Forensic Auditing/ Accounting

1. Introduction
Forensic auditing’ covers a broad spectrum of activities, with terminology not strictly defined in
regulatory guidance. Generally, the term ‘forensic accounting’ is used to describe the wide range of
investigative work which accountants in practice could be asked to perform. The work would
normally involve an investigation into the financial affairs of an entity and is often associated with
investigations into alleged fraudulent activity. Forensic accounting refers to the whole process of
investigating a financial matter, including potentially acting as an expert witness if the fraud comes
to trial.
Forensic accounting, forensic accountancy or financial forensics is the specialty practice area of
accounting that describes engagements that result from actual or anticipated disputes or litigation.
"The work performed and reports issued will often provide answers to the how, where, what, why
and who. However, ultimately the court decides. Forensic" means "suitable for use in a court of
law", and it is to that standard and potential outcome that forensic accountants generally
have to work. Forensic accountants, also referred to as forensic auditors or investigative auditors,
often have to give expert evidence at the eventual trial. All of the larger accounting firms, as well as
many medium-sized and boutique firms and various police and government agencies have
specialist forensic accounting departments.
2. Definition of Forensic Auditing
1. Forensic auditing is also known as forensic accounting. A forensic auditor is a Certified
Public Accountant (CPA) who uses special techniques to detect or prevent certain types
of crime for businesses and government agencies.
2. Forensic Audit is an audit whose purpose is to use accounting procedures to collect
evidence for the prosecution or investigation of financial crimes such as theft or fraud.
Forensic audits may be conducted to determine if wrongdoing occurred, or to gather
materials for the case against an alleged criminal.
3. The application of accounting methods to the tracking and collection of forensic evidence,
usually for investigation and prosecution of criminal acts such as embezzlement or fraud.
Also called forensic accounting.
4. Forensic accounting utilizes accounting, auditing and investigative skills to conduct an
examination into a company's financial statements. Thus, forensic accounting provides an
accounting analysis suitable for court. Forensic accountants are trained to look beyond the
numbers and deal with the business reality of a situation. They are frequently used in
fraud cases.
Forensic accountants analyze, interpret and summarize complex financial and business matters.
They may be employed by insurance companies, banks, police forces, government agencies or
public accounting firms. Forensic accountants compile financial evidence, develop computer
applications to manage the information collected and communicate their findings in the form of
reports or presentations. Forensic audit is defined as the use of accounting skills to investigate
fraud or embezzlement and to analyze financial information for use in legal proceedings.
Forensic accounting is typically used in the course of an investigation. The goal of which would be
to detect fraud and provide evidence which can be used in a court of law. The proceedings are
not always criminal but often times civil and also require a valuation of assets (as in a divorce case).
 Forensic audits are easily adapted to a principles-based accounting (principles-
based generally accepted accounting principles (GAAP)) environment with broad
guidelines applied to a variety of accounting investigations without using rule-based
audit approaches or more narrowly-focused fraud practices.
 Forensic Audit is not single-event based, like a fraud examination, and a
forensic audit is not used to render an audit opinion.
Skills required for forensic Audit
Forensic accountants are viewed as a combination of an auditor and private investigator.
Knowledge and skills include the following: investigation skills, research, law, quantitative
methods, finance, auditing, accounting and law enforcement officer insights. Organizational
behavior and applied psychology knowledge and skills are essential.
3. Difference between Forensic Auditing and Principle based Auditing and Internal Auditing
Forensic accountants and auditors share some goals similar to traditional accountants and auditors.
They have different roles, knowledge and skills. Forensic accountant investigations include
identification of fraud. This is different from Certified Public Accountant (CPA) investigations that
are not responsible for identifying fraud. Forensic accounting investigations include litigation
services related to a variety of situations including the following: business purchases, valuation of
divorce assets, property damage, lost profits due to embezzlement and other illegal acts, tax
evasion, and money laundering schemes.
Error Error Prevention Fraud Identification
Identification

