FORENSIC INVESTIGATION: THE IMPORTANCE OF

ACCOUNTING INFORMATION SYSTEMS

Linda Bressler
University of Houston-Downtown

ABSTRACT
Financial fraud has become a significant problem for small or large
companies in the United States and incidents of fraud can be noted on a daily
basis, and fraud investigators usually spend weeks working on a case to prosecute
fraud. This study briefly elaborated on financial fraud, explaining the accounting
information systems audit procedures followed by forensic accountants dealing
with financial fraud, and cited some examples. In addition, this study described
the role of forensic accountants and why they testify as expert witnesses,
transforming financial investigation to forensic investigation. Finally, a
recommendation for future research has been delivered and a conclusion has
been drawn.
Keywords: Fraud, investigators, AIS, Audit procedures, privacy issues, forensic, accounting skills

INTRODUCTION

Financial fraud does not affect only the direct victim, but it burdens other entities as well.
If fraud results from addiction to substance abuse, then it adds costs to law enforcement, crime
prevention, drug prevention and rehabilitation, courts, businesses and insurance companies
(Manning, 2005). Fraud can also include financial crimes including identity theft, collusion,
corporate fraud, embezzlement, and use of tax haven countries for illegal activities. Sometimes
fraud will occur because employees can be persuaded to reveal information via a social
engineering attack (Hurley, 1999). In addition, fraud can be committed by divorcing spouses
who do not wish to identify all marital assets (Marden & Darner, 2006).
In this age of high technology, fraud investigators can no longer be satisfied with just
auditing or accounting skills, these investigators should be trained as forensic accountants and
this training should include an extensive knowledge of (AIS) accounting information systems
(Bressler, 2006; Manning, 2005; Ramaswamy, 2005). Even as early as 2003, Tom Golden,
PricewaterhouseCoopers Midwest investigation manager stated that the need for trained forensic
accountants has increased significantly because of recent corporate scandals and media attention
(Peterson & Zikmund, 2007; Wells, 2003).
Numerous studies (e.g. Brazina & Leauby, 2004; Jin, Kim, & Fiore, 2005; Marden &
Darner, 2006) on fraud being committed in the United States can be a daily event. The Enron and
WorldCom scandal recently devastated employees who trusted management and their CPA
auditors (Off to jail, 2005; Schickel, 2005). In a recent report about fraudulent accounting
practices in New York, Christensen and Byington (2003) discussed the importance of auditors

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receiving training on fraudulent methods but also the importance of forensic accountants
possessing extensive knowledge of Accounting Information Systems (AIS).
This study briefly elaborated on financial fraud, explained the accounting information
systems, audit procedures followed by forensic accountants to deal with financial fraud, and
cited some examples. In addition, this study described the role of forensic accounts, why they
testify as experts witnesses, and how forensic accountants transform financial investigation to
forensic investigation based on their required forensic accounting qualifications. Finally, a
recommendation for future research has been delivered and a conclusion has been drawn.
DEFINITION OF TERMS
Accounting Information Systems (AIS) AIS can be defined as a collection of resources utilized
to transform financial and other data into usable information (Bodnar & Hopwood, 2004).
Chain of Custody Documents given to the court as evidence in their original condition and the
judge must be satisfied in writing or through other means whereby the items are in the same
condition as they were when the crime was committed (http//www.njlaws.com/chain.htm, 2009).
Computer Forensics The process of acquisition, restoration and analysis of digital data which
could include restoring corrupted or lost data, resurrect outdated systems and software
environments or to simply analyze common security breach activities (Green & Cooper, 2003).
Electronic Discovery Dissecting complicated transactions and revealing important evidence
(Hochberg, 2006).
Expert Witness Specialist in a subject who may present his or her expert opinion such as a
forensic accountant or C.P.A. auditor in the case of evidence utilizing AIS data. If the expert is
challenged by the defendants council, evidence of their expertise, training, or special knowledge
can be an exception to the rule against providing an opinion as testimony. The prosecution must
prove any experts qualifications if challenged and the trial judge has the discretion to rule if the
forensic accountant is qualified as an expert, or is limited on the subjects that she or he would be
an expert (http://www.legal-explanations.com/definitions/expert-witness.htm, 2009.
Forensic Accounting Forensic accounting can be defined as the use of accounting, auditing,
and investigative skills to assist in legal matters (Houck, et al, 2006).
Fraud Assessment Questioning (FAQ) Questions structured so that the individual being
interviewed may not necessarily know that the information they provide is of great significance
to the forensic investigation (Buckhoff & Hansen, 2001).
Red Flags Red flags in AIS would be internal controls within and outside the AIS software
that indicated possible suspect transactions (Manning, 2005).
Social Engineering In order to avoid being rude to a person requesting information,
employees may share confidential information and compromise companies information systems

