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Forensic Accounting Case Studies

Uncovering fraud and corruption in complex scenarios and high risk environments.

Forensic accounting cases are available to everyone as PDFs. The cases and solutions are password protected for faculty use only. Topics include: payroll, claims management, sales commission fraud, procurement fraud, asset misappropriation, tax fraud, sales fraud and FCPA investigations.

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To obtain access to the case solutions, please e-mail us or mail a request on your school letterhead to:

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The nonexclusive right to reproduce material contained in these cases without explicit written permission is hereby granted to faculty in connection with classroom use, academic research, and other educational endeavors of a not-for-profit nature.

The Deloitte Foundation also offers case studies covering accounting and auditing topics. Learn more about the Trueblood Case Studies . 

Mini Case Studies

Case: 1-1 Bonefix, Inc. Download: Case | Solution Type: FCPA whistleblower allegations

Case: 1-2 Government Tax Fraud Download: Case | Solution Appendix 1 Type: Analysis of government tax fraud

Case: 1-3a NWSupplies, Inc. Download: Case | Solution Appendix 1 Appendix 2 Appendix 3 Appendix 4 Type: Sales Fraud

Large Case Studies

Case: 2-1 Bags Medical Device Company Download: Case | Solution | Case Appendix | Solution Appendix Type: Sales Commission Fraud

Case: 2-2 Java Golf Club, Inc. Download: Case | Solution Appendix 1 Appendix 2 Type: Payroll Fraud

Case: 2-3 YourTech, Inc. Download: Case | Solution Appendix 1 Appendix 2 Appendix 3 Appendix 4 Type: Procurement Fraud

Case: 2-4 Reliability Tires, Inc. Download: Case | Solution 1 Solution 2 Solution 3 Appendix 1 Appendix 2 Appendix 3 Appendix 5 Appendix 6 Appendix 4: Invoices 1 Invoices 2 Invoices 3 Invoices 4 Invoices 5 Invoices 6 Invoices 7 Type: Procurement Fraud

Case: 2-5 Fun & Games Corporation Download: Case | Solution Appendix 1 Type: Accounts Payable Fraud

Case: 2-6 Darpa Company Download: Case | Solution Appendix 1   Appendix 2 Type: Fraud schemes in complex transactions

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Forensic Audit Guide

An in-depth examination of financial records to uncover fraud, embezzlement, or other illegal financial activities, often for legal or regulatory purposes

• What Is A Forensic Audit?
• Procedure For A Forensic Audit Investigation
• Why Is A Forensic Audit Conducted?
• Limitations Of Forensic Auditing
• Example Of A Forensic Audit Case

Forensic Audit FAQs

What is a forensic audit.

A forensic audit is an in-depth examination of financial records to uncover fraud, embezzlement, or other illegal financial activities, often for legal or regulatory purposes.It goes beyond being just a financial requirement for the organization.

There are other types of audits that an organization can undergo as well. All these help the third party understand the organization's health and position in the market.

A company or organization can undergo multiple audits at once. These will result in different results that will help understand the organization better.

A forensic audit is a review of the forensic accounts of a company to check for evidence of fraud or misconduct to present in a court of law. This is a specialization within the field of accountancy.

Many organizations have a forensic audit department. This audit requires knowledge of accountancy and auditing and their proceedings. It also needs an expert understanding of the legal framework.

It involves many investigative activities, such as examining financial records and interviewing relevant parties. For example, it may be conducted to prosecute a party for fraud or any other financial crime.

During the audit, an auditor can be called to check the ongoing proceedings and the various activities. These proceedings include checking fraudulent activities and other situations such as bankruptcy, filing documents, disputes, etc.

Key Takeaways

• A forensic audit is a careful examination of financial records aimed at uncovering fraud or illicit financial activities, often for legal or regulatory purposes. It surpasses standard financial assessments.
• In addition to forensic audits, organizations may undergo various other audits to gauge their financial health and market position, which provide comprehensive insights into their operations.
• Forensic audits are related to forensic accounting, necessitating expertise in accounting principles and legal frameworks. They often involve investigative measures like scrutinizing financial documents and interviewing relevant parties.
• The forensic audit process mirrors traditional financial audits, including planning, evidence collection, reporting, and, potentially, court proceedings, catering to legal requirements and presenting findings coherently.
• Auditors may be called upon in forensic audits to explain complex financial matters in court, simplifying technical concepts for legal comprehension.

Procedure for a Forensic Audit Investigation

Forensic and financial audits have many things in common, from the first step of an audit, Planning, to the last step, reporting.

The only difference between the two is that a forensic audit involves an additional step of possible court appearance, where the audit findings and reports are submitted in front of a court of law.

1. Planning the Investigation

Planning is the first step in any auditing. Here, the objectives are determined, and plans are made to achieve them. These objectives include:

• The auditor must first plan their course of action to identify the fraud being carried on.
• They must study all the evidence to determine the fraud period
• One important objective for the auditor is to sum up the fraud by explaining how it is being conducted
• They must also unveil the true identity of the people involved in the fraud
• They must also uncover the monetary value of the fraud
• The main objective is to uncover and document evidence of fraud, which may be presented in front of a court of law
• While fraud prevention is important, the main objective of a forensic audit is to uncover and document evidence of fraud

2. Collecting Evidence

At the end of an audit, the forensic auditor must submit the findings of the possible fraud at a court of law. The evidence must be complete enough to name the fraudster(s), the scheme behind the fraud, how it was conducted, and documents supporting the value involved in the fraud. 

The forensic auditor has to ensure the documents are authentic and not altered by anyone.

The flow of the evidence must also be in the right order so that the court has a clear view and is better able to understand the fraud.

There are various techniques that an auditor can adopt to collect this evidence.

• Substantive technique: This audit procedure goes through a company's financial statements to check for errors or fraud. There are many substantive techniques that an auditor can implement
• Analytical procedures: Analytical procedures involve comparing various sets of financial information to conclude by analyzing the comparison
• Computer-Assisted Audit Techniques(CAATs): This involves collecting audit evidence via the computer. Various programs help the auditor collect evidence
• Understanding the internal control and examining them: Every Company has its internal control system that checks the data before an external audit, the evidence collected by them is tested, and true evidence is recorded

3. Reporting

The auditor must prepare a written report to be submitted to the client to carry on legal proceedings as per their wish. An audit report must contain the following:

• All the evidence the auditor thinks is necessary to explain the fraud.
• They must sort all this evidence and present it in a way that will provide a summary of the fraud.
• The auditor must also explain how they carried out the fraud.
• The final part of the report must suggest ways to prevent such fraud.

4. Court Proceedings

The case doesn't need to go to court, but the auditor must be present if it doesn't. His/Her main task there will be to explain the fraud to the people in the court, who may or may not understand accounting and auditing. 

Therefore, an auditor will assist in simplifying such hard-to-understand concepts in the court of law.

All the above steps are primary steps. An auditor might add some steps or subtract some, depending on his/her preferences. These steps help the auditor uncover the fraud.

Why is a forensic audit conducted?

A forensic audit is conducted for various reasons, including but not limited to identifying ongoing fraud in the company. There are different manners the company can exploit to conduct fraud, some of which are listed below.

1. Corruption or Fraud

During a forensic audit trial, an auditor will be on the lookout for

• Conflict of interest: When a person who is to commit fraud uses his/her influence for personal gain from the company. They might not be the personal beneficiaries of such acts
• Bribery: This is an act of influencing someone to do the wrong deed in exchange for money
• Extortion: When a person uses his power to threaten or uses force to get things done, it is an act of extortion

2. Misappropriation of assets

Asset misappropriation refers to the theft or misuse of company assets, rather than falsifying records to show non-existent assets. Instead, they have been altered to showcase more profit and manipulate the financial records.

3. Financial misstatement

This type of fraud occurs when a company's financial records are presented as false to show that companies perform better than the actual performance. 

Such a type of fraud aims to show a better position in the market, earn extra profit, and collect money from the public via investors.

These were the main types of fraud taking place; there are many other frauds that a company can execute. It is the auditors' task to check for any such possible fraud and act accordingly.

Limitations of Forensic Auditing

Many reasons act as a limitation for conducting forensic auditing. While forensic audits are typically conducted independently, auditors may seek assistance from workers within the organization to gather necessary information, which is standard practice.