Auditing X X
Forensic Accountant X

1. Traditional auditing is a process of reviewing others work to determine if they have

followed the prescribed policies, procedures and practices. The determination is based on
evidence. It is a matter of fact and not merely a matter of opinion.
2. The financial audit report will aid management as a tool for determining the efficiency of its
marketing strategies, evaluating the soundness of its internal control policies to safeguard
the company’s assets, reviewing compliance with company policies as well as governmental
rules and regulations.
 Forensic accounting on the other hand is more concerned in establishing the
existence of fraud.; determining the extent of damage or losses involved as a result
of the fraud or crime, the gathering of sufficient evidence for use by the courts of law
to come up with a fair and judicial ruling for indemnification and/or prosecution
3. Error Identification and Prevention: Traditional auditing has a focus on error
identification and prevention. Prevention is the result of an effective internal control
system. The auditor reviews the effectiveness of the internal control system by sampling
transactions and not by a complete review of all transactions. The process can reveal errors.
All errors are not considered equal. Some are important and are referred to as material. For
 example, omission of a million dollar loan that is not recorded in the accounting records
might be a material error. Other errors are not material. An example of an error that might
not be material would be a math error due to rounding that causes the reported amount to
be ten dollars more or less than the actual amount. These examples are not meant to imply
that there are absolute dollar amounts that denote the difference between material and not
material (e.g., immaterial).
4. The users of financial audit and forensic examination reports are the key differences
between the objectives of a financial audit and forensic examination.
 An audit’s objective is to provide assurance, to the intended user, that the
information contained in those financial statements is a fair and accurate
representation of the organization.
 A forensic accounting engagement applies accounting, auditing, and investigative
skills to examine, analyze, and report on financial information in a manner suitable
to the court (user)
5. In traditional auditing materiality is the accounting way of designating the importance of a
transaction or an event. If it is material, then it is important. Audit risk is defined relative to
whether material errors will be found. This requires judgment.
 Audits may establish a threshold of materiality (audits often fail to detect fraud that
is below the materiality level established by the auditor performing the
engagement) where forensic accounting engagements don’t have a materiality
threshold. In the field of forensic accounting, every act or evidence of suspicious
activity is material.
4. Breaking down of Forensic Accounting/Engagements of Forensic Auditors/Accountants
The forensic auditor/accountant could be asked to investigate many different types of fraud. It is
useful to categorise these types into the following
(i). Litigation Support
Forensic accounting is utilized in litigation when quantification of damages is needed. Parties
involved in legal disputes use the quantifications to assist in resolving disputes via settlements or
court decisions. For example, this may arise due to compensation and benefit disputes. The forensic
accountant may be utilized as an expert witness if the dispute escalates to a court decision.
(ii). Investigation
The forensic accountant could be asked to investigate many different types of fraud such as (a)
financial Statement fraud, (b) corruption and (c) misappropriation of asset
a. Financial statement fraud
This is also known as fraudulent financial reporting, and is a type of fraud that causes a material
misstatement in the financial statements. It can include deliberate falsification of accounting
records; omission of transactions, balances or disclosures from the financial statements; or the
misapplication of financial reporting standards. This is often carried out with the intention of
presenting the financial statements with a particular bias, for example concealing liabilities in order
to improve any analysis of liquidity and gearing
b. Corruption (bribery and extortion).
 Bribery is when money (or something else of value) is offered in order to influence a
situation.
  Extortion is the opposite of bribery, and happens when money is demanded (rather than
offered) in order to secure a particular outcome
C. Asset misappropriation
By far the most common frauds are those involving asset misappropriation, and there are many
different types of fraud which fall into this category. The common feature is the theft of cash or
other assets from the company, for example:
 Cash theft – the stealing of physical cash, for example petty cash, from the premises of a
company.
 Fraudulent disbursements – company funds being used to make fraudulent payments.
Common examples include billing schemes, where payments are made to a fictitious
supplier, and payroll schemes, where payments are made to fictitious employees (often
known as ‘ghost employees’).
 Inventory frauds – the theft of inventory from the company.
 Misuse of assets – employees using company assets for their own personal interest
d. Other investigative tasks of forensic auditors
Forensic accounting also encompasses the determination of whether criminal matters occurred.
Such crimes may include bankruptcy, insolvency, tax fraud, money laundering, identify theft or
insurance fraud. Forensic accountants may assist in searching for hidden assets in divorce cases
(engagements in marital and family law of analyzing lifestyle for spousal support purposes,
determining income available for child support and equitable distribution.) or provide their
services for other civil matters such as breach of contracts (e.g. disagreements relating to
company acquisitions, breaches of warranty or business valuation disputes).
(ii). Forensic Accounting in the Insurance Industry
A forensic accountant may be asked to quantify the economic damages arising from a vehicle
accident or a case of medical malpractice. The accountant must be knowledgeable about the
legislative process relating to these cases. Forensic accounting encompasses the review of
