Forensic and Investigative Accounting Module 1

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(Promoting Excellence in Forensic Accounting /Audit Investigation Skills Globally)
FORENSIC AND INVESTIGATIVE ACCOUNTING
Module 1
INTRODUCTION TO FORENSIC AND INVESTIGATIVE ACCOUNTING
OBJECTIVES
After completing Module 1 you should be able to:

1. Distinguish forensic accounting from fraud auditing.
2. Understand the definition of forensic accounting.
3. Understand the threads of accounting history and other commercial developments that led to
the creation of today's forensic accounting.
4. Understand how public auditing trends may have led to accounting scandals.
5. View the parallel developments of formal accounting practice, accounting literature, and
forensic and investigative accounting.
OVERVIEW
Although forensic accounting is not a new discipline, it is one that is rapidly developing and
gaining status in the accounting and legal communities. The media have been energetically
covering accounting scandals and intrigues, which are often characterized as the forensic
accountant's "beat." If the number of articles written on the topic is any indication, readers of such
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esteemed newspapers as The Wall Street Journal and The New York Times are captivated by the
forensic accounting topic. The good news for accounting students is that if current trends persist,
forensic accounting and its many sub specialties will provide some very interesting and lucrative
career opportunities.
Accountants, long the butt of bean-counter jokes, are viewed a bit differently these days. Major
scandals certainly have tarnished the image of the accountant, but the "forensic accountant" is
getting a lot of respect. Gordon Brown, British Chancellor of the Exchequer, on October 10, 2006,
said that "what the use of finger prints was to the 19th century and DNA analysis was to the 20th,
forensic accounting will be to the 21st century."
After the terrorist attacks of September 11, 2001, it was determined that a number of the
perpetrators used debit cards that had been set up by cash-largely untraceable brought into the
country. There were even some transactions with no moving money, possibly using offsetting
receivables and payables, that were still traceable.2 The FBI agents employed forensic-type
techniques when looking at credit cards, phone records, and interviews with terrorists' neighbors
and friends. Shutting down the cash flowing into the terrorists' network was accomplished using
financial sleuths.
These may be unwelcome visions of accounting, but they point out that accounting-and forensic
accounting in particular-is not only noteworthy, but newsworthy. In light of the notoriety and
scandal, one movie analogy does seem appropriate: Similar to the agents in the film Men in Black,
the forensic accountant's armory must be equipped with talent to suit every purpose, from
detecting cooked books, to kiting, to money laundering. As AI Pacino said in the movie The Recruit,
"Things are not what you think they are."
This Module provides a broad definition of forensic accounting and creates a frame of reference
for students to read and understand the rest of the book. Upon tracing the threads of forensic
accounting through its history and development, students will understand forensic accounting to
be a challenging discipline that substantially interacts with economics, finance, information
systems, and the law. Terry McCarthy, audit partner with Green & Seifter, "liken[s] it to 'CSI' or
'Law & Order,' but instead of figuring out the trajectory of a bullet, you're trying to find out how a
transaction occurred.”

Definition and Development of Forensic Accounting
DEFINING FORENSIC ACCOUNTING
Many people believe forensic accounting and fraud auditing are synonymous. They are not. A
fraud auditor is an accountant especially skilled in auditing who is generally engaged in auditing
with a view toward fraud discovery, documentation, and prevention. A forensic accountant may
take on fraud auditing engagements and may in fact be a fraud auditor, but he or she will also use
other accounting, consulting, and legal skills in broader engagements. In addition to the
accounting and investigative skills that should certainly be present in the fraud auditor, the
forensic accountant needs a working knowledge of the legal system and excellent quantitative
analysis and communication skills to carry out expert testimony in the courtroom and to aid in
other litigation support engagements.
Bruce Dubinsky, a partner in Klausner, Dubinsky & Associates, stresses their broad approach by
emphasizing that there are plenty of accountants getting involved who should not be involved in
the niche. "'The only limit to our size is finding competent professionals.' He explains that just
being an accountant is no longer enough to do this work-the person has to understand the legal
system, and what the law says. How to interrogate and interview people are musts. Tracking leads
and obtaining legally usable intelligence is also crucial. 'Many accountants think it is simply fraud
investigation and it's not. It really is much more than dealing with the numbers. It's no longer just
basic fraud work.
Robert Overbaugh, a partner at Pittsburgh-based Sisterson & Co., is more blunt. He asserts that
"forensic accounting is often thought of, in somewhat narrow terms, as dealing with the
investigations of fraud or financial misconduct." His firm thinks in broad terms and performs
engagements in most areas in which attorneys use financial experts in litigation and disputes.7 To
put it another way, a forensic accountant reduces the complexity by distilling information and
slicing away deceptions to help a judge or jury to see the essence of a financial disputes.
Forensic accountants provide perspective in situations evaluating whether accounting information

is presented fairly without GAAP-based constraints, such as:
• Identification of financial issues.
• Knowledge of investigating techniques.
• Knowledge of evidence.
• Interpretation of financial information.
• Presentation of finding.

