This paper examined the concept of forensic accounting theory. Forensic accounting theory is an explanation of rationale behind the adoption of methods and techniques used in detecting creative accounting or fraudulent manipulations in financial reporting, and the outcome of using such methods or techniques, depends on the accounting and non-accounting decisions taken into consideration by the forensic accountant or investigator.

Keywords: Fraud, Forensic accounting, financial reporting, Fraud detection, Forensic accounting theory, financial report and Forensic investigator.


A forensic accounting theory is an explanation for observed forensic accounting practices. Past and recent accounting scandals in financial and non-financial firms have shown that expertise in forensic accounting is crucial to detect financial fraud that originates from a firm’s financial accounting process. The emerging innovations in financial fraud schemes and the frequent changes in accounting methods and policies by firms in the preparation of financial reports have made fraud detection become a complicated process in recent times. For this reason, a combination of skill, knowledge, experience and ability to pay ‘attention-to-details’ will be the major attribute of a successful forensic investigator in these times.

These observations require some new thinking in the forensic accounting literature in explaining why and how certain skills and methods are used to detect fraud, the decisions regarding the materiality of the findings, and the precautions taken when reaching conclusions from the fraud detection process. A forensic accounting theory can provide some explanations! As new academics emerge and are eager to understand forensic accounting, either as a branch of accounting or as a branch of forensic science in a fast changing world where sophisticated innovations in creative accounting have increased rapidly in the business sector, it is needful to remind ourselves that the forensic accounting as a field of study may become porous and disconnected if there are no set of theories or theory that explain observed forensic accounting practices. Such theory is needed to change how we think about forensic accounting practice, and to advance our understanding of forensic accounting.

There are a lot of theories that have been developed by experts in the field of forensic accounting and more theories are still on their way. These theories make contribution to the forensic science literature and to the accounting theory literature. By developing the forensic accounting theories, a new and comprehensive statement of how the choice of forensic detection methods and techniques are made, and how the findings from forensic detection activities are interpreted are presented. The forensic science literature – whether academic, policy or practice – can use the forensic accounting theory perspective to provide believable explanations for fraud detection objectives and outcomes. In relation to the accounting theory literature, I present some hypotheses or frameworks that can be used in the study of forensic accounting as a branch of accounting.

Conceptual framework:

Forensic Accounting: there are several definitions of forensic accounting. For instance, forensic accounting has been defined as the application of financial skills and investigative mentality to unresolved issues conducted within the context of the rules of evidence (Bolgna and Linquist, 1995). Forensic accounting is also defined as the application of accounting and auditing, financial and investigative skills, to unsettled issues conducted within the context of the rules of evidence (Arokiasamy and Cristal-Lee, 2009; Ozkul and Pamukc, 2012). Forensic accounting may also be defined as the application of auditing methods, techniques or procedures to resolve legal issues that require the integration of investigative, accounting, and auditing skills (Arokiasamy and Cristal-Lee, 2009; Dhar and Sarkar, 2010). Forensic accounting may also be defined as the process of gathering, interpreting, summarizing and presenting complex financial issues in a clear, succinct and factual manner often in a court of law as an expert (Howard and Sheetz, 2006; Stanbury and Paley-Menzies, 2010).


