JISTEM - Journal of Information Systems and Technology Management

Revista de Gestão da Tecnologia e Sistemas de Informação

Vol. 10, No. 1, Jan/Apr., 2013 pp.119-144
ISSN online: 1807-1775
DOI: 10.4301/S1807-17752013000100007

THE FORENSIC ACCOUNTING AND CORPORATE FRAUD

Joshua Onome Imoniana

Maria Thereza Pompa Antunes
Henrique Formigoni
Mackenzie Presbyterian University, SP, Brazil

___________________________________________________________________________

ABSTRACT

This study is aimed at analyzing the characteristics of forensic accounting services

performed by accounting firms in Brazil, using an exploratory approach. At the end of the
study, there is a discourse analysis of a speech made by the CEO of one of the key players
in forensic accounting services (Kroll) in Brazil. In order to guide this reflection, we
pose the following question: what is the characteristic of forensic accounting that
substantiates professional accountants’ innovation to curb corporate accounting
malpractices? In this intent, we accept the premise that the bone of contention in some
unhealthy business environments is the inability of an auditor to track frauds. We used
the icons (categories and/or nodes) that dynamically represent formalism in the theory of
self re-production to explain the patterns found in the speech. Our findings make us
conclude that the idea that frauds have been least detected by auditors begins to gain
shape as auditors are more adequately trained to detect frauds instead of emphasizing the
traditional segregation of duties and safeguard of assets.
Keywords: Forensic, Accounting, Fraud, Audit

_____________________________________________________________________________________
Manuscript first received/Recebido em 31/03/2011 Manuscript accepted/Aprovado em: 16/02/2013
Joshua Onome Imoniana, Research Fellow at University of Bologna. He is a Professor of AIS and
Auditing at the Graduate Program of Accounting at the Universidade Presbiteriana Mackenzie, Brazil. As
CeGit and ISACA Advocate, is a PhD in Accounting from the University of São Paulo 1992. phone: +55-
11- 4702-7846 or: +55-11-21148273 E-mail: joshua.imoniana@mackenzie.br or
josh.imoniana@yahoo.com

Maria Thereza Pompa Antunes, is the Chair of Graduate School of Accounting and also Professor of
Methodology and Financial Analysis in the Graduate Program of Accounting at the Universidade
Presbiteriana Mackenzie, Brazil. She received a Ph.D. in Accounting from University of São Paulo – USP
in 2004. phone: +55-11-5539- 3737 ou 2114-8887 E-mail: mariathereza@mackenzie.br;

Henrique Formigoni, Post-doctorate from University of Salamanca. Professor of Financial Accounting

and Tax in the Graduate Program of Accounting at the Universidade Presbiteriana Mackenzie, Brazil. He
received a Ph.D. in Accounting from University of São Paulo – USP, in 2008. Phone: +55-11-2114-8836
E-mail: hformigoni@mackenzie.br;

Published by/ Publicado por: TECSI FEA USP – 2013. All rights reserved.
120 Imoniana, J. O., Antunes, M. T. P., Formigoni, H.

1. INTRODUCTION
The perspective of accounting influence on today’s society will continue to be
bright as users foresee in information providers the need of upholding the pillars of
corporate governance; that is, accountability, fairness, responsibility and transparency.
The last few years have witnessed a great expansion in both interest and research in the
behavioural and social aspects of accounting, and there is little doubt that this area will
be one of the increasing and important activities in the years ahead (Hopwood, 2009).
Under the new ideological principles of economic development primacy, marketization,
and mixed ownership paved the way for a different view of accounting to emerge
(Ezzamel, Xiao and Pan, 2007).
Aware of this trend of accounting, and particularly as it has been construed in all
parts of the world as eliminating boundaries, a fight against corruption and international
fraud that corrodes the pause of most of the developing countries, accounting must be
seen as going through a new era, with its end products assisting in the investigation and
processing of the perpetrators of fraud.
Assuming that one considers fraud as the main source of human greed and
absolute arrogance of the human nature, and that it is also innate in those who
perpetuate it, never contented with what they have or always taking advantage of a
perceived lack of control, forensic accounting is regarded as one area of these fields of
accounting that is going to receive greater attention in future research, be it sociological
or humanistic approach.
If we did not close our eyes to what has beheld our society for various decades,
we would not be deceived by the fact that fraud has always existed. To make matters
worse, new technologies are being developed to bridge the gaps between employees and
employers, businessmen and agents, considering punitive measures to make fraud less
interesting, but this has not been enough. According to Imoniana (2003), stealing, fraud
under extortion and threat to businesses are normally perpetrated by employees or
executives who possess the following profiles of:
 Being ambitious, excessively calculating and good planners;
 Living above their earnings;
 Having social and psychological problems;
 Having economic and financial problems;
 Always believing in the laws of advantage;
 Trusting their ability to perfectly manipulate others to conceal the trace of
frauds;
 Being a collaborative employee;
 Gaining confidence of superiors and plotting their plans out of working
hours;
 Performing overtime, but reluctantly requesting to be compensated;
 Taking short or no vacations; and
 Knowing the business better than anyone.

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The Forensic Accounting and Corporate Fraud 121