James Edwards, the publisher of the Journal of Forensic Accounting, champions this broad
definition rather than the narrow fraud examination definition. He believes that forensic
accountants are employed to seek, interpret, and communicate transactional and reporting event
evidence in an objective, legally sustainable fashion, not only in situations in which there are
specific allegations of wrongdoing, but also in situations in which interested parties judge that the
risk of loss from wrongdoing is such that proper prudence requires legally sustainable evidence to
support the conclusion that no wrongdoing is occurring.
Concisely defined, forensic accounting is the use of accounting for legal purposes. Hal Rosenthal
gives the modem definition of forensic accounting as "the use of intelligence gathering techniques
and accounting/business skills to develop information and opinion for use by attorneys involved
in civil litigation and give trial testimony if called upon." But in order to establish a context for
understanding all the various forensic activities that are associated with forensic accounting
today, this book uses a more expansive definition.
FORENSIC ACCOUNTINNG SERVICES DEFINED. An AICPA committee says that "forensic

accounting services generally involve the application of special skills in accounting, auditing,
finance, quantitative methods, certain areas of the law and research, and investigative skills to
collect, analyze, and evaluate evidential matter and to interpret and communicate findings, and
may involve either an attest or consulting engagement.
Forensic
First, to many readers forensic may bring to mind a popular academic activity called "forensics"
where students from different schools face off in various contests of argumentative and oratorical
skill. In fact the term "forensic" refers to items that are used in debate or argument, moreover such
items that are used in public debate or forum. In commerce or business, things forensic are
generally those things that relate to a legal forum or court.
Accounting
Accounting students know that there are many definitions of accounting. For some it is the
language of business; for others it is quantifying data for financial purposes-setting up accounts
for things. Taken in a broad sense, accounting refers to many activities that relate to financial
accounts. Although not all-inclusive, these include identifying, recording, settling, extracting,
sorting, reporting, and verifying financial data.
When the terms accounting and forensic are placed together, however, the sum is greater than its
parts. Implicitly, there are a few other factors to incorporate in the definition: time, purpose, and
peremptory.

Time
Most students are familiar with the term forensic medicine. Forensic medicine focuses on events
that have happened-the cause of illness or death-an analysis of the evidence surrounding trauma
that has occurred in the past. Forensic accounting also looks at things past, but it should be noted
that some of its most challenging tasks require projections into the future. Forensic accountants
who value a business, for example, may examine past history, but they often project out in time to
look at future cash flows. When a forensic accountant is engaged to determine the monetary loss
to a family for harm done to a working mother, he or she may look at past earnings but projects
future earnings lost. Forensic accounting focuses on the past, although it may do so in order to
look forward.
Purpose
Purpose is also important. Forensic accounting is accounting performed in some circumstances for
a specific legal forum; in other circumstances it is accounting performed in anticipation of
presentation before a formal forum. One could argue that all accounting work might presuppose
that work performed may be destined for review or argument in a legal forum, but the forensic
purpose is more explicit.
Peremptory
Forensic accountants are also engaged in preventing fraud. Just as a physician may recommend
certain preventative health measures for healthy patients, the forensic accountant might be called
in as a preemptive strike to manage fraud risk. Forensic accountants may be employed in a wide
variety of risk management engagements within business enterprise as a matter of right, without
the necessity of allegations (e.g., proactive). For example, a forensic accountant may take a
preventive approach as a result of normal operations (e.g., review of internal controls or identify
areas of fraud exposure). There is no reason to suspect fraud. Second, a forensic accountant may
be used to detect indicia of fraud
Thus, it's possible to construct a good broad working definition for forensic accounting that
reflects real-world use of the term.
Forensic Accounting Defined

Forensic accounting is the action of identifying, recording, settling, extracting, sorting, reporting,
and verifying past financial data or other accounting activities for settling current .or prospective
legal disputes or using such past financial data for projecting future financial data to settle legal
disputes.
A CLOSER LOOK AT FORENSIC TEAMS.