This leads to manipulating the results, and the fraud goes undetected. For example, suppose a company is committing fraud, and the auditor asks for information from the people involved during the audit. In that case, they will not provide true information.

This is also called audit dependency, one of the major fallouts of an audit. Due to such limitations, a forensic audit cannot be considered a foolproof system to detect and identify fraud in an organization. 

Here are a few more limitations of forensic auditing:

• Forensic auditing is expensive in nature
• There are situations where there is no relevant data for forensic auditing to be conducted
• It is very time-consuming for a company
• It distracts the company from its actual work and focuses only on auditing
• Data received can be limited or inconsistent by third parties
• This can affect employee morale

The choice between a traditional audit and a forensic audit depends on the specific circumstances and objectives of the audit, rather than a blanket preference for either approach.

A traditional audit detects and prevents fraud, whereas a forensic audit can only detect/identify such fraud.

Example of a Forensic Audit Case

Let us say a hypothetical company, Skylights, is in the business of producing light bulbs. It gets into a contract with another company, Elite Lights, on the recommendation of the BOD.

Elite Lights supplies raw materials for light bulb production.

The company has its license revoked due to some past allegations by the court, but the BOD, even after knowing that Elite Lights has its license revoked, gets into the contract as the BOD of Elite Lights offers them something in return. This is an example of Corruption/fraud.

Let us see another example. ABC Pvt. Ltd. has an annual profit of $400000. Still, when audited, the auditor found evidence that the company had showcased a profit that was not in existence. Still, a manipulation of assets has led the company to this false profit.

In all the above cases, fraud can be identified with the help of forensic auditing. This can also help the company provide the necessary details of how, when, where, and what the fraud was and ways for prevention.

There are many case studies that show real-life incidents of fraud that have taken place in the past. Learning about fraud can help one understand it. You can find some cases in Forensic Audit Case Studies .

The main types are:

• Financial Statement Audit: As the name suggests, this is a type of forensic audit where a company's financial statements , such as Balance sheets and Income statements, are tested to check the compliance of the statement to standards
• Financial Due Diligence Audit: This is a type of forensic audit where the records beyond financial statements are tested and verified. The evidence found through this type is used to understand the company’s position in the market

While a forensic audit shares similarities with a normal audit, it also involves investigating financial irregularities, legal disputes, and potential fraud, with the additional step of presenting evidence in a court of law.

Like a normal audit, verifying all the provided facts is the primary objective.

All the evidence collected is studied and reported before presenting it to the client or the court. In the case of a regular audit, the auditor 's final step is to report the audit, but in the case of a forensic audit, the auditor has to explain the fraud in a court of law.

A forensic accountant can conduct a forensic audit. In the case of most companies, they have their forensic accounting department, and they are the ones who conduct the audit and find evidence for the fraud.

The main role of a forensic auditor is to find evidence for possible fraud. However, they must also be able to present the fraud in simple terms in a court of law. 

Anytime during the audit, external authorities can jump in to verify compliance and see that the audit is conducted smoothly without any problem.

No, forensic and internal audits are two different concepts but fall under the same category. Think of it like auditing is a book, and forensic and internal audits are the two chapters.

A forensic audit is more concerned with finding the evidence to present in the law. In contrast, an Internal audit is a part of the internal control system that helps the company discover any mishap before an outsider.

During a forensic audit, external auditors conduct an independent investigation without interference from external authorities to ensure compliance and uncover potential fraud. Internal audits, on the other hand, may involve external parties to ensure compliance and best practices..

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Case studies in forensic accounting

In forensic accounting, accountants and lawyers may be close partners; and in fact, attorneys are often the reason accountants enter the field of forensic accounting to begin with. All three accountants featured in these case studies found their way into the field through an attorney who needed help with a particular case. The rest, as they say, is history.

THE SMELL TEST

On record: Michael Plude, partner, Kaskie, Plude & Co.

Defining forensic accounting: Michael Plude came into his career as a forensic accountant in a circuitous way. He started out in industry working as an assistant controller for a manufacturing company. Wanting to advance up the ladder, he obtained his MBA, and then, after a push from management, his CPA and state board license. But after the company was sold, he found himself in public accounting after all, having resisted the pull since graduation.

“I was hired by a firm specializing in bank auditing,” Plude said. “I developed a reputation, and got called by PwC to help update their bank audit procedure. This gave me a good opportunity to see different levels of accounting at a public firm.”

This experience led him to eventually take over the management of Kaskie, Plude & Co. — formerly solely Kaskie — which put him in the right place at the right time when, tragically, a firm client died suddenly, leaving behind his family and a business that needed running.

“A local probate clerk asked me to step in and manage the business while the family got it together,” he recalled. “While managing, I came across an embezzlement, and had to create legal proceedings with some employees who were trying to steal the company. I was using my audit skills while managing the company and something just didn’t smell right. With auditing and financial instincts, you’re always looking for fraud. I was lucky because that training attuned me to looking for fraud, which was something not really on the public consciousness until Enron.”

Plude pointed out that a lot of the time, forensic accounting gets confused with fraud examinations.

“When most people think of a forensic accountant, they first think of a fraud examiner. However, fraud examination is only one aspect of a forensic accountant. The pure definition of a forensic accountant is an accountant who acquired through education and work experience the skills necessary to work within our legal system in the capacity of a financial expert. These financial skills can draw from a range of disciplines such as auditing, taxation and finance. We work in business valuation, contract disputes, embezzlement, white collar crime, bankruptcies and IRS audits, which we get a lot of. We help attorneys assess whether it’s a criminal case, and we work out a plan to litigate damages and keep it out of criminal court.”

Training: As Plude’s history, and those of the other accountants featured below, shows, training for forensic accounting really amounts to years of experience — outside traditional certifications, such as the Certified Financial Forensics and Certified Fraud Examiner, awarded by the American Institute of CPAs and the Association of Certified Fraud Examiners, respectively.

Plude noted that the ACFE certification focuses on fraud, while the AICPA’s is broader and focuses on other areas in forensics. However, “A CFF certification doesn’t mean you have carte blanche,” Plude said. “You have to have some form of expertise in the area. The worst thing you can do is take a case and not have the background to present to the judge. A lot of firms will specialize in certain areas of forensic accounting for this reason.”

“I’ve been pushing for forensic accounting training at the college level,” he added. “Right now the career path is someone starts at a CPA firm, does work in tax and auditing, and develops a solid foundation in the basics; from there what I usually see and what is usually helpful, is the younger CPA will seek out an older CPA who is accredited in financial forensics, and it becomes a mentoring situation. I’m mentoring an accountant right now who shows great promise. He came in thinking he loved taxes, but as I started working with him, he started developing a desire to get into forensics.”

Delivery of services: Kaskie, Plude & Co. delivers its forensic accounting services through law firms, both small and local, and global. Through these connections, the firm serves a range of clients from Fortune 100 companies to local businesses. “Anybody can get stuck in litigation nowadays,” he said.

The firm is full service, which means Plude has skilled staff with expertise he can tap into for any given forensic case. He may sometimes need to hire an actuary or an attorney. And as far as type of client goes, the firm will take on any client to whom they think they can be of service.

For Plude, forensic accounting is as much about proving innocence as guilt. “I had a client who worked for a casino restaurant, and she was accused of stealing from her employers,” he recalled. “We were able to prove that the financial controls were so weak that they couldn’t pin the crime on her. We’ll serve any client that we feel we can help.”

PROOF WITHOUT WORDS

On the record: Dawn Brolin, executive vice president of business development and compliance, Powerful Accounting powered by Out of the Box Technology

Defining forensic accounting: In a way, forensic accounting requires forgetting all the accounting principles learned over a career and approaching books with an intense amount of skepticism. As Dawn Brolin puts it, “Forensic accounting is really the ability to step outside the daily accounting role you live in and instead put every ounce of doubt in your brain — what you’re looking at is not correct. Don’t assume that when an account is reconciled, it’s right. Think backwards and outside the box.”

Brolin thinks it takes a certain type of personality to be able to both extract key data and decipher it. “I like to win,” she said. “I think that gives me an edge. It’s me against that complaint. I’m not fighting with people — I’m fighting with papers. I just need to get to the truth. I will not put anything in my report if I can’t look in the eyes of a judge knowing it to be true, and I can tell them how.”