As implied, there is no gain saying that fraudulent acts and corruption have
become a cankerworm that has eaten deeply into the fabric of our society. This seems to
be in an escalating rate as we witness it day-in day-out through newspapers that public
officers, managers entrusted with the life of businesses, manage business to their own
advantage. Fraud has become an industry, not just for the fraudster; academics study it,
investigators investigate it, lawyers litigate on it, and conference goers debate it; but the
industry is built on managing the consequences of fraud rather than on preventing fraud
(KPMG, 2009).
Ironically, this seems to be a lost game when we align what the accounting
profession has always done to tackle issues at stake with the deliverables to the
stakeholders, saying that it has taken its own part of the uncultured and deregulated
society, whereby all the accounting information technologies are not enough to curb
fraud.
Therefore, when we assume that the accounting profession is doing its own share
of the task it seems to be comfortable, but one is yet to believe in this, since the
normative positivist approach in accounting has not been totally ineffective, and also the
purely positivist approach which takes with it an inductive approach is yet to be
defeated. Thus, this is likely going to be the best bet of accounting for the near future.
In the recent years we have fraud auditing taking place as a result of a suspect of
fraud in financial statements or accounting documents. In addition to this, we have
expert witnesses; in this case, the accountant using his technical procedures and
scientific know-how to give a proof, necessary to substantiate a decision, normally a
litigious one, by providing accounting reports in accordance with the rules of law and
professional ethics.
Today, the said fraud auditing has grown to include forensic accounting that
entails a lot of more jobs. Invariably, the result may determine the future of the experts,
should the evidence gathered be ruled as inadmissible in the court of Law.
According to KPMG (2009) providing expert accounting assistance is not simply
a matter of adding up the numbers. First, the numbers may not be easy to find or are not
in perfect order. Some information will be available internally, some only externally.
So, considering the likeliness of information where something may be dubious, some
information will require reworking to be useful and other information may not be
available at all. Some parties may relate information about what happened, which may
not bear any resemblance to reality. Then comes the need for someone to keep an eye
on all these, hence, the requirement for an investigative bookkeeper otherwise known as
forensic accountant.
Therefore, this study is aimed at analyzing the characteristics of forensic accounting
services performed by accounting firms in Brazil, using an exploratory approach. At the end of
the study, there is a discourse analysis of a speech made by the CEO of one of the key players in
forensic accounting service (Kroll) in Brazil.
Thus, as the current article comprised a study to source unavailability of literature
through research, be it normative or supportive in nature, one sees relevance in it. This
is what Littleton and Zimmerman (1962) described as perceptive; a search for a rational
justification of the already accepted practice rather than a free inquiry into one or
another of the many aspects of accounting knowledge. We do not expect practicing
accountants to be social scientists any more than we expect practicing physicians to be
physical or natural scientists. Their opportunity for services is by far another kind; it

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122 Imoniana, J. O., Antunes, M. T. P., Formigoni, H.

lies in helping their clients or patients to the utmost of their professional abilities within
the scope of ethical practices (Mautz, 1963, pp. 317).
Based on the aforementioned, we pose the following research question: what is the
characteristic of forensic accounting that substantiates professional accountants’
innovation to curb corporate accounting malpractices?

2. LITERATURE REVIEW
Antecedents of forensic accounting
In the antecedents of forensic accounting, for clarification purposes, we take
investigative auditing or forensic auditing as the basis of all these changes.
Accordingly, Joshi (2003) sees the origin of forensic accounting traceable to
Kutilya, the first economist to openly recognize the need for the forensic accountant,
who, he said, mentioned 40 ways of embezzlement, centuries ago. He, however, stated
that the term “forensic accounting” was coined by Peloubet in 1946. In the same
antecedents, Crumbley (2001) stated that a form of forensic accounting can be traced
back to an 1817 court decision.
The United States culture has been described as a lawsuit society. The growth in
litigation has produced accompanying opportunities in a field called forensic
accounting. The field is highlighted by accountants who serve as expert witnesses on
both sides of a dispute (Dykeman, 1982). The Brazilian society is a learning type,
where lawsuits are very sluggish, and it favours those who use them as a management
strategy to drag and retard their effects on businesses. Organizations lose 5 – 6% of
revenue annually due to internal frauds with the equivalent of $ 652 Billion in US as of
2006 (Coenen, T.L, 2008).
Forensic accounting is primarily aimed at accounting practitioners who want to
expand their services to attorneys. However, […] some expert witnesses have sparked
negative relations such as the Judge in the Eastern Kodak-Berkey Photo anti-trust case:
“[…] too many of the people come in and think that they can sell whatever counsel is
willing to buy and profit from it […] you just can’t and shouldn’t be doing that kind of
thing” (Dykeman, 1982).
Even though, as already introduced, forensic accounting takes care of fraud audits,
Sarbanes Oxley is not leaving any stone unturned to provide for the coverage of any
management negligence in the process of business controls. In this question, the SOX
sections including Public Company Accounting Oversight Board (PCAOB) helps to
clarify the auditor’s fraud responsibility.
Concepts of forensic accounting
It is difficult to conceptualize forensic accounting without comparing it with
auditing, mainly because auditing has been used to assess business positions, accounting
malpractices and even today auditors do perform investigative jobs. We have seen
auditors perform fraud investigation, expert witnessing,, due diligence; etc. Probably as
a new era, and professional advancement unfolding various strengths and opportunities
and also embracing various perspectives, there is none gainsaying that accounting is
also in this same trend.

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The Forensic Accounting and Corporate Fraud 123

KPMG (1999) defines forensic accounting as assistance in disputes which are

likely to involve litigation, arbitration, expert determination, mediation or an enquiry by
an appropriate regulatory authority, and investigation of suspected frauds, irregularity or
impropriety which could potentially lead to civil, criminal or disciplinary proceedings;
while focusing primarily on accounting issues.
Forensic accounting is intimately related to auditing, particularly when we
mention forensic auditing. Thus, observing the comparative table 1, services provided
by accountants include, amongst others: expert witnesses, being forensic services to
give proof in accounting issues in litigations and auditing and to certify the veracity of
accounting statements diligence. The forensic job is totally analytical in as much as in
the end it tries to calculate the rate at which losses have been inflicted on the business.
Generally, reporting in forensic accounting is programmed for a certain period. Yet,
different from auditing, , there are no regulatory organizations which control efforts to
be put into forensic accounting.
Table 1 - Comparison of Forensic Accounting and Financial Auditing
Items for analysis Forensic Accounting Auditing
Serve as a backing to prove a fraud Continuous to certify the state of the
in the business in an apparent risk art of a business and comply with an
Why, When and Where the prone environment. efficient market theory
services take place
Scope of the job Present analytical accounting and Opine on the accounting statements
financial information to support of business entities considering all
legal and administrative decisions criteria used in its preparation
Details of tasks performed Detailed planning of tasks aimed at Sampled and/or probabilistic
documenting deterministic and procedures to serve as a base of
calculative analysis. concluding the financial statement.
Periodicity When necessary and particularly Covering the fiscal year to
according to the periods stipulated by substantiate the activities of the
the Judge or client. accounting period.
Reporting Investigative or expert reports Financial statements, management
letters or auditors’ report.