insurance policies to determine coverage issues and methods of calculating potential losses.
Forensic accounting may be utilized for either the insured or insurer’s case
5. Who performs Forensic Audit/Accounting?
Forensic audits are performed by a class of professionals with skillsets in both criminology and
accounting who specialize in following a money trail, keeping track of fraudulent and actual balance
sheets and checking for inaccuracies in overall and detailed reports of income or expenditures. If
they find discrepancies, it may be the auditor's job to investigate and determine the reason for it, or
it may be the job of a separate financial investigator.
 Forensic accountants are viewed as a combination of an auditor and private investigator.
 In USA Forensic accountants have been employed by the Federal Bureau of Investigation
(FBI), Central Intelligence Agency (CIA), Internal Revenue Service (IRS), Federal Trade
Commission (FTC) etc.
6. How Are Forensic Audits Used in Court?
Forensic audits are presented as evidence by a prosecutor or by a lawyer representing an
interested party. Because finance is a complex discipline, the jargon used by forensic auditors to
describe a company's financial position is often highly precise. This either requires a prosecutor or
lawyer to call upon expert witnesses to explain the significance of the audit in layman's terms or to
have the auditor do so himself or herself in order to build a case.
7. Forensic Audit Process
The process of forensic accounting as described above includes the ‘forensic investigation’ itself,
which refers to the practical steps that the forensic accountant takes in order to gather evidence
relevant to the alleged fraudulent activity. The investigation is likely to be similar in many ways to
an audit of financial information, in that it will include a planning stage, a period when evidence is
gathered, a review process, and a report to the client. The purpose of the investigation, in the case
of an alleged fraud, would be to discover if a fraud had actually taken place, to identify those
involved, to quantify the monetary amount of the fraud (ie the financial loss suffered by the client),
and to ultimately present findings to the client and potentially to court
The process of conducting a forensic investigation is, in many ways, similar to the process of
conducting an audit, but with some additional considerations. The various stages are briefly
described below.
i. Accepting the investigation
ii. Planning the investigation
iii. Gathering evidence
iv. Reporting
v. Court proceedings
(i) Accepting the investigation
The forensic accountant must initially consider whether their firm has the necessary skills and
experience to accept the work. Forensic investigations are specialist in nature, and the work
requires detailed knowledge of fraud investigation techniques and the legal framework.
Investigators must also have received training in interview and interrogation techniques, and in
how to maintain the safe custody of evidence gathered.
Additional considerations include whether or not the investigation is being requested by an
audit client. If it is, this poses extra ethical questions, as the investigating firm would be
potentially exposed to self-review, advocacy and management threats to objectivity. Unless
robust safeguards are put in place, the firm should not provide audit and forensic
investigation services to the same client. Commercial considerations are also important, and a
high fee level should be negotiated to compensate for the specialist nature of the work, and the
likely involvement of senior and experienced members of the firm in the investigation.
(ii) Planning the investigation
The investigating team must carefully consider what they have been asked to achieve and plan their
work accordingly. The objectives of the investigation will include:
 identifying the type of fraud that has been operating, how long it has been operating for, and
how the fraud has been concealed
 identifying the fraudster(s) involved
 quantifying the financial loss suffered by the client
 gathering evidence to be used in court proceedings
 providing advice to prevent the reoccurrence of the fraud.
The investigators should also consider the best way to gather evidence – the use of computer
assisted audit techniques, for example, is very common in fraud investigations.
(iii) Gathering evidence
In order to gather detailed evidence, the investigator must understand the specific type of fraud
that has been carried out, and how the fraud has been committed. The evidence should be sufficient
to ultimately prove the identity of the fraudster(s), the mechanics of the fraud scheme, and the
amount of financial loss suffered.
To assist in the process of identifying suspects and criminals, forensic accountants use physical
evidence, testimonial evidence, documentary evidence and demonstrative evidence. Testimonial
evidence can be explored in some detail at the web site www.crimesandclues.com/testimony.htm/.
Evidence can be gathered using various techniques, such as:
 testing controls to gather evidence which identifies the weaknesses, which allowed the
fraud to be perpetrated
 using analytical procedures to compare trends over time or to provide comparatives
between different segments of the business
 applying computer assisted audit techniques, for example to identify the timing and location
of relevant details being altered in the computer system
 discussions and interviews with employees
 substantive techniques such as reconciliations, cash counts and reviews of documentation.
The ultimate goal of the forensic investigation team is to obtain a confession by the fraudster, if a
fraud did actually occur. For this reason, the investigators are likely to avoid deliberately
confronting the alleged fraudster(s) until they have gathered sufficient evidence to extract a
confession. The interview with the suspect is a crucial part of evidence gathered during the
investigation.
(iv). Reporting
The client will expect a report containing the findings of the investigation, including a summary of
evidence and a conclusion as to the amount of loss suffered as a result of the fraud. The report will
also discuss how the fraudster set up the fraud scheme, and which controls, if any, were
circumvented. It is also likely that the investigative team will recommend improvements to controls
within the organization to prevent any similar frauds occurring in the future.