Training: Brolin got her training like most forensic accounting specialists do: on the job. In 2011, attorney Eric Green of law firm Green & Sklarz recruited her to reconstruct the books for a civil audit case. “I realized then that reconstructing is about whether I can prove something without words to the auditor,” she said. “You absorb, retain, and move on. You’ll learn from one case, and apply those lessons to new ones.”

Brolin lectures part-time at Eastern Connecticut State University, where she is also an alum. In the college’s master’s program in accounting, she teaches elements of forensic accounting — but other than that, she sees little in the way of exposure to the subject at the undergrad level, and even at the graduate level.

One of the key texts she uses is the “Report to the Nations” released by the Association of Certified Fraud Examiners, a text she calls her “book of blessings.” She also uses it to educate her clients on risk exposure in their own businesses. Using this report, and her own experience, she teaches her students how to look at a financial statement differently.

“Why am I going to teach them again about the balance sheet, when most of them will be working with small businesses and smaller firms, or in audit?” she asked.

Brolin also said that technology training is one of the main pieces lacking in accounting education. “Do they know apps? Yes, but do they know how to use an accounts payable program? No,” she said. “These are tools they can use when they go out into their field of choice, to teach them the tech and the mindset of how fraud exists and where the forensic mindset is when dealing with clients and not being a robot.”

She tasks her students with picking a fraud case, and then figuring out exactly what technology could have been implemented to minimize the risk for that particular case reoccurring. They are then asked to put the control together without the technology, and then with the technology.

“Their eyes are wide open, and they say, ‘Wow, we never thought of it that way,’” Brolin said.

Recruiting: “Hiring starts with somebody who has a passion for knowing facts and not making assumptions,” Brolin said.

She just hired a new staff member who, she could immediately see during the interview process, had “the ability to figure things out on his own,” a key characteristic for an accountant hoping to tackle forensic cases. She put him on a case where he needed to review the entire Outlook file (which amounted to millions of emails) from a company to find the incriminating directive sent from a new partner instructing staff not to allow signature stamps for payment to a particular vendor, and that these payments should only go through him. Brolin’s employee found what he needed within two hours, because he figured out exactly what keywords to search to uncover the email.

Delivery of services: For Brolin, every piece of tech she and her clients use serves a primary purpose: to prevent fraud.

“Our industry is being sold on apps for ‘efficiency,’ but we should be being sold on fraud prevention, accuracy of financial statements, accuracy of a completed tax return,” she said. “If the only thing you’re looking for is efficiency, you’re missing the other two legs of the stool: occupational fraud prevention, and tax fraud prevention. Apps are for protecting clients from potential fraud and having proper substantiation and backup for their financial information.”

A forensic accountant uses every tool available in their tech stack to discover the financial trail for whatever is needed, whether it’s fraud, or making a case for a business valuation. “A forensic accountant says, ‘I don’t have access to that bank statement, so what do I have access to? Canceled checks? Emails? Bill.com? How else could I figure out how to prove something to be true?’” Brolin explained.

One of the key skills a forensic accountant gains over time is fluency in multiple technology platforms, because depending on the case, they will have to pull data from different software, and typically, data analysis software is a key component of sorting through data. But interpreting that data, and going “beyond the books” to figure out what is not being shown, is the most important part, Brolin said.

“Say I’ve requested a copy of a QuickBooks file that was relied upon to do a tax return,” she said. “I get it, but it doesn’t match the tax return. Then the attorney can subpoena workpapers from the CPA. If they don’t provide it under subpoena or they give you a thumb drive with 800 emails and none of them have workpapers, then I can confidently put in my expert opinion, based on lack of workpapers, and based on the QuickBooks files that were relied upon, that something is wrong in between. Is there a second set of books?”

‘NOT ALL BLACK AND WHITE’

On the record: J. Allen Kosowsky, partner, CironeFriedberg

Defining forensic accounting: Like Brolin, Allen Kosowsky got his start in forensic accounting by being asked by a law firm to assist in a case — in his particular situation, where a wealthy individual had come under investigation by regulatory bodies in the United States. This was in the 1980s, so Kosowsky has seen the field evolve from following literal paper trails to utilizing a host of available technologies.

“Back in mid-1980s, not many others were doing what I was doing,” Koswosky recalled. “Through that first case, I kept getting work through law firms. ... Some criminal lawyers needed help with criminal cases under the Koval agreement [where an accountant’s communications with a lawyer in service of a case remain confidential]. That left me with a number of engagements for people who were skimming, taking personal deductions on tax returns, and governmental investigations where there were witnesses that lawyers needed to make sure were clean.”

Kosowsky recalled one case over two decades ago, where he was on the stand representing the city of New Haven, Connecticut, for a case. The judge stopped Kosowsky and asked, “What’s a forensic accountant?” He said the practice segment is a lot better known today.

Training: Kosowsky, who has guest lectured at Fairfield University’s master’s in accounting program, believes that earning training in forensic accounting today is “a whole lot easier than it was five, 10, 30 years ago.” But still, he agreed that the skill set can be hard to train, and may have to come down to instinct.

“To be a good forensic accountant, you need an aptitude for situations that are quite equivocal or not clear,” he said. “Some accountants don’t like that. It’s hard to put into words, because it’s not all black and white.”

Recruiting: These days, Kosowsky said, forensic accounting as a practice segment is getting more attention from firms. However, firms don’t quite know yet how to position a forensic accounting segment. It’s not recurring work, like tax work, so firms aren’t sure how to manage and forecast for that type of business, let alone hire for it.

“That turned into a problem area for some firms,” Kosowsky said. “They don’t want to bring a person in full-time if you don’t have the same clientele coming back all the time. In forensic, the work comes when the work comes. Also, making sure you get paid on engagements can be tough. With litigation, for instance, sometimes the money gets tied up, and takes time.”

Kosowsky’s own practice has always been robust, solely based on the referral business and exposure from the cases he was taking on through attorneys asking for help. He didn’t have to do any meaningful marketing, he said. And his merger into Connecticut firm CironeFriedberg shows one way a firm can add forensic accounting to its portfolio — by acquiring a practice that already has it figured out.

Delivery of services: “One thing expected through our merger with CironeFriedberg is we’ll be offering forensic accounting as a service to their existing clientele,” Kosowsky said. “For instance, if they’re terminating an individual and they don’t want a problem with wrongful termination, we may need to look at the past behavior of the terminated individual to use as part of a settlement process. With a bigger staff, we may be able to take on bigger cases.”

When it comes to technology, again, the solutions used will depend on the case, and vary greatly. Data analysis, however, is a mainstay, and software created for audit, for instance, can be useful to forensic accountants who need to sift through large amounts of data to detect anomalies or suspicious entries.

“Typically, though, I use a traditional program like Microsoft Excel to take a lot of data and go through it,” Kosowsky said.

Another key aid in the success of Kosowsky’s cases are his relationships in the industry, including with criminal investigators within the Internal Revenue Service and the U.S. attorneys in his state, Connecticut. “Them knowing my work gives them confidence that the tasks from the accounting perspective will be done correctly, and those relationships are to a client’s benefit,” he said.

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Home » Blog » Guide to Forensic Auditing – Insights, Techniques, and Case Studies in Fraud Investigation

Guide to Forensic Auditing – Insights, Techniques, and Case Studies in Fraud Investigation

• Other Laws | Blog |
• Last Updated on 4 February, 2024

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Table of Contents

• What is Fraud?
• Classification of Fraud
• Conventional Approach v/s Forensic Approach
• Four Phase Fraud Cycle
• Types of Trigger
• Preventive Technique
• Practical Case Studies
• Digital Forensic – Walkthrough
• Interrogation Techniques
• Care to Cure
• Forensic – Prospects
• Directories

1. What is Fraud?

Universal   Our Belief F inancial – F air R eward – R ecovery A cquired – A cquired U nder – U nfair D eception – D octrine

Maths on Fraud = MQ < (O + P) R MQ – Moral Quotient = (W * IQ) O – OPPORTUNITY, P – Pressure, R – Rationalisation

1.1 Separating Truth From Fiction: Unveiling the Common Myths of Forensic Audit

• Only CA’s are capable to conduct financial fraud investigation
• Financial Frauds investigation happens only on financial records
• Forensic can be conducted by any tools & protocols
• Any and all Data Can Be Recovered In case of digital forensics
• Pressing whistle involves identity Risk
• Fraudster commits fraud as a One Day Affair
• Forensic Auditor can recover money from fraudster
• Once Forensic Report issued can’t be challenged
• Anyone with a skeptical eye can conduct an investigation with adequate credentials
• Fraud investigations extend beyond numbers i.e. Covert Operations, Social Media profiling
• The tools used for forensic shall be admissible in court of law
• When the storage medium is extremely damaged, this is not always possible
• There are numerous whiste-hotlines that help safeguarding whistleblower’s identity
• Fraudster commits fraud over a period of time encompassing a series of red flags
• Recovery of money invites legal attention
• Alleged -party can issue a counter report as well to question the forensic report

1.2 Statistics

2. Classification of Fraud

3. Conventional Approach v/s Forensic Approach

Conventional audit approach.