Ideology of forensic accounting

The ideas of separating financial auditing from forensic accounting supports the
premise that, unless it is investigative, financial auditing is not meant to investigate
frauds, even though we have the provisions from the PCAOB for auditor’s fraud
responsibility. Therefore, in the various researches about the participation of auditors in
detection of frauds, one would observe that their statistics show low participation
during the course of an audit. This attempt boldly explains the cornerstone of corporate
auditing by distinguishing the levels of accountability, integrity, transparency, ethics,
competence and independence, apart from emphasizing the scope of work, data
gathering, review procedures and reporting.
Forensic accounting, therefore, emanates from social discourses, as the accounting
profession tries to give an answer to a typical problem brought by the growth and
diversity of opinions in the social science structure. At the highest level, the social
norms which guide the selection process are ideological (Mason, 1980, p. 30). Such
discourses are replete in the works of Foucault, 1972; Larrain, 1979; Eagleton, 1991 and
the host of others.

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124 Imoniana, J. O., Antunes, M. T. P., Formigoni, H.

Characteristics of Forensic accounting

In order to expatiate on the peculiarities of forensic accounting, it is worthwhile
giving it a broader view under the taxonomies of a sub-activity of accounting. Such a
breakdown for forensic accounting involves the following:
a) Financial accounting, economics analysis, fiscal and criminal law,
psychological, administrative and investigative dispensation;
b) Application of forensic standards – possibility to use the reports in a
proof of Law in courts or tribunals,
c) Can be used in the following situations:
 Investigation of frauds - thorough investigation and calculation of the
impact on the business and therefore suggesting the arrest of the culprit for a criminal
suit. Today, in the IT environment, where users’ profiles are very similar and access
controls are somehow lacking, this becomes critical. A general problem in forensic
identification arises when a suspect is observed to have a particular rare trait, or
combination of traits, also known to be possessed by the criminal (Balding and
Donnelly, 1995).
 Legal disputes and/or arbitration
 Preparation and submission of expert reports
 Supporting of Judges in subjects relating to accounting
 Verification of accounting records
 Supporting in due diligence.
Yet, according to Zysman (2009) a capable Forensic Accountant should have the
following characteristics:
 curiosity;
 persistence;
 creativity;
 discretion;
 organization;
 confidence; and
 sound professional judgment.
Still, according to the same author, a Forensic Accountant must be open to
consider all alternatives, scrutinize the fine details and at the same time see the big
picture. In addition, a Forensic Accountant must be able to listen effectively and
communicate clearly and concisely.
According to Zysman (2001) forensic accounting activities include:
 Criminal investigation, which are usually on behalf of the police with the
aim of presenting evidence in a professional and concise manner.
 Shareholders and partnership dispute that involve analysis of numerous
year financial records for valuation and qualification of the issue in dispute;
 Personal injury claim, where, for example, economic losses from a motor
accident or wrongful dismissal may need to be quantified.
 Business interruption and other types of insurance claim. These
assignments involve a detailed review of the policy to investigate coverage issues and
the appropriate methods of calculating the loss.

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The Forensic Accounting and Corporate Fraud 125

 Business/employee fraud investigations which can involve fraud tracing,

asset identification and recovery, forensic intelligence gathering and due diligence
review.
 Matrimonial dispute involving the tracing, locating and evaluation of
assets.
 Business economic losses, where a disputed contract, construction
claims, expropriation, product liability claims and trade marks are the issues.
 Professional negligence ascertains the breach and quantifies the loss
involved, and mediation and arbitration, as a form of alternative dispute resolution.
Frameworks and Laws enhancing the control of fraud
Lately, several frameworks otherwise known as best practices and Laws have
been implemented to enhance the control of fraud in various countries that undoubtedly
affect all corporations which have international exposure. They range from COSO
(COMMITTEE OF SPONSORING ORGANIZATIONS OF THE TRADEWAY
COMMISSION, COBIT (Controls Objectives for Information and Related
Technologies), Sarbanes Oxley Law involving specially Sections 101, 202, 302, 404,
409, 802 and 906 which introduces the PCAOB (Public Company Accounting Oversight
Board) Auditor independence, Corporate management responsibility; importance of
Internal Control systems and the monitoring of the managerial responsibilities in
general; corporate fraud, criminal concerns and penalization, to mention just a few.
According to Tarantino (2006), in order to comply with SOX controls, one has to be in
accordance with the recommendations of COSO, COBIT international standards of
corporate governance.
Therefore, it is quintessential that the said frameworks and laws agree with what
every SEC and Central Banks worldwide as regulating bodies offer in congruence with
the objective of protecting the interest of stakeholders. This would assist the
effectiveness of curbing money laundering and drug trafficking, is notoriously alleged
as having a link with terrorism. Following Albrecht, Howe and Romney, (1984) an
individual is influenced by a moral perception, situational pressure in which one is
encountered and opportunity is taken to commit fraud.

3. METHODOLOGY
The study adopts an exploratory approach, distributed into theoretical and
empirical to tackle the ideology of forensic accounting and its perspectives, and also, in
the end, it performs a discourse analysis to solidify our research objectives.
In the theoretical approach, we summarized all the available literatures relating to
the topic. This entailed a search in the host of libraries of the main schools of
accountancy in the globe and the main databases: EBSCO, Business Sources Complete,
Proquest, JSTOR and also Brazilian Institutional Database - CAPES that serves
researchers nationwide and worldwide; and Journals such as AOS, JFA, AJM, BJSP,
AR, JA, to mention just a few.
As we try to verify the characteristics of forensic accounting through empirical
analysis, Bunge (1980, pp. 13-14) signals possible epistemological problems that should
be checked. This enlists categories of problems such as: logical, semantic,
gnosiological, methodological, ontological, axiological, ethical and esthetical. Thus,

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126 Imoniana, J. O., Antunes, M. T. P., Formigoni, H.