In 2006, Ernst & Young's forensic team was comprised of 350 practitioners in the. United States
alone and focused on strategies to mitigate and manage conflict in bankruptcy disputes, financial

and economic damages, fraud and investigations, government contracts and grants, insurance
claims, intellectual assets, and legal technology.13
According to Frank Piantidosi, chairman and chief executive of Deloitte Financial Advisory
Services (FAS), their "forensic accounting expertise includes anti-money laundering, the Foreign
Corrupt Practices Act, purchase price disputes, arbitrations, construction fraud, health care fraud,
construction oversight, intellectual property theft, and misdirected royalty revenues, to name just
a few."
"'We have forensic labs in nine major cities across the U.S. and an additional 18 cities around the
world, including Hong Kong, London, Amstenam, Frankfurt, Cape Town and Melbourne,' he said,
adding that all FAS labs meet the FBI's chain of custody requirements. 'They are secure, state-
ofthe-art, and house advanced systems for storing and accessing data, including dedicated servers
and fire-resistant safes."
Distinction between Forensic Audit and Financial Audit

A forensic audit is often different than a typical financial audit. A financial audit is generally a
sampling activity that does not look at every transaction. Thus, the system can be exploited by
someone, such as an executive, who knows how to "cook the books."
A forensic audit looks at the detail of a specific aspect of the records, trying to determine why
everything does not or should not add up. Thus, a forensic audit is much more time consuming and
can be significantly more expensive than a regular financial audit. Doug Carmichael, former Chief
Auditor for PCAOB, faults auditors for not adopting forensic techniques. He prefers more tests of
detail rather than relying on tests of controls.
HISTORICAL ROOTS OF ACCOUNTING

Professor Gary Giroux believes that 10,000 years ago temple priests in Jericho took inventory of
the village livestock by using tokens to keep track of the herd size and to count the grain harvest.
By 3,000 B.C., the first accountants appeared in the form of scribes scribbling figures that recorded
the ruler's wealth, which encompassed stashes of grain, livestock, gold, food stocks, and jewelry.
In ancient Egypt, scribes inventoried the pharaohs' grain, gold, and other assets-probably to
prevent and detect theft. This type of accounting activity continued to be the accountant's main
area of responsibility until the turn of the 20th century, when accrual basis accounting became
common and reporting issues became a top priority.
A more formal, modem approach to accounting started to take root in the United States in the late
1800s. The American Association of Public Accountants (eventually becoming the AICPA in 1957)
was formed with 31 members in 1887. In 1896, New York State legislated the first CPA law,
followed by the opening of a School of Commerce, Accounts, and Finance at New York University
in 1900. Congress called for audit reports for large corporations in a 1902 Act.19 In the early

1900s the United States business regulatory system started to take more formal shape. The
Federal Reserve Board was created in 1913, the same year the Federal income tax law was passed.
The Federal Trade Commission was created in 1914 and by 1921; all states had passed laws
requiring examination for the CPA certificate.
HISTORY OF FINANCIAL REPORTS AND LEGAL CHALLENGES

Financial reports on business operations and performance were created by accountants in the
United States, Canada, and Europe for a long time before actual independent audits were
mandated. Although financial reports and documents could often be challenged in court, outside
auditors were not part and parcel of the process until the mid-1800s in England and early 1900s
in English-speaking North America. The current system of accounting checks and balances
financial reporting coupled with both internal and external auditing-is relatively recent. In theory,
the outside independent audit helps ensure the fairness and accuracy of reports for all intended
audiences. Before financials were audited by independent outside experts, the courts were often
the place where challenges were made and accounting experts were brought in to give testimony
on the disputes in question. So even before independent accountants were asked to certify
financial statements in auditing engagements, the practice of forensic accounting (i.e., accounting
discipline applied to a legal forum) was common.
THREADS OF FORENSIC ACCOUNTING