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data when asked questions about passwords, access codes and remote dial-in information. These
types of attacks are known as social engineering (Hurley, 1999).
Tax Haven Country Countries that offer various business services in order for customers to
avoid taxes and/or avoid prosecution for illegal acts. Many times individuals intent on fraudulent
acts will actively seek tax haven countries to conduct their financial business and/or hide their
financial data because of the secrecy laws of certain tax haven countries (Manning, 2005).
FINANCIAL FRAUD

PricewaterhouseCoopers recently conducted an audit of HealthSouth Corporation and

their investigation resulted in the company being charged with fraudulent reporting dealing with
inaccurate revenue and expenses and improper accounting business combination activities
(Weld, Bergevin, & Magrath, 2004). The forensic accountants utilized spreadsheet software in
their analysis including the use of statistical and database analysis. The forensic accountants
needed to understand the AIS system and in addition to other analyses, be able to conduct a
detailed analysis of receivables and looked for links between cash flows and several performance
measures (Bodnar, 2004; Buckhoff, 2004).
Researchers (e.g. Buckhoff & Kramer, 2005) emphasized the importance of forensic
accountants understanding the elements of fraud. Wolfe and Hermanson (2004) discussed the
fraud diamond which offered different ways to think about fraud risks including opportunity,
incentive, rationalization, and capability. In addition, the authors indicated that fraud examiners
should not underestimate the fraud perpetrator because the perpetrator would be smart enough to
understand and take advantage of internal control weaknesses (Fiore, Jin, & Kim, 2005). Also,
the author spoke of the importance of thoroughly understanding the AIS system because even
small businesses will most likely be utilizing at least inexpensive AIS software or a spreadsheet
packages (Buckoff & Kramer, 2005; Derby, 2003; Williams, 1997). An understanding of AIS
would be especially important when investigating fraud and who in the organization might be
capable of bypassing or removing red flags from the AIS system (Kranacher & Stern, 2004;
Weber, 1999).
UNDERSTANDING OF AIS AND AUDIT PROCEDURES

In addition to AIS knowledge, the forensic accountant should also be familiar with
software audit tools which utilize auditing through the computer and the AIS software. Jackson,
(2004) asserted the importance of audit tools training for successful forensic accountants. The
author sited an example with a faculty member at Boston College, who created a forensic AIS
audit program that automated audit-related systems. Students might even benefit from increased
hands-on practice with software audit tools utilized in a forensic investigation. The author gave
the reader suggestions on training methods for forensic accountant staff as well. Several authors
believed that the more experience a forensic examiner acquires, the more likely he or she will be
able to isolate and identify red flags and other pertinent information (Accounting Department
Report, 2005).

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Fraud Investigation

Yormark (2004) stated that the forensic examination team should be carefully chosen. A
decision should be made to outsource for more experienced staff members or staff members
demonstrating skills in investigative techniques if needed. The author also stated that with the
initiation of the whistleblower protection provisions of Sarbanes-Oxley, employees will be more
likely to speak about irregularities they observed which might result in additional fraud
investigations. According to Wells (2003), fraud examiners usually possess certain personality
traits including perseverance, being aggressive rather than shy, and being good with numbers.
Upon the formation of the fraud investigation team, goals should be set before conducting the
investigation including communication on the importance of acquiring and safeguarding
evidence (Wells, 2005). Forensic accountants should gather enough usable data to support an
investigation of fraudulent activity (Manning, 2005).
Acquiring and Safeguarding Evidence