within these problems, we relate forensic accounting more closely to gnosiological,

which, according to the author aspire empirical concept.
In addition to this, we performed the discourse analysis based on a lecture given
by GOMIDE, Eduardo de Freitas – CEO of Kroll, Brazil on March 5th , 2008 at The
Municipal Government Centre of the City of Rio de Janeiro about Forensic Accounting
and prevention of frauds. It is one of the steps in making every effort to continually
improve the programs and activities developed by the institution towards goal
congruence (MUNICIPAL GOVERNMENT OF THE STATE OF RIO DE JANEIRO,
2008). The discourse has been extracted from the CONTROLLER'S Bulletin -
bimonthly Journal published in the format of dossiers concerning frauds and corruption.
While there is no fixed method prescribed for discourse analysis, there are
common phases and some validation tests (Wetherell, Stiven & Plotter, 1987; Hollway,
1989).
In order to enhance our discourse analysis, we separate some terms, words,
sentences, phrases and paragraphs used to guide emphasis given to the main portion of
the speech by attributing coding categories with the aim to validate this discourse, we
ran the NVivo Software for Qualitative Analysis version 9.
Thus, to establish the coding categories (otherwise referred to as nodes) that were
used to analyze the discourse, we borrow a leaf from the coding families as proposed by
Bogdan and Biklen (1992). The cited coding categories are: Context code; Situation
code; perspective code; process code; activity code; event code; strategy code; and
relationship and social structure code.
In our study, we associate them with the normal taxonomy for observable coding
family (parent, child) for forensic accounting, among which we enumerated in the
following discourse analysis.
.
4. DISCOURSE ANALYSIS
As a reminder, the discourse analysis is on a lecture given by Eduardo de Freitas
Gomide – CEO of Kroll, hereinafter referred to as EFG, in Brazil on March 5th , 2008 at
The Municipal Government Office of the City of Rio de Janeiro about Forensic
Accounting and prevention of frauds.
The entire discourse was analyzed and the frequency of the most frequent 32
words can be seen as in Table 2. In essence, these words or terms vary in their intent,
peculiarity in the characterization of forensic accounting in which out of the mentioned
words the most relevant ones were described by counts and weighted percentages
respectively as follows: accounting 53 and 0.78%; analysis 25 and 0.37%; company 76
and 1.12%; financial 35 and 0.52%; forensic 39 and 0.58% and finally fraud 58 and
0.86%.

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The Forensic Accounting and Corporate Fraud 127

Table 2 – Word frequency Analysis

Word Length Count Weighted Percentage (%)

Accounting 10 53 0,78
Analysis 8 25 0,37
Assets 6 18 0,27
Audit 5 19 0,28
Auditing 8 15 0,22
Billion 7 15 0,22
Brazil 6 16 0,24
Business 8 20 0,3
Case 4 21 0,31
Client 6 14 0,21
Companies 9 31 0,46
Company 7 76 1,12
Data 4 18 0,27
Financial 9 35 0,52
Forensic 8 39 0,58
Fraud 5 58 0,86
Identify 8 15 0,22
Information 11 22 0,33
Internal 8 27 0,4
Kroll 5 20 0,3
Million 7 15 0,22
More 4 16 0,24
People 6 18 0,27
Problem 7 22 0,33
Risk 4 23 0,34
Those 5 15 0,22
Time 4 19 0,28
What 4 39 0,58
When 4 25 0,37
Where 5 22 0,33
Which 5 46 0,68
Working 7 16 0,24

Thus, after a summary run by NVivo Software for Qualitative Analysis, one was
able to assemble the following 23 categories describing forensic accounting and
corporate fraud as in Table 3.
According to Laclau and Mouffe (2001) there are four key concepts that are
interwoven, they are elements, moments, articulation and discourse. In the authors
view, an element is a difference that has not been developed via discursive articulation.
Once an element is identified linguistically, it is transformed into a moment.

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128 Imoniana, J. O., Antunes, M. T. P., Formigoni, H.

Articulation is the practice of establishing a relation among elements that modify their
identity.
Table 3 - Structure of Categories – Forensic Accounting and Corporate Fraud

In this respect, in order to expatiate on the said discourse, we bring all the logical
representations shown in the literatures and otherwise, and project them towards the
nodes; see Figure 1. This in turn represented in a number of icons that dynamically
symbolize something to us in a self-reproduction and have been presented as follows.

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The Forensic Accounting and Corporate Fraud 129

Figure 1 – Logical representation of nodes in relation to their source

a) History of forensic accounting (Perspective code)

As a recapitulation, Economics as a field of study was the first to mention forensic
accounting some centuries ago. This was said to have been emphasized by Kutilya who
cited 40 ways of embezzlement.
In this discourse, EFG cited that the activity of forensic accounting as a financial
service at Kroll seemed to have started a fight against fraud first in United States of
America around 1938.

b) Concepts of forensic accounting (Context code)

The main aim of forensic accounting is not only to understand how a fraud was
committed, but to document it with the highest possible accuracy. According to
Gomide (2008, p. 167) a good forensic accounting combines accounting analysis and
also requires good accounting and investigative skills).
In the discourse, EFG cited that “it falls under general information or certain topics, or

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130 Imoniana, J. O., Antunes, M. T. P., Formigoni, H.

subjects as it can be sorted. […] general statements that people make to describe the
subject, as investigative accounting, or even forensic auditing”.
In order to have a broader view of forensic accounting, see the text search run
report figure 2 below.

Figure 2 Broader concepts of forensic accounting

It shows right from the first text that “ good forensic accounting combines [….]
economic analysis and criminal…. say profile of the subject being investigated. This
goes as far as to showing that forensic accounting was initially coined by Peloubet in
1946.