 Fraud: this is defined as a deliberate attempt by corporations to deceive or mislead users of published financial statements, especially investors and creditors, by preparing and disseminating materially misstated financial statements (Rezaee, 2005: p.279). Fraud can be committed by employees, former employees and outright outsiders (Crumbley, 2003; Zahra et al, 2005; Ozili, 2015), and there is a general consensus that fraud involves the intentional alteration or manipulation of material financial records and supporting documents (Ozili, 2015). Fraud schemes vary in scope and context, and some types of fraud are industry-specific (Calavita et al, 1997, Ozili, 2020). The common motivations to commit fraud is the pressure to meet personal needs, social needs and economic needs, and the need to meet compensation-based targets (Johnson et al, 2003; Denis et al, 2006; Hernandez and Groot, 2007; Lie, 2005; Burns and Kedia, 2006; Erickson et al, 2000). The fraud triangle is a framework widely used in the literature to describe the motivation to commit fraud and how fraud is perpetuated (Schuchter and Levi, 2016). The fraud triangle shows that individuals who commit fraud follow a triangular sequence which means that there is a need that must be met, there will be some opportunity to meet the need through illegal means, and the ability to rationalize why the fraud should be committed (Ozili, 2015; Schuchter and Levi, 2016). Other studies have expanded the fraud triangle to include additional fraud motivators (see Dorminey et al, 2010; Ozili, 2015; Lokanan, 2015; Huber, 2017; and Free, 2015).


Financial Reporting: this is the process of summarizing the financial transaction of an organization in a statement that shows the financial performance and position as at a particular time period. The financial reporting summarizes in different accounting charts the financial activities that happened in a year so that the user can make informed decision about such organization.


Financial report: this is the statement that shows in a summary form the financial activities of an entity in a particular period. Financial report comprises of statement of financial position, statement of comprehensive income, cash flow statement and notes to the account.


Forensic investigator: this is a professional in the field of forensic accounting that carries out the investigating enquiries relating to fraud so as to have reasonable evidences that is tenable in the law court. Forensic investigator is not necessary need to be an accountant; other professionals from different field also practice forensic investigation or accounting. The term ‘forensic investigator’ would have given a broader coverage because it recognizes that not all forensic investigators are accountants. Forensic investigators may be accountants, economists, actuary, lawyers, psychologists, etc. Therefore, using the term ‘forensic investigator’ is a broader term that encompasses the wide range of professionals involved in forensic investigation.

It has also been highlighted, the important skills needed to be a forensic investigator. The core skills are strong analytical abilities, written and verbal communication skills, creative mind-set and business acumen (Messmer, 2004); critical and strategic thinking, auditing skills, investigative ability, synthesis of results and thinking like the wrong-doer, critical and strategic thinking, effective written communication, effective oral communication, and investigative intuitiveness (Davis et al 2010); in-depth knowledge of financial statements, the ability to critically analyse them and a thorough understanding of fraud schemes (Ramaswamy, 2005).


Theoretical Framework:

Forensic accounting theory looks at how the accounting and non-accounting decisions made at the start, during or at the end of the investigation process affects the choice of forensic detection methods and techniques used, and the interpretation of the findings of forensic investigation. Forensic accounting theory states that the techniques and methods used to detect fraud reflect the accounting and non-accounting decisions that were taken into consideration by the forensic investigator. In other words, the main premise of forensic accounting theory is that the choice of forensic detection methods is not merely a result of the forensic investigator’s experience, skills or knowledge but rather depends on the accounting and non-accounting considerations made by the forensic investigator at the start, during, or at the end of fraud detection process.

Thus, forensic accounting theory suggest that the choice of methods or techniques used to detect creative accounting or manipulations in financial reporting, and the outcome of using such methods or techniques, reflect the accounting and non-accounting decisions that were taken into consideration by the forensic accountant or investigator.

Some working assumptions

  • A humane objective of a forensic investigation exercise is to identify and uncover unresolved issues, and recommend corrective actions that discourage such behavior from occurring again.
  • Such corrective actions may include the imposition of fines, imprisonment, etc.
  • The outcome and findings of a forensic investigation exercise should not lead to the collapse of the convicted firm or the death of the convicted individual. Without this assumption, forensic investigators may seek the downfall of the corporation or the individual they are investigating for criminal suspicion. Therefore, this assumption is crucial because it eliminates the personal judgmental bias of the forensic investigator, and prevents the personal bias of forensic investigators from interfering with the forensic investigation


Given the assumptions above, the uderlisted  hypotheses were developed to explain the accounting and non-accounting considerations that influence the choice of methods and outcomes of a forensic investigation activity



 Materiality hypothesis

The materiality hypothesis of forensic accounting theory states that forensic investigators will use forensic detection methods that help to determine whether the unresolved case is material or immaterial under legal and regulatory rules. After a case has been reported for investigation and the case involves financial reports or financial statements that are perceived to be materiality misstated, it is in the best interest of the forensic investigators to use forensic detection methods that reveal the true nature of the case, and the actual monetary value involved in the case, from which a determination can be made as to whether the actual monetary value is material or not.