Hercules De Cordes, a schoolmaster and bookkeeper in Antwerp, was an early expert witness on at
least three occasions. Apparently, in a November 8, 1554, dispute regarding merchants, he had to
be qualified as an expert witness in the modem sense rather than as a fact witness. He stated to the
magistrate that "he had kept merchants'" accounts for some twenty years while in Italy. Again on
January 15, 1570, De Cordes testified as an expert witness since he had kept the merchant's books.
Seven years later in April 1559, he stated in his deposition that, "he had compiled four 'states' of
accounts kept in debit and credit from the ledger of Otto Uher.
In North America, forensic accounting can be traced as far back as 1817 to a Canadian court
decision:
Meyer v. Sefton was inter alia, an inquiry to determine the value of a bankrupt's estate. Here a
witness who had examined the bankrupt's accounts was allowed to testify, since from the nature
of the case such an inquiry could not be made in court.
Thus, the website of the Association of Certified Forensic Investigators of Canada maintains that
the field of forensic and investigative accounting had its genesis in Canada. Seven years after the
Canadian case, on March 12, 1824, a young accountant by the name of James McClelland started
his business in Glasgow, Scotland, and issued a circular that advertised the various classes of work

he was prepared to undertake. These classes included "the making up of Statements, Reports, and
Memorials on Account Books, on disputed Accounts, and Claims for the purpose of lying before
Arbiters, Courts, or Counsel."
As accounting evolved in more formal ways, accountants grew in stature and their expertise was
more in demand in the courtroom. In 1856 in England, the audit of corporations became required.
PUMPKIN PILFERING. A forerunner of the forensic investigative accountant is found in Spanish

19th century literature penned by Pedro Antonio de Alarcon. He relates a tale of a pumpkin and
tomato farmer, Buscabeatas, whose most prized pumpkins are stolen one night, so he rushes to
the market town of Cadiz. The farmer discovers his own products in one of the stalls, but the
merchant says, "If you don't prove your accusation, and I know you can't, you will go to jail."
Buscabeatas then took the green stems from his stolen pumpkins and fitted them to the pumpkins,
one by one. "The spectators were amazed to see that the stems really fit the pumpkins exactly, and
delighted by such strange proof, they all began to help Buscabeatas."

ACCOUNTING LITERATURE" PARALLELS ACCOUNTING PRACTICE
Concurrent with the practice developments described above were developments in accounting
literature. In this literature the role of the accountant as an expert witness was gaining attention.
In the first volume of the Accountants' Index, forensic-type articles are found under two categories:
(1) Evidence and (2) Arbitration and Awards. Arbitration articles began as early as 1883, 25 and
fraud-type articles began the next year. Investigation-type articles started in 1889,27 and the first
expert witness article, by William H. Shaw cross entitled "How to Receive and Give Evidence,"
appeared in 1898.28
In the inaugural year of The Journal of Accountancy (1905), a lawyer named Cleveland Bacon
penned the article "The Accountant as an Expert Witness Bacon stated that "judges all over the
country recognize that experts are alone able to arrive at the true meaning of complicated
accounts," and he asserted "that the certificate of certified public accountants is the most essential
single element of" qualifying as an accounting expert witness.
Two years later a Glasgow accountant, Alex Moore, stated that an accountant as an" expert witness
is required from time to time in criminal cases and more often in civil cases and arbitrations.
Moore also helped to mold the prototype accountant expert witness by describing Wyllie Guild,
who Moore believed to be one of the best professional witnesses:
He expounded his own views with a wealth of imagery and illustration which often affected the
obdurate hearts of a British jury, and woe to the counsel who rashly attempted to cross-examine
him. He was not severe upon any counsel who cross-examined him. He just overwhelmed him with
a bland cloud-like mass, against which no ill nature on the part of the counsel could prevail, which
no incisive questions could penetrate. Mr. Wyllie Guild was left standing in the box, leading
everybody who heard him to think that he was absolutely right, that he alone of anybody in the
Court knew anything about the case, and those who differed from him were exceedingly to be
pitied.
In 1925, the Chairman of the U.S. Board of Tax Appeal (the current U.S. Tax Court) said that CPAs
were disproving the saying "you cannot teach a new dog old tricks" because of their mastery of the
rules of evidence. In the next issue the Journal proposed that educational institutions should start
including in their. Curricula the study of the law of evidence, particularly as it applies to practice
before the U.S. Board of Tax Appeal (now the U.S. Tax Court).
This expansion of accounting into areas such as forensic accounting and other perhaps broader
business considerations was addressed in a 1924 speech given by Arthur Andersen, then senior
partner in the CPA firm he founded, before the National Association of Cost Accountants Western
Regional Conference on Industrial and Financial Investigations. Andersen said, "Some ten years