Manning (2005) confirmed the importance of speed and efficiency when conducting an
investigation which would also improve public perception and help restore employee morale.
Fraudulent activity can be an embarrassment to both the company for which the fraud was
committed as well as the auditors that did not catch the fraudulent activity earlier. Therefore, the
best investigation is a speedy investigation not only for public perception but also so that
important evidence will not be lost or destroyed (Super Future Equities, 2008). When
acquiring investigative data, Green and Cooper (2003) noticed that when drafting discovery
requests in regard to technological AIS records as well as paper documents, all states of data
active files as well as hidden, deleted or backup files should be requested.
On the other hand, Yormark (2004) found that the examination process might include
reassembling lost or deleted information within the AIS or hard-copy documents. The author
also suggested an analysis of AIS systems and internal controls as well as a physical examination
of archival data. In his article about a recent fraud at a small company, Wells (2005) reported
that the new general manager at the small company became suspicious of the companys
certified financial officer (CFO). The general manager could not convince the owner of possible
fraudulent acts at that small company because the CFO appeared to be a dedicated manager who
served the owner for many years.
The owner told the general manager that the CFO was the second highest paid employee
and the most valued and trusted. When the owner told about the CFOs high lifestyle which does
exceed his salary, the owner stated that the CFO recently came into an inheritance and invested
well in the stock market. Limited internal controls including a lack of separation of duties
existed and the CFO completely controlled the companys finances, signing checks, booking
journal entries, conducted bank reconciliations, and prepared the financial statements on the AIS.
The CFO kept his office littered with papers on his desk as well as messy file cabinets, etc.
However, just because the records appeared to be in disarray does not necessarily mean that the
employee conducted fraudulent activity. In this case, the CFOs work ethic was sloppy as well
as fraudulent. In addition, the CFO appeared to be very secretive about his work and locked his
door anytime he left his office.
Because the general manager received no support from the owner, he crawled through the
ceiling into the CFOs office and collected AIS evidence of the fraudulent activity. Fraud

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experts do not suggest that individuals crawl through air ducts to gather evidence on their fraud
cases. Rules of evidence should be adhered and local prosecutors should be contacted to ensure
the correct understanding of the evidentiary procedure. If the forensic investigator did not have
knowledge of AIS, he or she might not know what evidence might be pertinent to the
investigation and also the care that should be taken to protect evidence important to the
investigation (Super Future Equities, 2008).
Wells (2005) indicated how easily AIS data evidence can be lost if the records or
transactions cannot be safeguarded. Evidence in the form of AIS data need to be relevant,
material, and competent and Manning (2005) stated in his book that the best evidence will be the
original document itself. Also admissible in court would be charts, schedules and summaries of
data. The forensic accountant should thoroughly understand the AIS system in order to produce
such evidence as well as explain about the evidence in court. In addition, the chain of custody
can be very important because the investigator needs to prove that the evidence would be in the
same condition as when the crime was committed.
This would include AIS data as well as other evidentiary material and the investigator
should be able to identify the evidence by some sort of mark or notation made upon retrieval of
the evidence. Many times investigators will mark her or his initials on the evidence and/or data
and write a description of any identifying information because the trial may be several months
after the initial confiscation of the fraud investigation evidence.
Sometimes there can be so much evidence that the investigators do not know what to do
with it all. Kahan (2005) wrote about an investigation in Florida whereby the investigator
accumulated 800 emails deleted from a companys computers. Sometimes investigators can
notice possible evidentiary information right in front of them and only need to be more
observant. During a fraud investigation, one of the investigators noticed that the individual
under suspicion of fraud never leaves his laptop unattended and he always takes the computer
with him whenever he leaves the building. The laptop was removed under the premise of fixing
a problem with the machine, and once in the hands of the information technology (IT) staff,
investigators imaged the hard drive with the laptop being returned to the perpetrator without his
suspecting. The suspect later was fired and prosecuted for embezzlement.
Hochberg, (2006) suggested that electronic AIS discovery in this case and many forensic
investigations can be extremely important to the investigation and the electronic data retrieved
needs to be safeguarded. Computer forensics can bring documents back that were previously
erased; however forensic accountants need to know what will be helpful to the investigation as
well as be sure that no violations occurred to staff privacy during the investigation process.
PRIVACY ISSUES

Privacy issues should be a concern for a forensic investigator. Much concern exists
regarding identity theft and dumpster-diving (Stringer-Calvert, 2002) as private information
can be revealed in employees trashcans leading individuals to purchase paper shredders to
protect company data. The question can be asked as to whether the same care will be taken with
private digital information and/or the companys accounting information system data. The
retrieval of electronic documents can many times be recovered even if the user deletes files off
the electronic media. It will be very important for the forensic investigator to handle and
preserve the data which many times come in the form of AIS data (Retrieving, 2006).