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The Forensic Accounting and Corporate Fraud 131

c) Focus of Forensic Accounting (Context code)

Forensic accounting falls within the context of our environmental needs. That is,
to give forensic assistance in accounting issues. This is very vital in the environment
that is flooded with fast moving businesses and polluted with politicians who have
powers to corrupt well meaning businessmen. This normally happens in detriment of
well planned public projects that are roughly implemented.
In terms of qualities of a forensic accountant, Fitzhugh (2010) mentioned that by
the nature of the job, forensic accounting favors individuals who have prior work
experience in fields like law enforcement and auditing. Maturity and prior professional
knowledge give forensic accountants a frame of reference to utilize their professional
judgment and frequently a "gut" instinct developed from years of experience. Entry-
level staffers right out of college generally do not have that life experience to have
developed these talents.
d) Comparing auditing and forensic accounting (Situation code)
The main difference between auditing and forensic accounting is that one
performs audit to assist management in adequately implementing their strategies
towards goal congruence, and also reports the true and fair state of affairs of a business
to stakeholders to enable them make decisions while we perform forensic accounting to
investigate conduct deviation and measurement of its impacts. Each forensic
accounting job differs, and there are no generally accepted accounting principles for this
practice area to provide guidance to practitioners on how to perform an engagement. It
is an unstructured environment requiring self-motivation (FITZHUGH, p. 28, 2010).
On the contrary, audit is structured and is guided through generally accepted auditing
standards and procedures. As we are aware, one of the main procedures reviewed by
auditors is the segregation of duties. By segregation of duties, we mean definition of
responsibility by exposing a clear line of authority when defining processes; they are all
obvious steps of accounting for fraud. But in the vast majority of companies in which
forensic accounting is requested and performed, this is lacking, thereby showing a point
of vulnerability to be observed.
e) Peculiarities of a fraudster
EFG mentioned that when you see an employee who is excessively proactive,
something could be wrong. “…. working weekends and never took a vacation. This is
true in the football history, and took place in Victoria”. Another case, the client in São
Paulo involved a Santa Claus: the guy never took a vacation in life, worked at home for
20 years or so, was the favourite character in the company, fancied himself at the end of
the year, distributed presents, and had earnings of $ 1,500.00. Over seven years,
defrauded the company of $ 6 million”.
According to EFG “In many cases in which we work, we see what is funny; it is
the embezzler who hires us because we can expect to give him a certificate of good
conduct. He thinks, "I will bring Kroll, who is reputed to be the best. It will audit, you
will find nothing, so I'm fine."
f) Extension of the forensic accounting investigation (Situation code)
The general framework of forensic investigation limits its coverage to areas
naturally prone to malpractices, they are areas such as: contracts and negotiations;

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132 Imoniana, J. O., Antunes, M. T. P., Formigoni, H.

billings; procurements and accounts payable. Others are payroll, information systems
manipulation or maladjustments, to mention just a few.
“I often tell my clients that Kroll would not exist if they made a good contract
analysis every year. If they made a simple analysis of adhesion of these contracts, I'd
say 70% of fraud would cease to exist”
According to Gomide (2008), “We base our strategy in such areas that have
greater exposure to risk of fraud”. According to the business context such areas are:
inventories, purchasing and generally they are exposed to theft of financial assets.
“These have an obvious reflex in the activities of the organization, in the profitability
because it opens a wound in the business whereby the organizational climate becomes
highly polluted”.
“We would say that a concurrent review of contracts would ultimately remove
70% of frauds. So, Kroll would not have as many clients as we have today if the simple
verification of prices, volumes, due dates as stipulated in the contract are monitored.”
He mentioned further, “I have a client who paid unusual professional fees to a tax
specialist to the tune of USD$ 20 million before the consultant was changed, such
expense could also raise an eyebrow”. Marketing and publicity are very intangible, this
is an escape to fraud; in general, outsourcing, which could be questionable, ought to
receive management attention.
Concerning Turning Around Accounting Information Systems (TAAIS), through
this tactics, the fraudsters are able to dribble the accounting information systems and
module up the information provided by them to the decision makers. The structure and
the integrity of the AIS are reviewed.
Normally, when companies acquire systems, they lose sight of adequate
parameterization of such system when they try to borrow a leaf from the default
parameter to reduce costs. This ends up in having a fragile ERP being implemented with
wrong control procedures in place and even open to outsiders.
For Gomide (2008), it is very difficult to measure and monitor IT contracts. This
is for us a black box which needs some clarification and some care. “When a client says
he can only use certain technology (ABC or XYZ), we begin to raise some suspects.”
g) Auditors fraud responsibility
An auditor’s role in fraud detection takes a new turn as we adapt SAS No. 99
Implementation Guide. As it may not be different from other corporations all over the
globe, Brazilian corporate management is very cunning. For them all controls are
effective except if you are able to prove otherwise, meaning to say that it is virtually
impossible for you to hold them responsible for fraud due to lack of direct evidence as
they are able to camouflage traces of malfunction. So forensic accounting plays an
important role in this moment since we perform information systems audits.
In the discourse, EFG represented fraud detection in forensic accounting with
various symbols. Figure 3 – Forensic Accounting and Fraud - demonstrates the various
interpretations one was able to have from this discussion.

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The Forensic Accounting and Corporate Fraud 133

Figure 3 – Forensic Accounting and Fraud

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134 Imoniana, J. O., Antunes, M. T. P., Formigoni, H.

h) Monitoring frauds and enhancing financial performance

According to EFG, what we do is use that information derived from historical
performance doing the trimming of time - as companies change over time. Thus, we
use the past two or three years of information, understanding the normal pattern of this
company and detect exceptions. At the moment, one detects an exception and proceeds
to a closer investigation, which is barely an audit. It is therefore important to map
frequency, values, and probabilities and understand the internal controls that are in
practice within the company. Wise characteristics, the skills needed are such as those
shown in the Graph 1, ranging from analytic to fraud detection and asset tracing skills.
Graph 1- Enhanced Skills for Forensic Accounting

Adapted from Davis; Ogilby, and Farrell (2010)

i) Identifying Red Flags - investigative mentality (event code)
The use of interpretation of red flags arising from accounting information is
hammered in the discourse. “Something smells like fish” […] these are some
adaptations of some controls developed in banks, particularly to track some problems
related to money laundering (Gomide, 2008, pp. 8). What can one consider as an
example of red flags - unusual revenues, earnings or earnings management for instance?
This applies to companies negotiated in stock markets whose book values are
manipulated so that investors are unable to follow the twists and turns of events.
According to EFG, “I have an example of a client in Rio, who nearly zeros his
inventory as he pushes sales to the wholesaler at the close of quarterly reporting. A
month later, he receives a bunch of returns, but the headquarters had recognized all the
revenues. Three years late, this modus operandi was changed after hiding bad results
for so long a time”.
Controlling problem manifests itself through a variety of easily identified
symptoms – red flags that usually reflect poorly designed processes or questionable
ethics (Bickley, 2004). These symptoms could be as in Table 4.