ago I had the idea that accounting was not in itself an end, and that the sooner public accountants
developed that bigger and broader viewpoint, the sooner they would place their services on a
professional leveL"Unfortunately, the vision of this proud accounting pioneer could not have
foreseen his firm's demise in 2002 from several highly public lawsuits-Sunbeam, Waste
Management, Baptist Foundation of Arizona, and Global Crossing. The subsequent bankruptcy of
Enron, shredding of documents by Andersen personnel, and indictment of the entire firm
essentially destroyed the company. Some have suggested that the broad vision of the firm's
founder was replaced by a myopic view that mortgaged the firm's reputation and resources for
pure profit motive.
Internal Revenue Service
In May 1927, the Supreme Court held that a bootlegger, Manny Sullivan, had to pay income tax on
his illegal income, opening the door for Elmer Ivey to work with FBI agent Elliot Ness. Al Capone
had been quoted as saying, "the income tax law is a lot of bunk. The government cannot collect
legal taxes from illegal money." Of course, Capone was wrong, because he did not understand
investigative and auditing techniques like those used by Frank J. Wilson.
One can argue that the Internal Revenue Service ushered forensic accounting into the modem age
in the United States when they went after Al Capone. Elmer Ivey, who headed the IRS's Sill, went to
Chicago and met with Arthur Madden to collect evidence to arrest Al Capone on tax evasion
charges. Two agents posed as gangsters and infiltrated Capone's inner circle. Frank Wilson was
assigned from the Special Intelligence Unit (Sill) Baltimore office to investigate Al Capone.
Fortytwo years old, balding, with wire-rim glasses, Wilson feared "nothing that walks." Wilson
could "pore over a set of books, eighteen hours a day, seven days a week, forever. He sweats ice
water," said an associate. Wilson and his agents utilized the usual methods: they developed
informers, tapped phones, seized books, and looked for weak points in Capone's empire. Wilson
found a "smoking gun" in the form of an accountant's cash receipts ledger showing net profits
from a gambling house, with Al Capone's name on it.
Although Federal tax agents estimated his annual income to be $50 million,40 AI Capone dealt
only in cash, owned nothing in his name, had never filed an income tax return, nor ever made a
declaration of any assets or income.41 In an early indictment the government charged that Al
Capone had enjoyed an income of $1,038,660.84 from 1924 through 1929, and had not paid taxes
in the amount of $215,080.48.42 At trial, "Wilson provided a list of Capone's nondeductible
expenses: $8,000 worth of diamond belt buckles, a $6,500 meat bill, $27 shirts, furnishings bought
on a spending spree for his home-all told, '$116,000 that is not deductible from his income,'
Wilson said. 'And yet counsel comes here and argues to you that the man has no income Al Capone
eventually received an eleven year sentence for income tax evasion.

THE PHRASE "FORENSIC ACCOUNTING" IS BORN
A major benchmark in forensic accounting was the use of the term forensic accounting in
accounting literature. The first person to coin the phrase in print was probably Maurice E.
Peloubet in 1946.44 at that time Mr. Peloubet was a prolific writer and partner in the public
accounting firm of Pogson, Peloubet & Co. in New York. Peloubet stated that "during the war both
the public accountant and industrial accountant have been" and are now" engaged in the practice
of forensic accounting." Peloubet suggested that until recently forensic accounting had been only
practiced in the courtroom and that the preparation of financial statements had some but not all of
the characteristics of forensic accounting. As the number and power of administrative and
regulatory agencies increase, the accountant increasingly becomes "more involved in what is
essentially a type of forensic practice." The preparation of data for, and the appearance before,
such agencies "as a witness to facts, to accounting principles, or to the application of accounting
principles is essentially forensic accounting practice rather than advocacy." Peloubet's quote is
really the essence of today's forensic accounting. In this way, Peloubet was not only witnessing the
use of the term but was also chronicling the expansion of forensic practice from testimony to
investigation.
By the late 1940s and early 19508 more expert witness articles began to appear in the literature.
The entire winter 1951 issue of the Iowa Law Review was devoted to the interrelationship of law
and accounting. Kenneth W. Robinson suggested that there is teamwork to be done by lawyers and
accountants. In the following year, George B: Pearson, Jr., a former judge, gave 10 warnings to the
accountant who wished to do a good job on the witness stand.
Max Lourie, a lawyer employed in the New York Supreme Court, published an article in 1953,
which was awarded Second Prize in the N.Y. Society's 1953 Prize Essay Contest. In this otherwise
very informative article Lourie suggests that he probably invented the term forensic accounting.
Although his article appeared seven years after Maurice E. Peloubet had apparently coined the
term, Lourie presented an excellent history and overview of forensic accounting. Max Lourie also
voiced three positions of importance:
• An accountant should not have to attend a law school to learn the art of expert testimony.
• Colleges and universities should deliver forensic accounting training.
• Forensic accounting reference books and textbooks should be developed for students.
(However, the first textbook was not published until almost 30 years later)