 Ability signaling hypothesis 

The ability signaling hypothesis states that forensic investigators will use sophisticated forensic detection methods that signal their superior forensic accounting ability and their ability to uncover unresolved issues. In environments where people do not trust investigators and do not trust the integrity of their findings, forensic investigators will be under pressure to prove their worth! Investigators in such environments will have strong incentives to use sophisticated techniques to prove their worth and to prove their superior ability to outsiders. For instance, to uncover accounting fraud, forensic investigators can use their knowledge of sophisticated accounting techniques, their specialist knowledge in accounting practice and their expert knowledge in the application of accounting standards coupled with their experience in forensic investigation. Using such sophisticated methods give forensic investigators an opportunity to differentiate themselves from their peers and competitors in the crime detection industry, and it can increase their credibility and reputation in the industry as well.

Bonus contract hypothesis  The bonus contract hypothesis states that, if the compensation or bonus to the forensic investigator is attached to how thorough and successfully forensic investigators are in uncovering unresolved issues when investigating suspected financial misstatements or financial crime, it is in the best interest of forensic investigators to use specific forensic detection methods, materiality assumptions and interpretations that increase the likelihood of uncovering unresolved (or suspected) financial crime or misstatements, which in turn would improve the compensation to the forensic investigator. Forensic investigators with bonus contracts are more likely to choose forensic detection methods or procedures that increase the likelihood of uncovering unresolved issues especially those relating to financial crime. Furthermore, if detecting actual fraud is the benchmark for assessing the performance of the forensic investigator, the forensic investigator will have stronger incentives to use specific forensic methods, procedures and choices that increase the probability of receiving the promised compensation that depend on the successful detection of actual fraud. For the purpose of empirical testing, the bonus contract hypothesis can be stated as:

H3: the presence of bonus contracts for forensic investigators lead to higher likelihood of resolving financial fraud cases


Anonymity hypothesis

The anonymity hypothesis states that, if the outcome of a forensic investigation may threaten the personal security of forensic investigators, it is in the best interest of forensic investigators to use specific forensic detection methods that hide their identity even if using such methods may decrease the likely of resolving the case. Such methods include the use of questionnaire, letters, text messaging, and audio interviews through phone calls. These methods do not allow the accused to see or meet the investigator in person, and these methods work well especially when investigating financial crimes and fraudulent misstatements by individuals or firms affiliated with criminal gangs, drug cartels and related groups. postulated a forensic accounting theory and derive some hypotheses in the formulation of the theory. The forensic accounting theory identified the accounting and non-accounting decisions taken into consideration by the forensic accountant or investigator during a forensic investigation exercise. The forensic accounting theory propose four hypotheses that explain the accounting and non-accounting decisions taken into consideration by forensic investigators namely: the materiality hypothesis, ability signaling hypothesis, bonus contract hypothesis, anonymity hypothesis and the collapse avoidance hypothesis.

The implication of the forensic accounting theory is that forensic accountants and investigators should consider the broader implications of their choice of forensic detection methods in the forensic investigation activity they are involved in. Forensic investigators should also be aware of their working tools and the investigative environment they thread on, taking into account the relevant accounting and non-accounting considerations as well as the diverse interests of both the forensic investigator and the firms or individuals being investigated. The forensic accounting theory developed in this paper is useful to both practitioners and academics involved in the problem-solving process for improving the integrity and quality of financial reporting and the fight against financial crime.





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