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The Forensic Accounting and Corporate Fraud 135

Table 4 – Red Flags

1 Organization has multiple charts of accounts
2 Accounts procedures not documented
3 Large adjustments are made after preliminary results are known
4 Organizations reports on other business segments with a net loss
5 Accountability for each general ledger account is unclear
6 Reconciliations are not automated
7 Large transactions are given special terms
8 Commissionable sales and bonus pools exclude significant items
9 No adequate systems for major AIS (Accounting Information Systems)
10 Standards are not documented
11 Spreadsheets are a key part of important processes
12 Processing staff work takes a lot of overtime (especially when reporting dates)
13 Restructuring Expenses excluded as a percentage of the revenue drop in the quarter
14 Dormant ledger accounts exist
15 Customer are assigned multiple numbers
16 Internal accounts do not reconcile
17 Management reporting adjustments do not net to zero
18 Each small subsidiary has its own separate accounting processing group
19 The organization has a large number of special purpose entities
20 Evaluation of control effectiveness is left to internal audit
21 Performance metrics do not exist for transactional processes
22 Exceptions to policies are routines
23 The books are closed prior to quarter end
24 Ad hoc test and implementation plans are used for system upgrades
25 Below-satisfactory audit ratings are always reflected in performance appraisals

According to EFG, the signs of red flags are innumerable. They range from the
following:
a) Revenue and profitability unreal;
b) High volume of financial transactions with very low assets;
c) Hiring Consultants, Lawyers, Marketing Experts, Advertising Agency;
Outsourcing; NGOs services;
d) Excessive volume of receivables;
e) Lack of inventory count;
f) Limitation in usage of IT software or resources.
He added “The biggest fraud I have worked on here in Brazil was relatively
simple: the director hired some legal advisors, they gave an opinion to the company
about the collection of certain taxes. Revenue came in the course of justice and would
win in the second or third instances and, later, the company marked up all their
calculations. Only in that case until rulings, the company had paid $ 20 millions in

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136 Imoniana, J. O., Antunes, M. T. P., Formigoni, H.

consultancy fees to tax consultants”. He added, “Be at alert when you hear “I can only
use this technology…….” or "I can only hire one company for maintenance because
they are the ones who know that database."
j) Traces of Red Flags (Event code)
What is the sign shown to the management that it has ignored all along? In all
circumstances, all the business trends are shown by the financial statements. They
accept that the management receives overlapped information that the control
environment permits, there is always the likelihood of having the hunches about the
happenings.
This event code has the preoccupation with the frequencies of the cases that
generate forensic accounting services and what the alerts presented to the management
are. Are the management, regulatory organization and the research institutions prepared
to give the support needed to track a more disastrous impact on business? Suppose we
associate the impact of norms that are readily prepared by the government to safeguard
the interest of the investors, what technologies are used to dribble the said regulators.
k) Case study of Enron (Event code)
To describe how the financial analysis is used to track anomaly in business
transactions, the discourse used as an analogy, in the case of Enron, is demonstrated in
figure 4. This notorious case showed the results of 1999 as compared with those of
2000. In 1999 the revenues were US$ 40 billion whereas in 2000 they were US$ 100
billion. According to Gomide (2008) just in a quick look, a question surfaces: how does
a company grow 100% between an exercise and the other? What is the rationale? Has
the price of energy sky rocketed, made a significant investment? Is it a point of
interrogation of which we must be interested in? Cost of sales grew in the same
proportion, from USD$ 39 billion to USD$ 98 billion?
At this juncture, one would like to analyze further; eyebrows are raised when one
sees that cash and receivables have grown from 3 billion to 13 billion within the period.
In a breakdown we observed that it is as a result of price risk management activities
related to the operation of derivatives. We therefore perceived that from one year to the
other, Enron decided to change operations (from energy Generation and Distribution
Company, to trade and negotiate receivables through derivates). Forensic accounting
sees this as unusual to the business and questions whether the perspective of the
business is bright and, for that, it may be uncertain.

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The Forensic Accounting and Corporate Fraud 137

Costs
Revenue 1999
100 2000
271.90
34,761 94,517
Earnings 1999 2000
Operating Expenses
40,112 100,789 1999 2000
1999 2000 3,045 3,184
100 251.27
100 104.56
802 1,953

Depreciation, Tax & Impairment

100 143.52 Costs & Expenses 1999 2000
1,504 1,135
1999 2000
100 75.46

Gross Margin 39,310 98,836

Cash & Receivables
1999 2000 100 251.43 1999 2000
Revenue 3,836 13,644
0.0200 0.0194 100 355.68
1999 2000
100 97.00 Current Assets
Assets from Price Risk Managt.
40,112 100,789
1999 2000 1999 2000
100 251.27 2,205 12,018
7,225 30,381 100 545.03
ROA
100 320.50
1999 2000 Inventories, Deposits & Others
1999 2000
Revenue
0.0240 0.0299 1,214 4,719
100 388.71
1999 2000
100 124.58
Investments and Other Assets
Asset Rotation 40,112 100,789 Investment, Goodwill & Others
1999 2000 1999 2000
1999 2000 100 251.27 15,445 23,379
15,445 23,379 100 151.37
1.2016 1.5387
100 151.37
Natural Gas Transmission
100 128.05
1999 2000
6,948 6,916
100 99.54
Property, Plant & Equipment, Net
Total Assets
Eletricity generation & Distrib.
1999 2000
1999 2000 1999 2000
3,552 4,766
33,381 65,503 10,681 11,743 100 134.18