In 1964, as the U.S. accounting profession grew to more than 80,000 CPAs, Philip J. Gallagher in the
Journal of Accountancy suggested that an accounting expert witness must be able to define the
basic concepts of the profession and be able to explain accounting terminology. Gallagher then
asked: "If the trained mind of a lawyer finds the complexities of modem day accounting somewhat
of a puzzle, what then might we expect the untrained mind of a layman to comprehend?"
Forensic Accounting and Investigative Accounting Come of Age
THE FORENSIC ACCOUNTANT BECOMES AN INVESTIGATOR
Once accrual accounting took hold and the role of external auditor became much more broad
based and control-oriented than transaction-oriented, there developed a need for a fraud auditora
specialist who would ferret out deception in financial statements and reporting. Gradually the
definition of forensic accounting expanded from the accountant who testifies in court to the
investigative accountant as Peloubet chronicled. The forensic accountant learned to detect fraud
itself, not merely to testify about it. Perhaps nowhere is this more evident than in the use of
accountants and forensic accounting skills by the FBI.
FBI AND FORENSICS
In 1948 a related article entitled "Investigative Accounting" highlighted the growth of accounting
and the FBI's use of accountants during World War 11.54 According to Lee R. Pennington, during
the period of hostilities the FBI employed a total of 500 agents who were accountants. During the
period from December 6, 1940, to June 24, 1941, Special Agent Accountants monitored and
examined financial transactions totaling $538 million. Many of the war accounting investigations
involved the Surplus Property Act, Contract Settlement Act, and War Fraud Claims, but no wartime
investigations involved violations of the National Bankruptcy Act, mail fraud violations, antitrust
cases, and Court of Claims cases. 55 In 1960, J. Edgar Hoover began to emphasize fraud detection.
At this time the FBI had 6,000 agents, with 700 designated as Special Agent Accountants. These
agents investigated violations of the Federal Reserve Act, check kiting, embezzlements, fraud in
government contracts, criminal investigations under the National Bankruptcy Act, and various
civil investigations. Five years later Hoover again spoke of the fraud that FBI Agents encounter:
fraudulent check schemes, securities frauds, confidence game swindles, embezzlements, false bills
of lading, fraudulent bankruptcies, false claims, and various frauds perpetrated against the
government. He suggested that "many employee frauds are made possible either because the
company lacks an adequate system of internal control, or it does not follow reasonable
precautions in using the services of internal auditors and or public accountants."

Today there are more than 600 FBI agents with an accounting background, and many are CPAs.
The FBI today has a Financial Crimes Section that investigates money laundering, Internet crimes,
financial institutions fraud, and any other economic crime.
FIRST FORENSIC ACCOUNTING BOOKS IN UNITED STATES
Forensic accounting articles surfaced many years before the first forensic accounting book. The
first forensic accounting book appeared in 1982, written by Francis C. Dykeman, a retired partner
of Price Waterhouse. His book included no footnotes or history of forensic accounting. Both a CPA
and attorney, Dykeman's chapters include an overview of the judicial process, trial attorney's
cases, court systems, administrative agencies, working in an ambiguous environment, developing
and managing information, preparing and presenting direct testimony, cross-examination, the
trial, and others.
Four years later in 1986, Kalman A. Barson published a second forensic book entitled Investigative
Accounting. He stated that the following areas were ripe for investigative work:
• Matrimonial cases;
• Partnerships dissolutions;
• Minority stockholder suits;
• Insurance claims
• Audits or inspections by corporate internal audit staffs, of various branches or divisions;
and
• Acquisitions or mergers.
Mr. Barson has since written books on investigative accounting techniques, investigative
accounting in divorce, and ways to discover unreported income.
In 1987, a third book was published entitled Fraud Auditing and Forensic Accounting: New Tools
and Techniques. As the title indicates, authors Bologna and Lindquist emphasized fraud, with three
chapters dealing with expert witnessing. They said that the structural and behavioral
considerations of fraud were like an iceberg: many of the behavioral considerations lurk beneath
the surface, posing a danger to the unsuspecting auditor.
A series of fictional novels involving the financial and investigative intrigue of fraud portrays a
forensic accountant as the hero. Author Iris Weil Collett (pen name of Larry Crumbley) and
various co-authors place Professor Lenny Cramer in exotic locations with colorful characters and
surround him with murders and crime. Some of the plots include IItrack[ing] foreign receipts to
uncover a plot to steal Burmese religion treasures...conducting an audit at Coca-Cola [and]