• Implementation and Testing of financial controls
• Overall risk assessment
• Ensuring compliance
• Financial Statement preparation
• Identification of process lapses

Forensic Approach

• Data mining with skeptical eye
• Deep Dive Approach to identify hidden frauds
• Red Flag Identification
• Pattern analysis
• 7 eye approach

3.1 Atypical Approach– 7 Eye Theory

• Skeptical Attitude
• Connecting Dots Perspective
• Investigative approach
• Data analytics – To identify duplications, irregularities, trends & patterns, Link Analysis, Joining Files, Fund Trail etc

Digital Eye

Digital Forensic is scanning of emails, hard disk, mobile phones and recovery of deleted files, password cracker & so on

Network Eye

• Market Intelligence
• Surveillance & Covert Operations

Evidence Eye

• Without Evidence entire exercise is futile
• Need to be proven in court of law
• Gun Powder Theory
• Time Bomb Theory
• Inverse Logic Theory
• Benford’s Law Theory
• Tools play an important role while using investigative techniques
• GST, Logistics Tracking Tool, Background Verification Tool etc.

4. Four Phase Fraud Cycle

• Red Flag & Green Flag Identification & Monitoring
• Implementation & Testing of controls
• Vendor, Employee & Third Party Due Diligence – Scan Theory & Pyschometric Test
• Anti Fraud Framework
• Implementation of whistle blow & vigil mechanism
• Lifestyle & Background check
• Forensic examination of documents
• Tailing, Spying, Hacking & Screening, Social Media Profiling
• Digital Forensic
• Market research, Covert Uncovered Operation, pretext calling
• Vendor Vigilance
• Indemnification Techniques
• Risk Appetite Redefinition
• Control Deficiency Correction
• Compliance with legal, regulatory and other requirements
• Conclusion – Report

5. Types of Trigger

• Living Beyond means (Lifestyle of employees)
• Financial difficulties
• Unusually close association with Vendor/Customer
• Control issues, unwillingness to share duties
• Divorce/family problems
• Wheeler-dealer attitude
• Refusal to take leave
• Behaviour of the person – Unfriendly and an introvert

Green flags

• Not asking for increment for a very long time
• Gift to employees
• First to enter the office last to leave
• Budget v/s Actual – at par/low
• No claims on reimbursement
• Payment done through Personal account/Credit card
• Sudden profit in an otherwise loss making business
• Excessive Supporting Documentations
• Excess Stock as compared to that recorded in books of accounts

6. Preventive Technique

Core Vigilance Committee – Proprietary

• Scanning of emails and hard disk
• Surprise intelligence check of employees
• Surprise vendor and customer visit
• Astound expense verification

Whistle Blow Technique

• Exposition of illicit activities being executed by fellow mate
• Communication via ethical helpline and email
• Independent committee to work on whistle blow

Test – Entry & Exit

• Entry Window – Eq test assuring intent, Background check
• Exit Window – Check on employee activities during notice period serving in the organisation

7. Practical Case Studies

Disclaimer: Names in following examples have either been masked or renamed for confidentiality purposes

7.1 Project Mars – Research Company

7.2 Document Fabrication

7.3 Rotten Fruit Case

1. Purchase and Sale – Related Party & Credit Note Raised

7.4 Vendor Reonboarding Case

Blocked vendor opening another company and re-onboarded twice

• JJ Advertising was identified earlier as a suspected vendor due to multiple malpractices and was blacklisted
• Onboarding of new vendor – Bakshi Media with same owner
• Social Media Search for JJ Advertising shows Bakshi Media as a new brand of JJ Advertising
• Mr Sharma is identified as the owner of JJAdvertising & Bakshi Media
• On verification of the invoices, it was pertinent to note that contact numbers on both the invoices were same & authorized signatory for both the invoices is Mr Ketu
• The nature of services provided by both the vendors is similar
• Post blacklisting of Bakshi, same owner opened another company “XYZ Limited”

Evidence proving relation and common links between JJ Advertising & Bakshi Media

Modus Operandi/Detection Method used

8. Digital Forensic – Walkthrough

8.1 workflow.

Stage 1 – Disk Imaging

• It involves entire system imaging including system files.
• Data Imaging happens on the basis of Binary codes created in the system.

Stage 2 – Processing of Data

• System creates hash value for each data so as to maintain the originality & enables to submit in court of law. If any of the contents of original files are changed after processing of data, new hash value is created.
• Also recovers deleted files by user.

Stage 3 – Carving

• Carving allows to recover all formatted files which were once a part of the system even if the computer has been formatted multiple times.

Stage 4 – Indexing

• An Index is like a data base of text strings extracted from files or space on an evidence image

Stage 5 – Review

• Review is based on keyword search which are general as well as specific to the ongoing project
• Unique searches of min 250 key words having minimal multiplier of 4
• Manual review of the files populated by the tool

8.1 Report – Digital Forensic (Web Nexus)

9. Interrogation Techniques

10. Care to Cure

10.1 companies act, 2013.

Section 143(12) – Reporting by Auditors: If during the course of audit, the auditor has reason to believe that an offence of fraud involving an amount exceeding Rs. 1 crore or more is being or has been committed against the company by the officers or employees of the company, then the auditor shall report the matter to the Central Government.

If the amount involved in fraud is less than Rs. 1 crore, the auditor shall report the matter to the audit committee or Board within a period of 2 days from the date of his knowledge of fraud.

10.2 CARO 2020

CARO 2020 provides for specific requirements for reporting of fraud under clause 11.

• Has there been any fraud by the company or any fraud done on the company. If any such fraud has been noticed or reported any time of the year. If yes, nature and amount involved have to be reported.
• Whether the auditors of the company have filed a report in Form ADT-4 with the Central Government as prescribed under the Companies (Audit and Auditors) Rules, 2014.

10.3 Other Compliances

(Depends on industry and Company Composition)

• SEBI Reporting
• RBI Reporting
• Whistle-blow cases – mandatory status reporting by statutory auditor
• Regulatory bodies outside India, if requirement so persists
• Adherence to AML guidelines & ABAC guidelines
• EOW Reporting – ₹6 crore and above

11. Forensic – Prospects

11.1 Forecasting the Future – Emerging Trends in Forensic

Key insights

• The global Forensic Accounting Services market is estimated to grow annually at a CAGR of around 6.5% over the forecast period (2023-2030).
• In terms of revenue, the global Forensic Accounting Services market size was valued at around USD 16.5 billion in 2022 and is projected to reach USD 27.3 billion, by 2030.
• The global Forensic Accounting Services market is being driven by the growing number of frauds in the BFSI sector.

12. Directories

12.1 current trends directory.

• GDPR- Revolutionary Regulation
• SEBI tightens norms for Forensic Audit
• Introduction of Forensic Standards
• AI and Data mining in forensic

12.2 Theory Directory

• Men to men marking theory
• Cluster Theory
• Un-orthodox Theory
• Connect the dot theory
• Confirmation Bias Theory
• Corporate Espionage
• Hydro Theory
• Orphan Fund Theory

12.3 Our Directory

• Maths on fraud
• 7 Eye’s on fraud detection
• CVC technique for fraud prevention
• In-house Tools like – Mail Scanning, SCAN, Mind Muneem
• Whistle–blow mechanism – Whistle-Eye

12.4 Take-Way

• Aura of forensic audit
• Practical Knowledge
• Point of View- General Auditor V/s Forensic Audit
• Forensic Readiness

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Forensic Accounting Case Studies

• Case Study CA160 - The Case of the Missing Bitcoins
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• FORENSIC ACCOUNTING

Big Data case study: What forensic accountants need to know

Many cpas will need to learn new it skills due to the rise of big data, which is producing plentiful forensic accounting business opportunities..