(vi). Court proceedings

The investigation is likely to lead to legal proceedings against the suspect, and members of the
investigative team will probably be involved in any resultant court case. The evidence gathered
during the investigation will be presented at court, and team members may be called to court to
describe the evidence they have gathered and to explain how the suspect was identified. It is
imperative that the members of the investigative team called to court can present their evidence
clearly and professionally, as they may have to simplify complex accounting issues so that non-
accountants involved in the court case can understand the evidence and its implications.
8. Conclusion
In summary, a forensic investigation is a very specialist type of engagement, which requires highly
skilled team members who have experience not only of accounting and auditing techniques, but
also of the relevant legal framework.
There are numerous different types of fraud that a forensic accountant could be asked to
investigate. The investigation is likely to ultimately lead to legal proceedings against one or several
suspects, and members of the investigative team must be comfortable with appearing in court to
explain how the investigation was conducted, and how the evidence has been gathered. Forensic
accountants must therefore receive specialist training in such matters to ensure that their
credibility and professionalism cannot be undermined during the legal process.
Additional Note to be edited
Notes from: Forensic Accounting And Auditing: Compared And Contrasted To Traditional
Accounting And Auditing, By Dahli Gray, Loyola College, USA

CRIMINALISTICS
Criminalistics is forensic science applied solving crimes. It focuses on the proper collection,
preservations and analysis of evidence. This includes the study of fingerprints along with other
body-related evidence such as blood and hair and DNA. Forensic accountants practice
criminalistics, but with the focus on computer and document-related evidence. This includes
studying old handwritings. To learn more about this go to
http://www.aicpa.org/pubs/cpaltr/nov2002/supps/busind1.htm. While the web site provides
information about studying very old handwriting, forensic accountants study not so old
handwriting and documents in general. The Greeks referred a very old document as a diploma.
The documents can be handwritten or generated using technology including a typewriter or
computer. Forensic accountants seek to use documents to gather evidence relative to crime solving.
Forensic accountants must work with people to gain access to documents. For this and other
reasons addressed later in this lesson and future lessons, forensic accountants must develop
communications skills similar to a psychologist or psychiatrist.