100 96.23 100 9.94

Fiber-opt, Contruct-in-prog &other
1999 2000
3,412 3,777
100 110.69

Figure 4 – Du Pont Analysis of the financial situation of Enron for the period ended in
2000
EFG added, “Let’s see profitability by comparing the net income to the cost of
goods sold, also from one period to another. There was a variation of 117%. It means I
became much more efficient from 1999 to 2000, I was much more efficient in managing
my net income minus my cost of goods sold”.
l) Assessment and mitigation of risks
The discussant mentioned that they based their control monitoring assessment in
such areas that have greater propensity to presenting a lack of internal control
procedural risks. Internal control risks are the risks whose material errors not
effectively prevented or detected by internal controls are in a timely manner (Imoniana,
2001, p.83). However, it is worthwhile mentioning the inherent risks and their detection
at this point in time. According to AUS-402 (2002), “inherent risk means the
susceptibility of an account balance or class of transactions to misstatement that could
be material, individually or when aggregated with misstatements in other balances or
classes, assuming there were no related internal controls”. Detection Risk (Imminent
Proofs of Misstatement) - What is the risk that the auditor would not be able to detect
adequate proofs about misstatements and be lured to giving opinion about financial
statement that is materially incorrect? (AUS-402, 2002)

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138 Imoniana, J. O., Antunes, M. T. P., Formigoni, H.

m) Performance enhancement and mitigation of risk (Process code)

In this code category, we intended to know how the subject sees the environment
in which forensic accounting activity is being performed. According to Gomide
(2008), it tells you how the subject defines their setting. […] How do they define what
they do?
When we talk about improving financial performance in curbing frauds, we are
fundamentally talking about internal controls and compliance. Inherently, businesses are
exposed to some risks (systematic) known to the management and it should use their
skills to amour the business flow against risks of cash flow or market fluctuation,
normally through hedging and other market tools to dilute such risks. On the other
hand, the unsystematic risks are uncertain and are not easily forecasted. Exactly for this
reason that some people use it as means for perpetrating frauds. “When I mention that
Brazil is yet to see an escalation of accounting frauds against investors, and that this
will become more rampant in the period to come, it is not a gain saying. I know a
couple of companies which performed IPOs and went to the Stock Market, but do not
have an adequate control structure. Neither do they have a corporate governance
practice but still with a deplorable financial structure” (Gomide, 2008).
n) Preparedness of internal audit (Perspective code)
There is a very great concern towards prevention and/or detection of frauds by
internal auditors. By expatiating on this code, the study tries to give some prognostics
about what is likely going to happen to the profession and the business in a short period
to come, concerning the services of forensic accounting.
Through a substantive analysis normally used by the auditors, this code
approaches the discourse by emphasizing our standard operations that need retouches so
that internal audits could be performed with the aim of tracking accounting
malpractices. In these said operations, even though some people might question them,
the concerns of corporate governance are a stimulating upbringing of internal auditors to
match the trends of business frauds.

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The Forensic Accounting and Corporate Fraud 139

o) Forensic Accounting Methodology (Strategy code)

In order to perform a forensic accounting job, there are various approaches which
could be adapted. This ranges from adaptation of auditing approaches to even criminal
investigative approaches. For instance, one can follow the procedures laid out in the
methodology summarized in table 5.
Table 5 - Methodology for executing forensic accounting engagement
St Detailed Procedures
eps
1 Meet with client and clarify scope
2 Perform a conflict check and identify main actors
3 Perform an initial investigation to classify the apparent risk level of the environment
4 Develop an action plan, choose the approach and team
5 Gather the relevant evidence by locating documents, information and/or assets
6 Perform end of finding analysis and measure damages inflicted on the business

In this methodology, the auditor is expected to have the first contact with the
auditee, identifying who and who in the case, making his initial conclusion about the
environment, and selecting the existing strategies to investigate the case. Additionally,
he should gather the relevant data to substantiate his hypothesis and perform end of
findings analysis by quantifying the damage made on the business.
Zysman (2009) outlined the following steps in executing Forensic Accounting
engagement;
 Meet with the client to obtain an understanding of the important facts,
players and issues at hand.
 Perform a conflict check as soon as the relevant parties are established.
 Perform an initial investigation to allow subsequent planning to be based
upon a more complete understanding of the issues.
 Develop an action plan that takes into account the knowledge gained by
meeting with the client and carrying out the initial investigation and which will set out
the objectives to be achieved and the methodology to be utilized to accomplish them.
 Obtain the relevant evidence: This may involve locating documents,
economic information, assets, a person or company, another expert or proof of the
occurrence of an event.
 Perform the analysis: this may involve: (a) calculating economic
damages;summarizing a large number of transactions; (b) performing a tracing of assets; (c)
performing present value calculations utilizing appropriate discount rates; (d) performing a
regression or sensitivity analysis; (e) Relevance of Forensic Accounting utilizing a
computerized application such as spread sheet, data base or computer model; (f) and utilizing
charts and graphics to explain the analysis.
 Prepare the report. Often a report will be prepared which may include
sections on the nature of the assignment, scope of the investigation, approach utilized,
limitation of scope and findings and/or opinions.

The discourse makes it clear that the Kroll type of methodology is tailor-made. It
is the one that operates from the floor of the factory where all the information about the

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140 Imoniana, J. O., Antunes, M. T. P., Formigoni, H.

company permeates. According to the discussant, even though they use all the
techniques (in our view - questionnaires, corroboratory inquiry, observation,
documentary evidences, re-execution) used by the auditors in a graduated format, their
methodology allows them to interview, the Cleaners, Gardeners, Maintenance
Technicians, etc: posing questions such as – is the company ethical? However, since
the employee might not know what ethic is, he tries to explain what everyone does in
details. There lies the analysis which could be done through our software based on
qualitative data analysis. Kroll uses a variety of tools. These are such tools as SAS
apart from the application of the Excel resources, which are very useful for data
analysis.
In summary, according to EFG it is the same principle, only instead of using the
financial analysis used to identify correlations and regressions red flags, we use
statistical modelling.
p) Average working hours for forensic accounting job (Strategy code)
This strategy code opens our eyes toward the recommended approaches to
handling different forensic accounting tasks, weighing the cost/benefit analysis of
running certain procedures. With the vast IT resources available nowadays, the forensic
accountant has from manual to computerized approaches to execute its tasks. It does
rest on him to be prepared to give the best professional judgment when it is necessary;
this, however, is based on his experience.
Generally, the working hours depend on the team and their experience and, most
importantly, the review procedures are chosen by the auditor. There is no rule of thumb
as to determining hours to be spent since it involves more detailed diligence.
On average, those in a forensic job, take between one month, one month and a
half, with three professionals working full time. EFG said, “we budget for hours, but we
try to define it in advance because no one wants to receive a bill for 500 hours when he
was expecting 100 hours. We seek to define the scope and project for hours, but it is
always an estimate, because you never know how a fraud will end”.
q) Bone of contention of fraud audit (Relationship and social structure code)
The societal relationship is always something of great preoccupation. What is the
impact of a business that has its continuity interrupted or near collapsed, that generates
resources to say, sustain a municipal government? Should the budget of the municipal
administration depend highly on these resources, the exercise of forensic accountings
turns to be a social responsibility to bring about transparency and restore ethics.
Does one say that auditors do not normally discover frauds in their cause of their
evaluation because their structured approach does not permit such a deviation?
Auditing is, traditionally, business inclined and risk based. Or, are auditors afraid of
performing additional jobs which would not be readily accounted for? Normally, the
independent auditor comes and stays for a very short period. It does not seem to be a
ripe time for someone to gain his confidence and reveal to him some dangerous plans
for frauds in the organization.
What about the internal auditor? Why is it that their control recommendations are
not rightly implemented? There is a great concern about the effectiveness of the works
of the internal auditing, the neighbours of the fraudsters. Questions about whether
management has lost faith in the internal auditors are factors which trigger additional
reflection.. Or that a fraud is revealed by discontentment of employees who have ideas