• Valuation Services

Editor’s note: The following case study is excerpted from The 2014 AICPA Survey on International Trends in Forensic and Valuation Services .

Although the buzz about Big Data has certainly been growing, electronic data analysis, which topped this year’s list of top issues for FVS practitioners, is not new to CPAs in this area. “It’s something we’ve been dealing with for some time,” noted Tim Bryan, CPA/CFF/CITP, a forensic accounting and technology services senior manager at Crowe Horwath in Sacramento, Calif.

The important changes that have moved data analysis to center stage include new technologies that support greater data mining, and the fact that clients have developed a more sophisticated understanding of its potential. “They are demanding a higher level of data analysis capabilities,” Bryan said.

He described one recent engagement that involved a government agency whose investigation of a company required an analysis of all sales data for that entity over a three-year period. “With every transaction, the company is going to generate a lot of data, so we were working with about 60 million lines of data that had to be synthesized into something the attorney could use to defend the client,” he explained. Key considerations include data validation. “Tying the data to a source that you know is complete and accurate is the biggest challenge, followed by getting it into a usable format.”

This case required taking the data out of a SQL server (a database that implements the structured query language) and moving it to the firm’s own SQL server.

New skills required

This work requires a broader set of skills. “Spreadsheet tools are no longer good enough,” Bryan said. “Database experience is vital for CPAs in these cases. At our firm, we have invested in people with this experience and given them database training opportunities and encouraged obtaining certifications. Spreadsheet tool capabilities stop at around 1 million rows of data, which is powerful but not enough for a case like this one.”

CPAs also must be able to slice and dice all that data to make sense of it. “We are running queries and sampling data by query to understand it and make sure we have a good understanding of the data,” he said. “The analysis is driven by the need to answer a query or test a theory raised by your side or a claim from the other side. We are analyzing massive amounts of data, trying to synthesize it to validate or invalidate a theory.”

The availability of Big Data is behind several new cases that Bryan has seen in wage and hour litigation. State and federal labor laws require employers to offer workers a certain amount of break time and an uninterrupted lunch break. Employees must clock in or out before and after each break or lunch, but if they are required to do so five minutes early, say, that could add up to significant overtime during a year. In one case, “we’re downloading years and years of time-slip-level data on every single employee,” Bryan said. “It will all be used to determine trends and whether the employees are getting their breaks and meal times.” Wage and hour litigation is not new, but there is a new demand for an analysis of raw data. “At the end of the day, data is going to tell the truth,” he said.

In his hiring, Bryan seeks people who can add IT abilities to their CPA skill set. “In addition to a CPA, I look for course work or minors in information systems,” he said. “We also offer internal training. We have one person doing continuing education in university-level classes in R, a programming language.”

One potential stumbling block for organizations is the failure to have the requisite systems to efficiently and effectively manage data analytics. “You have to beef up your systems and hardware and know how to use them,” he said.

New approaches require taking a more holistic approach that goes beyond sampling to consider every transaction. Bryan recommended that CPAs take some data analysis courses related to Big Data, which can easily be found online and are often free. “It’s a great way to introduce yourself to the subject, and the price is right,” he said. “When clients need data analysis, they think of CPAs, and they expect us to have the skill set to get it done.”

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Forensic Accounting and Fraud Examination: Techniques, Case Studies and Career Opportunities

In the 1920s, Al Capone headed up an organized crime scheme that included gambling, prostitution, robbery, drug trafficking and murder. Law enforcement officials couldn’t collect the evidence they needed to convict him on many of his more notorious crimes. However, Frank Wilson, an IRS accountant, combed through stacks of Capone’s financial statements and records and found evidence that led to his conviction on 23 counts of tax evasion. In the process, he invented the field of forensic accounting. 1

Forensic accounting is a specialized branch of accounting that uses investigative techniques to uncover fraud and other financial crimes. Forensic accountants analyze the financial records of organizations and individuals to uncover evidence of inaccuracies, anomalies and fraudulent transactions. They may work for lawyers, financial institutions or law enforcement agencies, and are often called upon as expert witnesses in civil and criminal cases. 2

This post will discuss techniques, case studies, and careers in forensic accounting.

Fraud Examination Techniques and Tools in Forensic Accounting

According to the Federal Trade Commission, fraud cost US consumers $8.8 billion in 2022, an increase of 44% from 2021, 3 making forensic accounting an important profession to countering these losses. Fraud detection in accounting uses a combination of accounting, investigative and cutting-edge analytical techniques and tools to unearth and expose fraud.

Financial Analysis Methods

Financial analysis methods use data analysis techniques to investigate financial data, uncover patterns, and identify outlying data to track down misconduct and financial fraud. Trend analysis, for example, allows forensic accountants to examine financial data over time, identifying inconsistencies or deviations from expected patterns. They can use this data to reveal hidden fraudulent activities, such as embezzlement or revenue manipulation. 4

By comparing financial ratios, such as profit margins or liquidity ratios, against industry norms or historical data, forensic accounting professionals can detect anomalies indicating financial misrepresentation or fraud. They also use techniques like Benford’s Law or statistical models to identify unusual patterns in large datasets that flag potential fraud or accounting errors. 4

Data Forensics and Digital Analysis

With the digital transformation, cybersecurity and forensic accounting issues often overlap. Data forensics and digital analysis techniques allow forensic accountants and professionals to leverage digital data to uncover financial fraud or irregularities. They use digital footprint tracing to examine digital records, from transaction histories to online behaviors, to trace the origins and flow of funds. 5

E-discovery techniques, such as extracting data from emails, databases and other digital platforms, help forensic accountants collect, preserve, analyze and present data from digital devices in investigations. Because so many financial transactions are digital, these accountants also need to be well-versed in cybersecurity to analyze and protect sensitive data. 6

Interview and Interrogation Techniques

Forensic accounting professionals don’t just examine records and run statistical models. They also interview employees and key witnesses in an investigation. These forensic interviews can provide additional facts or solicit confessions.

A forensic accountant builds trust and rapport with the people they’re investigating to encourage their cooperation. They start by asking questions they know the answer to, so they can establish baseline behavior. When they ask questions they don’t know the answers to, they can draw on this baseline behavior to determine if they’re telling the truth. 7

Fraud Case Studies in Forensic Accounting

Forensic accounting is used to uncover many different financial crimes, from corporate and investment fraud to money laundering. The following fraud examination case studies illustrate how forensic accounting skills were used to uncover significant financial crimes.

The Enron scandal was one of the largest corporate fraud cases in history. The company used off-balance-sheet special purpose entities (SPEs) to inflate profits and hide debts. Forensic accountants analyzed Enron’s complex financial records, tracing transactions and debts concealed through these SPEs. Their expertise revealed the extent of key executives’ financial manipulation, leading to criminal charges and new legislation designed to prevent similar crimes in the future. 8

Panama Papers Leak

The Panama Papers leak was the largest data leak in history, exposing millions of documents from the law firm Mossack Fonseca. These documents revealed emails, financial spreadsheets and corporate records that allowed forensic accountants to trace hidden wealth, tax evasion and money laundering activities. The leak revealed how politicians, including Russian President Vladimir Putin, and other wealthy individuals used offshore tax havens to commit financial crimes. 9

Bernie Madoff’s Ponzi Scheme

A Ponzi scheme is a type of investment fraud that pays returns to existing investors with money collected from new investors. Bernie Madoff committed the largest Ponzi scheme in history, defrauding investors out of billions of dollars. The financial analyst Harry Markopolos first discovered the fraud in 1999, but the SEC ignored his reports until 2005. As more of his investors started cashing out, Madoff was unable to keep paying investors. Madoff was arrested in 2008, tried, and sentenced to 150 years in prison. 10

Training and Careers for Forensic Accountants and Fraud Examiners

Forensic accountant careers require at least a bachelor’s degree, but a forensic accounting master’s degree will give you a competitive edge in applying for jobs. A forensic accountant can also obtain professional certifications such as Certified Public Accountant (CPA) and Certified Forensic Examiner (CFE). Forensic accountants work for accounting firms, law enforcement organizations, the federal government and financial institutions. 11

Famous Examples of Forensic Accounting Cases

Table of Contents

Forensic accounting cases can be a minefield of complications, disputes, and potential stumbling blocks. This in addition to the extremely high stakes that come with such cases. So, how do you know if a forensic accountant is the best option for you? 