Criminalists
The major players in forensic investigations include criminalists sometimes referred as forensic
science technicians. There are associations of criminalists. The web page of an example association
of criminalists is at www.cacnews.org.
Forensic Scientists usually work in a laboratory rather than at a crime scene. There is an American
Academy of Forensic Sciences (www.aafs.org). This organization is devoted to the improvement,
the administration and the achievement of justice through the application of science to the
processes of law. Crime labs typically examine the following types of evidence: fluids, such as
blood; unknown substances, such as drugs and poisons; trace evidence, such as hair or fibers to be
studied under a microscope; ballistics as related to projectiles such as bullets and bombs and
rockets; and fingerprints.
Forensic accountants focus on documents. The documents are most often created and maintained
within an information system on a computer. Understanding information technology is essential for
success in the process of forensic accounting.
Forensic evidence
To assist in the process of identifying suspects and criminals, forensic accountants use physical
evidence, testimonial evidence, documentary evidence and demonstrative evidence. Testimonial
evidence can be explored in some detail at the web site www.crimesandclues.com/testimony.htm.
“Because they rarely come upon a crime in progress, police depend on members of the public for
knowledge that a crime has been committed. They are equally dependent on victims, witnesses and
other informants for knowledge of who the offender is and where he might be found. To exaggerate
just a bit, the police can solve a crime if someone tells them who committed it.”
Documentary evidence used to be defined as paper, but it now is defined as any type of recorded
information. It could be in a computer or video or audio. It does not typically stand alone. It
requires an expert to interpret and present it. Demonstrative evidence is not actual evidence. It is
an aid to understanding. A model of a body part or pictures or other devices are used to help clarify
the facts. Typically an expert witness is needed to interpret the demonstrative evidence. Profiling is
used in the process of identifying suspects and criminals. There is an Academy of Behavior Profiling
(www.profiling.org). The home page states that the Academy of Behavior Profiling is a professional
association dedicated to the application of evidence based criminal profiling techniques within
investigative and legal venues. The mission statement includes the promotion of public awareness
of evidence based crime analysis and behavior profiling.
Expert testimony
To serve as an expert witness for a lawsuit or criminal case in a court, the forensic accountant
needs to have applied reliable principles and methods to sufficient facts or data. The expert witness
is a recognized specialist relative to the principles and methods applied to the sufficient facts or
data.
Specialization is documented training and knowledge such as that described in the web site
(www.profiling.org). When investigating computer-related evidence, the forensic accountant
should assure that the evidence not altered, damaged, contaminated, or destroyed by investigative
process. The forensic accountant must try to assure that malicious software is not permitted to
infect or corrupt. Relevant evidence should be extracted and fully preserved.