uncovering a scheme to steal the company's secret formula [and using] his forensic accounting
skills to solve a series of murders in the New York art world.
AICPA PRACTICE AID
In 1986, the AICPA broke forensic accounting into two broad areas: investigative accounting and
litigation support. The Institute issued Practice Aid 7, which outlined the six areas of litigation
services shown in Table 1.1.63
Table 1.1. Types of Litigation Services

Damages _ Valuation
Lost profits_ Business and professional practices
Lost value Pension
Lost cash flow Intangibles
Lost revenue Property
Extra cost
Antitrust Analyses General Consulting

Price-fixing Actuarial analyses
Market share, market definition Statistical analyses
Pricing below cost Projections
Dumping and other price discrimination Industrial engineering
Ant competition actions Market analyses
Monopolization Computer consulting
Accounting Analyses
Bankruptcy Tax bases
Tracing Cost allocations
Contract cost and claims Tax treatment of specific transactions
Regulated industries
Frauds (civil and criminal)
Historical analyses Family
law

CONTROVERSY SURROUNDING THE ACCOUNTANT'S ROLE IN FRAUD DETECTION
In the early 1980s there was a subtle shift in the 'way external auditors reviewed clients' records.
Companies began to use computers to perform their record keeping, and intense competition
caused the auditing fees to fall as much as 50 percent from the mid-1980s to the mid-1990s. Thus,
auditors had to cut costs by reducing the labor-intensive process of reviewing hundreds of
corporate accounts. They grew more reliant on internal controls and worked less with account
balances and entries. Because top executives can circumvent internal controls, they could
manipulate the records and cook the books. Eventually the results were what happened to Enron,
WorldCom, Xerox, Adelphia Communications, and the fall of Arthur Andersen in the early 2000s.
Thus, the pendulum will swing back to more forensic techniques in audits and higher fees.
Much of the disputed line costs in the World Com debacle were initially expensed properly, but
later entries were made to turn these costs into capitalized assets. Arthur Andersen was given
limited access to the general ledger.
The backup or support for the following $771 million entry was a yellow post-it note:
Property, Plant, and Equipment $629,000,000

Construction in Progress $142,000,000
Operating Expenses $771,000,000
However, accounting experts debate the role of auditors in uncovering fraud and hold many
different views. Some believe that every audit engagement should include much more skepticism
and detailed review of transactions. Others suggest that only special engagements specifically
targeting fraud tan adequately and effectively root out the problem. Whether forensic accounting
skills will be a necessary competency of every accountant or if those skills will be the domain of an
elite specialty remains to be seen.
The American Institute of Certified Public Accountants (AICPA) has recognized the need for
accounting professionals to change their attitudes toward fraud detection. The organization has
revised Statement on Auditing Standards No. 99 to feature brainstorming risks of fraud, increased
professional skepticism, discussions with management, responding to management override of
controls, and use of unpredictable audit tests. But the AICPA notes that of the two essentials of this
attitudinal change, only one is the purview of accountant’s greater professional skepticism. The
other defense is the job of corporate America, which should raise awareness of financial crime in
order to prevent it, coupled 'with encouraging employees to identify fraud.
The AICPA now has an Internet game called "Catch Me Game" which says "numbers don't lie;
criminals are another story." Students and professors are to use their skills and smarts to track the