Over the years there have been a select few highly famous examples of forensic accounting cases where specialist accountants have resolved situations that will be remembered for decades. 

In this blog we discuss what forensic accounting means, explore some of the most famous examples of forensic accounting cases. 

What Does Forensic Accounting Mean?

Forensic accounting is a form of accounting that utilises all the necessary skills of a traditional accountant, plus auditing and further investigative skills. Forensic accountants are instructed to conduct thorough investigations into the finances of individuals/businesses — to provide clear and concise analysis that would be suitable for use in legal proceedings. 

Forensic accountants will look past the numbers in any case and investigate the business itself to determine the realities of the situation. 

Now we’ve covered the basics of forensic accounting, let’s take a look at a few examples of the practice in action.

Examples of Forensic Accounting Cases

Forensic accountants can be instructed to assist with all manner of different types of cases, from commercial and matrimonial disputes, to fraud and financial crime and beyond. Due to the diversity of the field, forensic accountants can be instructed by all manner of different people, including companies, lawyers, creditors and insurers.  

Examples of forensic accounting cases includes:

Commercial Disputes 

Commercial disputes are a varied field of conflict. They can cover: 

• Contractual disputes
• Transactional disputes
• Shareholder/partnership disputes
• Professional negligence 

As a result of the vagueness of a ‘commercial dispute’ case, a forensic accountant is ideal as they will conduct a detailed and thorough investigation of the situation and uncover any and all issues, as well as their root cause to help provide a tailor-made solution and plan for their client. 

During a commercial dispute resolution, the main heavy-lifting from a forensic accountant will come during this investigative stage. However, they can also work to quantify damages, and act as an expert witness should the situation require it. 

Divorce and Matrimonial Disputes 

Dealing with divorce and matrimonial disputes is considered one of, if not the most difficult form of dispute a forensic accountant can be instructed to assist on. This is due to the heightened level of emotion present, and the need for the dispute to be resolved as quickly and as fairly as possible. 

The core role of a forensic accountant during a matrimonial/divorce dispute is to ensure that all assets and income are distributed fairly. They will achieve this by leaving no stone uncovered in the pursuit of the truth. 

The process of valuing assets or property/business interests can get incredibly complicated incredibly quickly if you are not careful — funds can be hidden out of sight either abroad or with friends and family. 

A forensic accountant ensures fairness prevails and that the possibility of one side pulling the wool over the eyes of the other is minimised as much as possible.  

Financial Crime 

Examples of types of financial crimes that a forensic accountant can expertly assist with include allegations of: 

• Accounting irregularities 
• Money laundering 

Generally, in financial crime cases, the prosecution’s case will be based primarily on their own interpretations of facts and figures, and not based on evidence from experts in the fields. With the assistance of a specialist like a forensic accountant, this case can be fought, and often beaten. 

Additionally, a forensic accountant will be adept at helping present the evidence. A key skill of a forensic accountant is the ability to clearly and concisely present their findings so laymen will understand, this is particularly helpful in a court setting.  

A forensic accountant can also act as an expert witness in court, giving key evidence under cross-examination. They will be confident in dealing difficult questions and utilise their expertise to help swing the case in your favour. 

Contentious Insolvency 

It is incredibly common for there to be some element of unhappiness and dispute in any case of business insolvency . However, when it comes to the additional contentious cases of insolvency, a forensic accountant could be the difference between company directors being faced with serious ramifications. 

Common causes of contentious insolvency include: 

• Serious mismanagement 
• Wrongful trading 

Without the expertise of a specialist forensic accountant, cases of contentious insolvency can be hugely difficult to navigate and resolve amicably. There is a high possibility for the situation to devolve and snowball into a significantly larger issue for all parties if not handled correctly. 

Forensic accountants have the keen eye for details when analysing key information and documents that could be vital in securing a positive outcome. 

Financial Fraud 

Cases of financial fraud are highly complicated. As a result, the actual amount of attention-to-detail required in pursuit of a fair conclusion can be too much for a standard legal team to handle on their own. This is where the input of a forensic accountant can make or break a case.

A forensic accountant will offer all manner of different services to investigate financial fraud, this includes: 

• Asset tracing and recovery 
• Corruption investigations 
• Bribery investigations 
• Quantification of loss 
• Background checks 

In a financial fraud investigation, the forensic accountant will be responsible for building a compelling, strong case that will stand up in court under cross-examination. 

Famous Forensic Accounting Cases

Across the course of modern history, there have been near endless examples of forensic accounting cases. However, there have been a few which have stood out compared to others. These include the arrest of legendary New York gangster Al Capone, and the divorce of Sir Paul McCartney and his then-wife Heather Mills.

Likely the most famous examples of forensic accounting cases in history, the infamous Al Capone was not caught thanks to the hard work of the police uncovering his crimes in undercover operations, nor was he caught red handed in a warehouse raid. He was eventually brought down thanks to the hard, diligent work of forensic accounting. 

During the 1930s, the Internal Revenue Service (IRS) sought to pursue the mob boss, and attempted to uncover his tax crimes. During the process, the IRS’ team of forensic accountants generated the income he would earn from his illicit activities, and were successfully able to prove that Scarface was — of course — not reporting this income for tax purposes. 

As a result, the IRS were able to land one of the most famous arrests of the century, right under the noses of the FBI. Even after the initial work was complete, it still took around two years of additional work to prove that tax had not been paid on the vast amounts of money Capone was reported to be earning and spending. 

Other famous cases of forensic accounting in action include the high-profile divorce of Sir Paul McCartney from Heather Mills in 2008. 

In this case, the contention came as a result of disputes over the net worth reported by McCartney. This is a common issue that forensic accountants are expected to be instructed to assist. 

In the end, the forensic accountants worked to discover the exact net worth of the former Beatle in order for a settlement to be made in court. 

Further famous examples of forensic accounting cases include: 

• The Civil trial of OJ Simpson where the former NFL superstar was found to have falsely pleaded poverty despite being worth over $33million — a settlement was found for damages. 
• The downfall of the companies of Robert Maxwell after his embezzlement was uncovered by forensic accountants post-death, proving that he was taking money from the pension-fund to keep his businesses afloat.

Why Inquesta Can Help Your Case 

Forensic accounting cases are generally highly complicated, with extremely high stakes. As a result it is important that you work with accountants you know you can trust. 

Inquesta have been operating in the field of forensic accounting and investigation for decades. We have a proven track record and sterling reputation. 

Our specialist team of forensic accountants have been instructed to support in a wide variety of different situations and cases, including but not limited to cases involving financial crimes like: 

• Accounting irregularities
• Money laundering

We work tirelessly in our drive for the best result possible for our clients. Your needs are at the forefront of every single thing we do, from top to bottom.  For more information on a forensic accounting service that you can trust to deliver results, contact a member of our team today or book a free consultation.

Home › Insights › Blogs › Defending IRS Cash Based Audits – Guilty Until Proven Innocent: The Case for Using a Forensic Accountant

Defending IRS Cash Based Audits – Guilty Until Proven Innocent: The Case for Using a Forensic Accountant

Why a Forensic Accountant? Using a forensic account is essential in developing a strategy to handle and defend the findings of a cash-based audit. However, before delving into how they can assist counsel and the client, it’s essential to define what a forensic accountant is.

Forensic accounting is a subset of the accounting profession. The Oxford Dictionary defines forensic accounting as “the use of accounting skills to investigate fraud or embezzlement and to analyze financial information for use in legal proceedings.”

In the context of a cash-based audit, an accountant or counsel may handle the actual audit and interface with the agent, and a forensic accountant (FA) may evaluate the books and records in advance of the audit or after the fact by reviewing the findings of the IRS. Their role will include accumulating appropriate evidence, critically assessing the assertions and calculations of the IRS, and identifying additional financial and nonfinancial information not considered or not given the right level of relevance in the conduct of the audit.