Chain of custody
This is similar to the audit trail that accountants learn about when studying auditing standards and
processes. It focuses on control in the transfer and analysis and disposition of physical and
electronic evidence. The process should cause minimal interruptions to business and overall
organization operations during investigation. The process should maintain privacy and
confidentiality.
FORENSIC COMPUTER INVESTIGATION
To conduct a forensic computer investigation, the forensic accountant should size up situation, log
every detail, conduct an initial survey and assess the possibility of ongoing undesirable activity.
Regarding the information technology and systems, the computers should be powered down and
checked for booby traps. The forensic accountant should duplicate the computer hard drive or
other permanent storage unit first and then analyze the hard drive.
When financial statement fraud is not suspected, it is important to remember that Generally
Accepted Accounting Principles (GAAP) are only generally accepted. If an organization fully
discloses the alternate accounting principles being used and uses them consistently, then it is not
fraud.
The primary objective of a financial statement is to provide information that is useful to decision
makers. Even the GAAP can be interpreted more than one way. Different interpretations do not
constitute fraud because fraud exists only when there is intentional misstatement. It is often
difficult to clarify a person’s intent. The following procedures have been developed to audit when
fraud is not suspected: confirmation, observation, physical examination, re-performance,
performance of analytical procedures, inquiry of client, and documentation.
FRAUD SYMPTOMS
Fraud symptoms are unusual and unexpected changes. An inexperienced person might not have
knowledge or awareness of what is usual or expected or what constitutes change. The fraud
symptoms are usually financial-record or person-related. Fraud symptoms are investigated by
analyzing documents and document-related items for financial record symptoms. Person-related
symptoms include personality and life-style changes. If people are living beyond their earned
income level, then there may be reasons for their behavior unrelated to fraud. Such reasons may
include receiving an inheritance or being deep in debt.
Behavior changes such as being more or less argumentative may have nothing to do with
committing fraud, but these changes have been correlated to fraud activity in past cases. Document
analysis has evolved into a science for paper documents. Handwriting and ink analysis are two
examples. Computer-generated documents that do not get printed out provide an opportunity for
developing different analytic techniques.
Evidence sources that are helpful to the forensic accountant include real estate records, court
records, assumed name indexes, Uniform Commercial Code filings and other public records as
maintained by a county clerk. Restricted sources can be accessed by certain people. A forensic
auditor might need to get help from people such as law enforcement or government personnel.
These individuals can access federally restricted databases
Specialized audit techniques that can be applied in cases of suspected or actual fraud include
supervising, search warrants, surveillance, source and application of funds, and tips similar to
anonymous complaints. Supervising includes observing, physically examining and documenting
evidence. As noted earlier in this lesson, comparing expected to actual is key to this process. Search
warrants are issued by judges upon review of the appropriate application. The judge decides if
probable cause exists so that a search is warranted. Surveillance includes watching and sometimes
going through the suspect’s trash.
The most successful technique is from anonymous complaints or tips. Organizations benefit from
having a process where customers and employees can provide information without revealing their
identity. American Journal of Business Education – Fourth Quarter 2008 Volume 1, Number 2
122
Many organizations encourage customers to complain by stating that their purchase will be free if
the receipt from the cashier is inaccurate.
INTERVIEW AND INTERROGATION
Interview and interrogation as evidence-gathering techniques involve asking people questions. The
basic difference is that interrogation is confrontational while interviewing is not. In either case, the
interviewer records both the answers to the questions and physical behaviors; these may include
the interviewed person looking at the floor rather than making eye contact.
Key information to gather centers on the suspect’s pressures: Being deep in debt; Perceived
opportunities such as having access to the organization’s assets; and Rationalization due to being
passed over for a promotion. Effective interviewing is a skill that can be enhanced with continuous
education and practice.
VERBAL AND NONVERBAL CUES
Verbal cues can be written or spoken. Nonverbal cues given by interviewed subjects include
crossing the arms over the chest and also crossing legs. These clues often convey hidden meanings
such as being closed and possibly hiding something.
To comfort the person being interviewed, it can be helpful for the interviewer to mirror the
physical behaviors of the person being interviewed. Research indicates that this makes the
interviewed person feel that the interviewer is on his or her side. Physical behaviors are called
nonverbal cues.
Eye movements are in this category as well. The interviewer needs to watch for patterns and ask
test question to confirm the patterns. This is needed for verbal cues given while talking. For
example, answering a question by asking another question is typically an attempt to deceive. Also
saying, “To the best of my knowledge,” often indicates such an attempt.
QUESTION TYPES
Question types that interviewers can use to obtain relevant and useful information include closed
ended, forced choice, open ended, connecting, positive reaction, clarifying, compound,
confrontational, and secondary. Closed ended questions are like multiple choice test questions. It
can be as simple as a yes or no question or it can have a limited number of choices. This is called a
forced choice. The downside of this format is that the correct choice might be missing and
evidence might not be uncovered.
Open ended questions provide very little guidance from the interviewer. The interviewed person is
also allowed to give details on feelings. Connecting questions try to connect or tie details together
to determine where the fraud took place.
Positive-reaction questions are like closed ended questions but the question is set up to get the
person being interviewed to say “yes.” Saying yes is believed to put the person being interviewed
into a cooperative mood. Clarifying question build on responses to other questions. Compound
questions can be confusing and should be avoided.
Confrontational questions are like a little speech pointing out evidence that is not consistent or that
contradicts other evidence. Secondary questions are usually just repeating back the interviewed
person’s response in hopes of getting further clarification. No matter what types of questions are
used, they should be used subject to a plan.
TECHNIQUES TO PERSUADE
Different approaches that interviewers can use to persuade subjects to cooperate include the direct
approach, non-direct approach and a combination of these two approaches. The goal is to gather
and document relevant and reliable evidence that leads to a conviction where fraud has occurred.
The direct approach reveals selected existing evidence and does not deceive the person being
interviewed. The non-direct approach allows the person being interviewed to ramble. It is similar
to the idea that if you give a person being interviewed enough rope, he might hang himself. A
variation on these two basic approaches includes just being silent to see what the interviewed
person might say. On the other hand, many questions can be asked rapidly. Appealing to emotions
including changing to a different location can be used to make the interviewed person feel more
comfortable and willing to reveal information.
Admission-seeking interviews use the ideas and techniques introduced earlier in this lesson to get
the suspect to admit guilt. Guilty people are often silent. The suspect could also offer a special type
of explanation, the alibi, to convince the interviewer of innocence.
SIGNED CONFESSION
The content of the signed confession includes a concise statement of guilt and that the statement
was made voluntarily. It should include a statement that the person signing the confession knew
fraud was being committed and when it was being committed. It should also include an estimation
of the monetary value of the loss or crime.
The interviewer should bring a hard copy of the confession to the interview for the suspect to sign.
If time goes by between the agreement to sign the confession and the actual signing, the confessing
person might decide not to sign. The interviewer needs to be prepared to “strike when the iron is
hot,” as they say. This includes having a hard-copy permission statement ready for signing
regarding voluntarily turning over assets such as checking and saving accounts.
FINANCIAL STATEMENT FRAUD
Financial statement fraud is intentionally violating the Financial Accounting Standards Board’s
Concept Statement number one that states that financial statements are to provide information that
is useful to decision makers. Misrepresentations are not useful. Intentional misrepresentation
constitutes fraud.
Legal recourse is available when the decision maker relies on the misrepresented information and
injury results. The injury is typically financial. Without intentional misrepresentation it is not fraud.
For example, someone could make decisions using financial statements that do not contain
intentional misrepresentations and the decision results in loss when profit was the goal. This is
poor decision making and not fraud.
FRAUD SCHEMES
Financial statement fraud schemes typically include overstatement of revenues and assets,
understatement of expenses and liabilities, asset misappropriation and inappropriate disclosure.
Inventory manipulation has been very popular and has been somewhat curbed by income tax law
requiring that the inventory method used for tax be the same as that used for financial statements.
For example when prices were rising, corporations would use the first in first out inventory method
for financial statements and the last in first out inventory method for the tax reports. This resulted
in a much higher reported profit for financial statements than for tax reports.
Corporations would purchase extra inventory near the year end to increase the reported cost of
goods sold for tax reports and thereby decrease the actual tax due. Shortly after the beginning of a
new reporting period, the corporation would return the excess inventory to the suppliers.