money trail back to the crooks. "When shady characters are up to no good, they often leave a trail
of questionable financial transactions."
The accounting profession may be making a strategic shift as they see that SAS No. 99 and the
other rules are not protecting them from being the insurer of last resort. The Big Four along with
Grant Thornton and BDO International released a report entitled "Serving Global Capital Markets
and the Global Economy." They suggest that a forensic audit is akin to a police investigation.
In the report, one of the things they are suggesting is for companies to have a forensic audit.
Companies would be required to have such an audit every three or five years or face these audits
on a random basis. Forensic auditors would scrutinize all records of companies, including e-mails,
and would be able, if not required, to question all company employees and to require statements
under oath. It might be necessary for an audit network or a specialized forensic auditor to
complete a forensic audit with the aid of independent attorneys (not those who have represented
the audit client in the other engagements).
FORENSIC ACCOUNTING IN THE CLASSROOM. The scandals of the past five years and their
resultant cost to society, to the business community, and to the reputation of the accounting
profession are evidence enough for many accounting educators to make forensic accounting part
of their curriculum. Accounting students don't find it easy to acquire a solid understanding of
financial accounting and auditing, plus a good sense of how the American legal system works.
However, a forensic accounting course complements rather than replaces foundational accounting
and auditing courses. This text focuses on the forensic discipline itself and the context in which the
forensic accountant operates, but the text does not replace the detail provided in financial
accounting, financial statement analysis, and auditing courses.
A form of forensic accounting is corporate investigation or corporate espionage. For example,

Diligence, Inc. is a Washington private intelligence firm that has former director of CIA and FBI,
William Webster on its advisory board. Corporate intelligence firms "essentially help businesses
deal with the risks of operating in challenging markets," but "we always respect the jurisdictions
in which we operate," according to Nick Day, founder of Diligence, Inc.
On their Internet site Diligence indicates that they specialize in all types of business litigation on
behalf of plaintiffs and defendants. Major litigation services include:
a. Standards and practices of financial institutions

b. Lender liability and bank operations
c. Bankruptcy
d. Business and real estate valuation
e. Lost profits and damages calculation

f. Accounting malpractice
g. Fidelity bond claims
h. Directors and officers claims
i. Business judgment
j. Breach of contract
Product liability
Client lists, customer lists, trade secrets, personnel records, research documents, and new
products and services are only some of the items that a business may seek through various means.
Theft of trade secrets is estimated to be around $100 billion a year.
Spies can be both inside and outside a business. Insiders can be executives, IT experts, and
janitors, and outsiders can be hackers or physical break-in specialists. Tools and methods of these
investigators include walking in the door, hacking, tricking personnel into revealing information,
dumpster diving, wireless hacking, and eavesdropping on phone lines. The purpose, of course, is to
obtain needed information.
There are ways for businesses to protect themselves from corporate spies. Personnel must be
made aware of the damage from financial spies, and the normal closed-circuit cameras and
security guards patrolling premises are important. Other preventive measures include:
• An eavesdropping protection kit that releases a soft noise that blocks out voices, making it
impossible for eavesdroppers to hear.
• A vanishing e-mail, called Vapor Stream, lets people send e-mails that leave no trail.
The e-mails cannot be tracked, copied, or printed. The cost is $40 a year.
• A wiretap-detection device that alerts you if a phone is being tapped, or if there is any
interruption in the phone line.
• FiberGuard Net 800 uses fiber optics that send an alert if a fence or gate is cut or if someone
climbs over the fence.
CONCLUSION
Why is forensic accounting such a hot issue today? Why do many people think of it as a new and
exciting field? Automation changed the business landscape to the point where in the 1980s the
number and speed of business transactions required a faster means to create financial statements
and audit them. The computer helped direct a revolution in accounting because business
transaction volume grew to such an extent that it was impossible for accountants to examine each
transaction. Internal controls, sizing risks, and sampling became the focus. Business got hooked on
cheaper "automated" auditing engagements. Unfortunately, unethical managers learned to skirt

the modem controls; thus, weaknesses in the modem risk control and sampling approach grew
during the 19908 and became even more apparent in the first few years of the 21st century.
There are many views about forensic accounting practice today. After all the recent accounting
scandals, some industry experts suggest that the task of fighting accounting fraud is like Sisyphus,
condemned to roll a rock up a hill each day only to watch it roll back down again. Others suggest it
may simply require more vigilant external and internal accountants who can make great strides in
eliminating fraud. "During one investigation, we found in the auditing working papers a statement
written in the margin of the internal audit working papers by the internal audit manager: Conceal
from bankers,'" says Nicholas L. Feakins, CPA, partner at San Mataeo, California-based forensic
accounting firm Feakings & Feakins. "It sounds amazing, but the [third party] auditors had put
BIevel staff on the project that simply didn't read the documents and missed it."
For broad-based, system-wide relief from today's financial scandals, many suggest the weaknesses
can be attacked successfully in repositioning the auditing engagement and mandating more
stringent ethical and independence requirements to start.
END.......
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