Depending on how a case develops, counsel can utilize forensic accountants in various capacities, including as a consulting expert who consults with the attorney but does not testify or as a testifying expert and fact witness.

It is typical for counsel to retain the FA under a Kovel letter. Under this form of representation, the accountant is considered part of the defense team, advising the attorney. As such, unless the expert will testify, their work product is not discoverable. This becomes even more critical in instances where additional non-tax related charges may be possible or if the audit may result in criminal charges.

The remainder of the article will address the forensic approach to a cash audit, including:

• Understanding the business and its operations
• Understanding cash controls and documentation
• Evaluation of the IRS findings

We will also address Form 8300-Cash Payment Report, consideration of digital transactions, and recalculation of the tax loss.

The Forensic Approach to a Cash Audit

There is no one-size-fits-all approach to a cash audit. Each engagement will have different issues that need to be addressed, and the FA’s role is not just to address the findings but to identify mitigating factors and alternatives that can be used to minimize the asserted tax loss or potential fraud claims.

In some cases, depending on the extent of the estimated tax loss, coupled with the investigating agent’s suspicions of fraudulent activities, a criminal referral may be made. In such cases, the taxpayer’s intent will become a key element in determining the trajectory of the audit and the case. Accordingly, forensic accountants must understand the taxpayer’s state of mind. This involves a meticulous examination of a company’s financial transactions and scrutinizing records to determine whether there was a deliberate attempt to underreport income or engage in fraudulent activities.

The taxpayer will no doubt be frustrated and at a heightened stress level as the agent goes through their interview and assessment processes. The taxpayer, typically a business and its owner(s), often find themselves on defense and asked to explain transactions that are multiple years old, with records that may not be perfect. Forensic accountants will navigate the company and its owners through this process, understanding the discomfort an in-depth examination of this type causes. 

Understanding the Business and Its Operation

Critically important when evaluating findings, evaluating indicia of intent (more on that later), and reconstructing the business’s financial activity is understanding what they do, how they do it, and the capabilities of key personnel. In addition, understanding the industry and its competitors will provide valuable insight. Some of the areas of evaluation include:

• What’s standard in the industry
• Comparison to similar businesses
• Industry trends
• Financial history
• Banking history
• Relationships with customers and vendors
• Capabilities of management and finance personnel

Understanding of Cash Controls and Documentation

The focus on controls and supporting documentation cannot be understated. This will often go directly to intent in a criminal fraud matter. Documenting the systems and walking through the actual implementation of the controls will pay dividends in the investigation and reconstruction. It is also from these records that the financial history can be recreated and documented even after the fact. The FA will want to document the controls, including segregation of duties and documentation maintained for various areas. Including:

• Deposits and cash deposits
• Record keeping, oversight, and reconciliations
• Cash disbursements
• W-2’s 1099’s, particularly cash payroll

There is no formal definition of books and records. Not every business has full-time, educated financial staff and the tools to capture and report financial transactions. Understanding the informal accounting processes and their utilization can be vital to presenting the financial activity.

Evaluation of IRS Findings

The IRS agents who perform these audits of cash-intensive businesses tend to be highly skilled. The reality is that there is not much new in the means of business undertaken to disguise or divert cash. The IRS has published audit guides designed around specific industries. Certainly, before agreeing to a meeting with an agent, the audit guide should be reviewed to identify issues likely to come under review.

You can expect that before the agent ever steps into the conference room, they will have utilized the tools at the IRS’s disposal to investigate the company. They will review social media and potentially interview competitors, customers, and vendors. They will have banking information and undertake other financial discovery from available public and not-so-public sources. They will have a wealth of industry and comparative financial data and specific operating details. They will likely have visited the business and already understand how it operates. They will have reviewed the business’s and its owners’ tax returns. In short, you’re not talking your way past the auditor.

Should the books and records be insufficient, the agent will attempt to reconstruct the business’s revenue via an alternate means. We will discuss the specific methods in a follow-up article; however, know that there are five prevalent methodologies to prove unreported cash. Depending on the industry and the availability of information, the auditor will choose a method, including:

• Percent markup
• Source and application of funds
• Cash expenditure

The forensic accountant must evaluate what the IRS has calculated and the related conclusions. By design, all these methods are indirect and imperfect income measures. There may also be another methodology that will more accurately achieve the result and may need to be independently computed by the FA. By identifying flaws in the calculation, unsupported assumptions and conclusions, or errors in the information utilized, the FA can drive the tax loss lower. The key is to access information and records to document alternative positions to the IRS’s conclusions.

One area to review is the diligence undertaken in accumulating and categorizing the deposits to the entity’s bank accounts. There are numerous types of deposits that do not represent taxable income, in whole or part. Identification of these items through access to information can effectively negate the inclusion. Some of these items include:

• Tips to be paid to employees
• Loan proceeds
• Asset sale proceeds
• Contribution to capital

One of the areas that should also be evaluated is the revenue reported on sales and excise tax returns versus the revenue reported on the income tax return and computed by the IRS. The FA must be aware that the analysis can open new issues to the State(s) for underreporting trust fund taxes. 

Business entities that are cash-intensive also tend to use cash to pay vendors and staff. This can quickly become a problem if not documented, as the IRS will have arrived at a revised income number; they have no incentive to look at the other side of the ledger and identify expenditures paid with cash, which reduces taxable income. The result, of course, is inflated taxable income. Once again, the ability to document these expenditures is critical. 

One concern is always compensation paid in cash to “contractors.” Not only is this extremely difficult to document to the IRS, but it comes with additional concerns of underreported employee withholding and employment taxes. What may assist is the review of 1099s if they have been issued. The issuance at least supports the proposition that the payments were made. We’ll leave the employee vs contractor argument for another day.

Contacting vendors to obtain purchase records and payment reconciliation can effectively support cash payments to vendors. We recommend contacting vendors early in the process and gauging their willingness to cooperate. Realize you will have alerted the IRS to the fact that they, too, have cash-based revenues.

Form 8300 – Cash Payments Report

Most people are familiar with the foreign bank reporting requirements and know that US banks will report deposits greater than $10,000 in cash on a suspicious activity report. Less known is Form 8300, which businesses are required to file with the IRS and FinCen for cash received over $10,000 within 15 days of the receipt of the money. In the context of a cash basis audit, supporting deposits with the 8300 filing will assist the forensic accountant in validating the revenue streams. Further, it demonstrates a level of diligence on the part of the business to report its cash income that will negate many of the negative connotations that can come with the auditor’s review.

Consideration of Digital Transactions

Business transactions have evolved from cash to credit cards to digital currency and peer-to-peer networks. What can quickly be lost in the review of cash-based transactions are companion transactions using nontraditional payment methods for both inbound and outbound transactions. Some of these transactions are well documented, and the details of the transactions are easily obtained, such as through PayPal. Other transactions are far less recorded, particularly if digital currencies enter the equation. Know that the use of these platforms may draw additional scrutiny. Accordingly, the time should be taken to document the transactions. Tracing digital currencies was once thought to be impossible; it is now well within the IRS’s wheelhouse and should not be taken lightly.

The use of check-cashing businesses will also insert a level of complexity into the documentation of the financial transactions of the business, as well as barter transactions. All of this will undoubtedly raise the auditor’s level of interest.

Recalculation of the Tax Loss

Unfortunately, in most cash audits, an assessment will be forthcoming. The forensic accountant needs to evaluate the agent’s findings to reduce the computed tax or tax loss. There will certainly be penalties and interest associated with the amount. In addition, there may be substantial underpayment penalties and civil fraud assessments. Through a critical evaluation of the methodologies and the transactions identified, the FA may be able to either reduce the assessment or at least create substantial doubt, which may become helpful in negotiations or on appeal.

Depending on the circumstances, the auditor may have decided to make a fraud referral. While in the past, most of these cases remained in the civil arena, agents are now given the training and the tools to refer the matter for possible criminal charges. While the number of criminal cases yearly remains small, the forensic accountant must be aware of the possibility. 

