and usage of specialised technologies to deliver better investigation results.

3.5 Conclusion

The critical evaluation of existing literature in accordance with the themes will be helpful

in the critical analysis of the research subject. The relevant theories discussed in this

section will be further analysed in analysis to establish the themes and objectives.
4. Critical Analysis

4.2 Theme 1: Principles of Forensic Accounting

The primary principle of forensic accounting involves the identification of fraudulent

activities and financial irregularities. By doing so forensic accounting helps businesses

maintain their financial integrity and protect themselves from potential legal and

reputational damage (Gupta, S., 2022). In the Carillion case, the audit process was not

capable enough to detect the financial frauds the company adopted in its accounting

policies. The errors and frauds were unnoticed for a long period of time. The Carillon

case highlights the need for a more robust and effective audit process to prevent

financial frauds. This underscores the importance of forensic accounting which is more

robust than regular accounting processes for ensuring transparency and accuracy in

financial reporting.

Additionally in the Carillon case, KPMG, the external auditors of the company, were

insufficient in addressing the financial crimes of the company. Though in May 2017,

KPMG reported misstatement of assets in Carillon’s financial statement, the auditors

missed the misstatement in the company’s revenue information. The company kept on

practising such financial irregularities and continued its operations till a point where it

collapsed with a debt of £7 billion in 2018 (Patil, 2023). Such financial losses couldn’t

have been prevented, if optimal accounting practices such as forensic accounting were

implemented in a timely manner. The case demonstrates the significance of forensic

accounting principles, which are more effective than mere auditing processes to detect

financial vulnerabilities.

4.3 Theme 2: Legal Environment and Ethics in Forensic Accounting

Forensic accounting is a specialised field that requires a thorough understanding of the

legal environment and ethical considerations. Professionals in this field must adhere to

strict ethical standards and be knowledgeable about relevant laws and regulations.

Many forensic accountants utilise the Benford law for fraud examination (Mbasiti et al.,

2021). The law states that the first digit of naturally occurring numbers in datasets will

follow a predictable pattern, and any deviation from this pattern may indicate fraud or

manipulation. This makes it a powerful tool for detecting anomalies in financial data.

When analysing the Carillon case, it can be identified that the company manipulated its

financial data to an extent that it seemed to be a high performing company with high

dividends and revenue but in reality it was out of cash and in heavy debt (Patil, 2023).

This is where forensic accounting plays a role in maintaining companies legal

obligations. This type of accounting could have avoided the negligence of accounting

laws that led to the downfall of Carillion.

Ethics are also an important part of forensic accounting. All forensic accountants are

required to maintain ethical standards and dwell into matters for self advantage

(Groşanu et al., 2020). It requires maintaining a professional ethical standard to provide

superior investigation findings for court proceedings. Additionally, it is essential to

ensure impartiality, accuracy, and credibility of the investigation. In the Carillon case,
the company was implementing many unethical practices to increase company

valuation and provide higher dividends. I also refused to invest in pension funds, while

the top level employees were provided higher bonuses and remuneration even during

loss periods. All of these red flags were missed by KPMG and the company's inter audit

system. By employing forensic accounting these ethical red flags could have been

easily identified. Therefore, forensic accounting works parallel to laws and ethical

standards, which tends to avoid fraud cases like Carillion.

4.4 Theme 3: Forensic Accounting Techniques

Forensic accounting involves various techniques to identify frauds and detect financial

irregularities. These techniques include analysing financial statements, conducting

interviews with employees and management, use of specialised technologies, and

reviewing internal controls. Financial accountants systematically analyse a company's

financial statement. It is quite the same as the auditing process but more advanced in

terms of data analysis (Akinbowale, 2020). During analysis of financial statements,

experts not only examine the financial record but also analyse misstatement patterns

that help them to identify financial crimes. A more robust analysis is done so that frauds

and fictitious cases like the Carillon fraud case can be avoided. Additionally,

interviewing employees and management is also a part of the forensic accounting

process. It helps professionals to know the loopholes in the company and also aids in

detecting red flags. Interviewing employees and management can provide valuable

insights into the company's internal controls, potential fraud schemes, and any
suspicious activities that may have gone unnoticed (Newman and Gough 2020). These

interviews can also help in identifying potential witnesses and gathering evidence for

further investigation. Furthermore, conducting interviews can also aid in improving the

overall effectiveness of the internal control system by identifying areas that require

improvement and implementing appropriate measures to mitigate risks.

Another important technique used by forensic accountants are specialised technologies

like Optical Character Recognition (OCR). It helps professionals to look for document

keywords and kinds using data range to analyse a ton of information efficiently. OCR

technology is particularly useful in cases where there are large volumes of data to be

analysed, as it can quickly and accurately scan through documents and identify relevant

information. This allows forensic accountants to focus their attention on the most

important aspects of a case and make more informed decisions based on the evidence

they have gathered (Akinbowale et al., 2020). Cloud adoption has also become

increasingly popular in forensic accounting. It has enabled forensic accountants to

easily access data from anywhere and collaborate with their team members in real-time.

This has greatly improved their efficiency and effectiveness in conducting investigations

(Rehman and Hashim, 2021). Furthermore, cloud-based solutions have also provided

forensic accountants with advanced analytical tools and machine learning capabilities,

leading to more accurate findings and conclusions. This has revolutionised the way

forensic accounting is done in the modern era. Therefore, forensic accounting

techniques are more advanced and robust mechanisms for investigating frauds for

reducing risk and detecting financial crimes by big companies like Carillion.
5. Conclusion

Forensic accounting is a specialised field of accounting that deals with detection and

identification of frauds. Forensic accountants are often called upon to provide expert

testimony in legal proceedings and work closely with law enforcement agencies to

investigate financial crimes. They use their accounting skills and knowledge of financial

regulations to uncover evidence of fraudulent activity. In the Carillon case, financial

frauds and misstatements have been a key issue for the company's downfall. It not only

led to the collapse of the company but also had a negative impact on the UK economy,

wherein thousands lost their jobs and stakeholders couldn’t recover debt. If forensic

accountants were employed timely, then such disastrous impact could have been

avoided. This demonstrates the significance of forensic accounting principles and ethics

for fraud examinations. Additionally, advancement technologies assist forensic

accounting professionals to deliver investigation results efficiently to assess frauds and

manage risk.
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