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The Forensic Accounting and Corporate Fraud 141

of the case, in some cases employees who are afraid of the faith of the organization,
who bear the grudge of such malpractices, with the element of suspicion and revealing it
or anonymously giving a sign to the auditor by reporting the fraud. Something that has
helped the auditors recently has been suggestion boxes installed all over the
organisation where information about frauds could be lodged. “Kroll utilizes the
statistical software by performing the regression and correlation analysis to pinpoint
unusual transactions”. By mapping and tracing financial errors that are socially
unacceptable. Those which fall out of the realms of the normal authorization,
particularly in the cluster analysis, are clearly shown as abnormal. “In such a situation,
we observe excess confidence on employees, lack of adequate procedures and
segregation of duties, where the same employee purchases and effects payments”
(Gomide, 2008).
According to research carried out by Ernst & Young covering corruption or
compliance - weighing the costs in 10th global fraud survey, the result is alarming. As it
can be observed in table 6, the percentage of the success of an internal audit job shows
“teeth for tat”. In analysis of one of the questions posed to the respondents, being
executives from all works of life: “How successful are internal auditors in detecting
bribery and corrupt practices”:
Table 6 – Percentage saying internal audits are not very or not at all successful
Central and Eastern Europe 44
Australia/New Zealand 32
Western Europe 25
North America 19
Far East 11
Middle East, India and Africa 11
Japan 8
Latin America 7

Adapted from Ernst & Young (2008)

According to Gomide (2008) “by experience, a vast number of frauds in which I
have worked were not detected by auditors and by an internal control review, because
the internal control structure was not effective”. He added that a fraud suspect is
revealed because that employee who takes short or no vacations, plays soccer with the
majority of the big lords of the organization, breaks his leg and someone takes up his
tasks in order to keep the operations moving, then the problem is discovered.
5. CONCLUSION
As far as the our findings go, firstly, we characterize forensic accounting
activities in eight perspectives, namely: (i) investigating all works of life say:
psychology, philosophy, economics, finance, law and finally concentrating on
accounting issues (conceptual aspects); investigation of frauds (mitigating internal
control procedural risks), (iii) judicial disputes on organizational structures and
succession (arbitrations with true and fair accounting figures on inherent risks), (iv)
elaboration and submission of expert reports (giving expert opinion), (v) due diligence
(giving bases for value definition).
Thus, in as much as forensic accounting emanates from investigative auditing, it is
difficult to detach it from pure auditing. As we can observe in table 2, words or phrases

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142 Imoniana, J. O., Antunes, M. T. P., Formigoni, H.

building which show the most common words, which one is able to construct with the
sources available in this study.
There is the fact that the forensic accounting practice is observed as a detachment
of auditing. This enables it to be categorized as one of the professions that will gain
space in time in terms of importance, because corruption is gaining ground in most of
the developing countries, be it in the public sector or private businesses.
The main elements of the characteristics of the forensic accounting practice in
Brazil match with the global practices as one reflects upon the discourse made to the
municipal government of Rio de Janeiro expatiated upon in this study. It tends to give
support to management and stakeholders at large to decide on doubtful fraudulent
transactions.
Fragile internal controls in some organizations seem to carry the vote in terms of
avenue that gives room to be perpetrated by fraudsters. Unless this is addressed,
enterprises will continue to spend their scarce resources to maintain fragile strategies
which could be foiled towards goal congruence.
Results show that, in practice, Kroll, and other accounting profession
organizations are assisting in consolidating the new function of accounting to support
the new era of accounts in the territories where they operate, such as Brazil. Even
though enterprises like Kroll utilize the standard audit approach to gather evidence, the
closeness to the lower echelon of the staff seems to be the most productive approach to
fishing information relating to frauds in the organization.
Noteworthy that some frauds have a link with control culture developed by the
management of some organizations, sometimes associable to probable fiscal
malpractices by some management who are afraid of retaliation from close allies.
Normally, these weaknesses are known to some fraudsters; therefore, they create
reluctance in the process of infringement of punitive measures on some employees
caught in certain fraud acts.
Lastly, the fight for maintaining the internal audit activity has just begun. In the
recent decades, during the boom of reengineering, it was classified as one of the
departments (cost centres) that were wiped out in some organizations but it managed to
survive. Nowadays, we have the issue of frauds that is becoming very rampant and the
necessity to have an effective internal control to back corporate governance rules is
gaining ground. The idea that frauds have been least detected by auditors is changing
shape as auditors are rightly trained to detect frauds apart from emphasizing traditional
safeguard of assets.
As a hint for further researches, one would suggest the comparative study of
discourses presented by key actors of the forensic accounting profession in other
countries for analysis. This will enable other researchers to sense the state of art in
other countries where the practice is highly disseminated since nobody reveals how he
or she performs the forensic investigation.

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The Forensic Accounting and Corporate Fraud 143

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