For the IRS to prevail in a criminal proceeding, the key element they need to prove is intent. The standard is beyond simply sloppy bookkeeping or the result of untrained people managing the finances. The IRS will look for what are known as the badges of fraud . There is no one size fits all, and no one element will rule the day. Instead, it’s an accumulation of factors that will point to a taxpayer who intended to underreport their income and failed to pay the appropriate amount of tax. Some of the criteria, a more detailed listing that can be found in the Internal Revenue Manual, include: 

• Fictitious payees
• Low margin, net loss
• Use of zappers
• Lack of adequate records
• Destruction of records
• Concealing assets
• A second set of books
• Failure to report

In conclusion, as explained above, the role of the forensic accountant, both in anticipation of the audit and after the fact, is multi-faceted. Understanding the business, documenting the processes and procedures, recreating the books and records, and evaluating the findings are all critical aspects of the procedures the IRS and the forensic accountant follow. Therefore, no cash-intensive business should take on an IRS cash audit without the proper representation utilizing legal, accounting, and forensic professionals.

For more information on this topic, please contact a member of Withum’s Forensic and Valuation Services Team .

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CASE STUDY FORENSIC AUDIT AND CRIMINAL LIABILITY IN FRAUD CRIMES

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An Overview of Forensic Accounting and Its Effectiveness in the Detection and Prevention of Fraud

• First Online: 27 August 2023

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• Isabella Lucuț Capraș 2 &
• Monica Violeta Achim 2  

Part of the book series: Contributions to Finance and Accounting ((CFA))

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The main purpose of this study is to determine whether forensic accounting is an effective tool for preventing fraud. To conduct a comprehensive analysis, the research examines three aspects: the skills and attributes of a forensic accountant, the techniques used in forensic accounting, and the challenges and opportunities in the development of the forensic accounting profession. The study’s sample includes 30 articles that were critically reviewed using a combination of systematic and traditional literature review methods. The main findings of the study suggest that the abilities and skills, as well as the techniques used in forensic accounting, make this function an effective tool in detecting and preventing fraud; however, they require more attention from academic institutions and specialized bodies that train accounting experts. Moreover, forensic accounting must be recognized as an independent profession. This study can assist businesses and policymakers in improving fraud detection and prevention methods. Furthermore, it can be used in schools to enhance accounting and audit curricula. The study has a social implication because it helps in the prevention and detection of fraud and discusses the forensic accounting profession.

• Forensic accounting

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Acknowledgement

This work was supported by a grant of the Romanian Ministry of Education and Research, CNCS - UEFISCDI, project number PN-III-P4-ID-PCE-2020-2174, within PNCDI III.

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Capraș, I.L., Achim, M.V. (2023). An Overview of Forensic Accounting and Its Effectiveness in the Detection and Prevention of Fraud. In: Achim, M.V. (eds) Economic and Financial Crime, Sustainability and Good Governance. Contributions to Finance and Accounting. Springer, Cham. https://doi.org/10.1007/978-3-031-34082-6_13

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DOI : https://doi.org/10.1007/978-3-031-34082-6_13

Published : 27 August 2023

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Forensic Investigations: 3 Shocking Cases & Vigorous Techniques

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Forensic accounting investigations are like detectives in the financial world. They play a vital role in uncovering financial crimes, such as theft or hiding money. These investigations help find and get back stolen or misused money. In this article, we’ll see how forensic accountants investigate financial crimes and the methods they use to find evidence.

What are Forensic Investigations?

Forensic investigations are like scientific detective work. Experts analyze evidence to solve crimes, settle legal disputes, and present evidence in court. They collect, study, and interpret physical and digital evidence found at crime scenes. Forensic accountants are specially trained to investigate financial crimes like fraud, embezzlement, and money laundering. They play a crucial role in uncovering the truth and bringing justice to those involved in such illegal activities.

Generally, in India, Certified Forensic Accounting Professionals (CFAPs) carry out forensic investigations. Training for Certified Forensic Accounting Professionals (CFAPs) focuses on honing their abilities to identify suspicious patterns and discrepancies in financial documents and transactions. These signs can be indicative of potential criminal activities.

Techniques of Forensic Investigations

They use a variety of techniques to gather evidence and build a case. Some of these techniques include:

• Financial statement analysis: Financial statement analysis is like investigating a puzzle in numbers. Forensic accountants, who are like financial detectives, carefully look at financial papers to find any mistakes, differences, or strange things that could mean someone is doing something wrong, like cheating or doing something illegal. It’s a bit like catching a thief who leaves clues behind in the numbers.
• Asset tracing is like following a money trail. Forensic accountants use their skills to track how money moves through complicated transactions to find out where the money originally came from. It’s like being a financial detective to figure out the source of the money.
• Computer forensics is like detective work for computers. Imagine someone using special tools and methods to find hidden information on electronic devices, like laptops or phones. They look for clues in the digital world to figure out if someone did something wrong. It’s kind of like searching for fingerprints on a computer instead of at a crime scene. These experts use special computer programs to uncover data and check if it can be used as proof in a case.
• Interviewing witnesses : Forensic accountants talk to people who might know about the fraud. They do this to learn more about what happened and to put together evidence for their case.
• Document analysis: Experts like forensic accountants look at papers like contracts, bills, and bank papers. They do this to find proof of cheating or other bad money activities.

Forensic Investigations in Action

Forensic investigations can be quite complicated and take a lot of time. They often involve dealing with large amounts of financial data and using special tools and methods. Let’s see some real-life examples of how forensic accounting investigations work.

In India, forensic accounting investigations are becoming more frequent because businesses and individuals are facing more attention from regulatory authorities, creditors, and other interested parties.

Satyam Fraud

One of the most well-known cases of forensic accounting investigations in India is the Satyam Computer Services scandal, exposed in 2009. Satyam, a major IT company in India, falsely inflated its revenue and profits by over $1 billion over several years.

This scandal resulted in the arrest and conviction of several top executives, including the company’s founder and chairman, Ramalinga Raju. Forensic accountants played a crucial part in uncovering fraud by carefully examining financial records and transactions to spot irregularities and discrepancies.

Forensic accounting played a significant role in the investigation of the National Spot Exchange Limited (NSEL) scam. Fraudulent activities by the commodities exchange resulted in the loss of more than Rs 5,500 crore in 2013. Forensic accountants also conducted investigations of financial records. They found transactions as evidence of wrongdoing. The investigation resulted in the arrest of several individuals involved in the scam, including the exchange’s founder and several top executives.

Forensic accountants have used their skills and expertise in India to uncover fraud in the banking sector. In 2018, the Punjab National Bank (PNB) became embroiled in a massive fraud case. Rogue insiders used fraudulent letters of undertaking (LoUs) to obtain loans from other banks. The fraud caused the bank to lose more than Rs 14,000 crore. As a result, many people, including top bank officials, were arrested. Forensic accountants played a vital role in finding the fraud. They looked at financial records and transactions to find any mistakes or unusual things.

Moreover, forensic accounting investigations are not limited to the corporate sector in India. CFAPs are also involved in investigating cases of tax evasion. They also work with law enforcement agencies and regulatory bodies to uncover fraudulent activities and financial crimes.

In simple terms, these investigations involve looking at financial documents, finding transactions that seem suspicious, and following the path of money. With their knowledge of forensic accounting, these experts help catch financial criminals and stop similar crimes from occurring again.

In a famous case, the Income Tax Department of India used forensic accounting techniques to uncover a tax evasion scheme involving a well-known builder. During the investigation, they found that some cash transactions were not properly recorded in the builder’s financial records. As a result, the builder was penalized heavily under Income Tax Laws. This case shows how forensic accounting techniques can be essential in revealing fraud and ensuring fairness for those affected.

CAG’s Role in Forensic Investigation

The Comptroller and Auditor General (CAG) of India is a significant auditing authority in the country. They have been actively involved in conducting forensic accounting investigations in the public sector. In 2020, they conducted a special audit of the Delhi Jal Board. Their investigation revealed many cases of irregularities and mismanagement of funds. The audit report also found instances of not following financial rules and procedures, as well as instances of paying more than required and irregularities in the procurement process. CAG’s efforts have helped uncover financial issues and promote transparency in public sector organizations.

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Forensic Accounting in India started with one word - Indiaforensic. With 12 Certifications in forensic accounting, Anti Money Laundering and Financial Crime Compliance, Indiaforensic are the pioneers of forensic accounting education in India.

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