Forensic Accounting: A Tool for Fraud Detection and Prevention in the Public Sector. (A
Study of Selected Ministries in Kogi State)
By Okoye, E.I. Ph.D, Fiia, Fsm, Fcna

Background To The Study

It has been observed that “Government spending has always been big business, but it has become
so massive today that the public through its legislators is demanding to know whether the huge
outlays of money are being spent wisely or whether they should be spent at all.” Officials and
employees who manage public sector activities are by virtue of that duty, required to render
adequate accounts of their activities to the public.

The incidence of fraud continues to increase across private and public sector organizations and
across nations. Fraud is a universal problem as no nations is immuned, although developing
countries and their various states suffer the most pain.
Forensic accounting is a rapidly growing field of accounting that describes the engagement that
results from actual or anticipated dispute or litigations. “Forensic” means “suitable for use in a
court of law”, and it is to that standard Forensic Accountants generally work. Forensic Accounting is
an investigative style of accounting used to determine whether an individual or an organization has
engaged in any illegal financial activities. Professional Forensic Accountant may work for
government or public accounting firm. Although, forensic accounting has been in existence for
several decades, it has evolved over time to include several types of financial information scrutiny.
Employee and management fraud, theft embezzlement, and other financial crimes are increasing,
therefore accounting and auditing personnel must have training and skills to recognize those
crimes, both at the state level and the grassroots (local) level to better ensure the states prospect in
the area of fraud prevention, deterrence, detection, investigation and remediation. In making
reference outside the scope of this research to enhance better need of the service of forensic
accounting in Kogi State is the news reports following the September 11 attacks depicted how
terrorists used the international banking system to fund their activities, transfer money, and hide
their finances, and signaled a need for investigators to understand how financial information can
provide clues as to future threats. These events raised public awareness of fraud and forensic
accounting.
Forensic accounting includes the use of accounting auditing, and investigative skills to assist in legal
matters. It consists of two major components. Litigations services that recognized the role of an
accountant as an expert consultant, and investigative service that uses a forensic accountant’s skills
and may required possible court room testimony. According to the definition developed by the
Association of Institute of Certified Public Accountants (AICPA’s) forensic and litigation services
committee, forensic accounting may involve the application of special skills in accounting, auditing,
finance, quantitative methods, the law and research. It also involves quantitative skill to collect,
analyze, and evaluate financial evidence, as well as the ability to interpret and communicate
findings.
Fraud includes all the multifarious means human ingenuity can devise that are resorted to by be
individual to get an advantage over another by false suggestions or suppression of the truth. It
includes surprises, tricks, cunning or dissembling, and any unfair way by which another is cheated
(Black’s Law Dictionary, 1979).
Forensic accounting is said to bring significant improvement in the quality of fraud detection and
prevention. This study meant to help and remind the public sector organization of Kogi State, in the
affected ministries to design an integrated approach to preventing and controlling fraud and
corruption within the workplace through an establish service of Professional Forensic Accountants.