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The U.S. Department of Justice released new guidelines regarding the collection and
handling of electronic evidence (http://www.ncjrs.gov/pdffiles1/nij/199408.pdf) and this report
recommended general forensic and procedural processes when dealing with digital AIS evidence
(A forensic, 2004). Once the investigator seizes the evidence and the prosecutor prepares for the
trial, it will be important for the forensic accountant to understand the rules of the court and be
thoroughly trained in testifying about the AIS fraud trail evidence.
FORENSIC ACCOUNTANTS TESTIFYING AS EXPERT WITNESSES

Several researchers (e.g., Craig & Reddy, 2004; Manning, 2005; Rasmussen & Leauanae,
2004; Shmukler, 2005; Wells, 2003; Wells, 2005) advocated the importance of forensic
accountants understanding and adhering to the Rule 702 of the Federal Rules of Evidence
Rasmussen & Leauanae (2004) noted that there can be three specific areas of expertise that
forensic accountants should possess which include investigative accounting, economic loss
calculation, and business and intangible asset valuation. The authors believed that forensic
accountants should possess not only an undergraduate degree but also advanced or a
postgraduate degree. In addition, because of the complexity and ever-changing technology
specifically AIS systems and fraud audit procedures, forensic accountants should also be
certified.
Certifications include Certified Public Accountant (CPA), Certified Fraud Examiners
(CFE), and also perhaps the investigator should possess the Certified Insolvency and
Restructuring Advisor (CIRA) designation. The article also suggests a good idea might be to
match the forensic accounting expert to the specific engagement in that depending upon what
type of fraudulent activity might be suspected, a specialist in that area should be utilized. The
forensic accountant should possess experience and specialty designations because expert
witnesses testimony could be challenged by the court.
Craig and Reddy (2004) noted in a recent study that Australian judges indicated expert
accounting evidence to be the most difficult evidence to evaluate adequately especially AIS
accounting data. The authors suggested ways to improve the process of expert accounting
evidence testimony which included communication skills training as well as financial training
not only for the forensic accountants but for the judges as well. The authors believed that it
would be the forensic accountants responsibility to communicate accounting and AIS data
accurately and clearly to the court. Wells (2005) indicated that although CPAs will usually be
regarded as specialists in accounting and AIS, an automatic qualification for an expert witness
does not exist for forensic accountants.
Many times, qualifications will be decided on a case-by-case basis with the judge
making the expert witness determination at the time of trial and it would be quite a loss for the
prosecution if important evidence provided by the expert witness would be set aside because of
expert witness competency issues or if the judge who does not understand AIS evidence, makes
judgments based upon incorrect presumptions (Heitger & Crumbley, 2005).

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TRANSITIONING FROM A FINANCIAL INVESTIGATION TO A FORENSIC

INVESTIGATION

Hochbert (2006) indicated that financial investigation activities can quickly change to a
forensic financial investigation. The author mentioned that there can be a variety of triggers, but
most of them will be included in one of the four following categories: 1) regulatory inquiries, 2)
shareholder actions, 3) internal audits and 4) independent audits.
A regulatory inquiry can commence from requests from a state insurance department or
even from the SEC whereby the company board of directors would need to determine the extent
of any existing discrepancies in their reporting data. Because in
most states shareholder(s) would be allowed to file suit against corporate officials of whom they
believe have breached their fiduciary duty, such an action could initiate a financial investigation.
In addition, an internal or external audit finding whereby perhaps red flag fraud
indicators might be discovered which could also encourage an extensive financial or forensic
investigation. At the point in time where the audit focus changes toward a more forensic
investigation, the investigator assigned should possess a more specific skill set which should
include understanding and in-depth knowledge of accounting information systems (Christensen,
Byington, & Blalock, 2005; Jackson, 2005).
FORENSIC ACCOUNTING SKILLS

In order for forensic accountants to be able to identify fraud indicators, they must be
trained in the areas of investigation, detection, and various specialized auditing techniques.
Many times the forensic investigator will be an experienced auditor and/or accountant. Harris
and Brown (2000) suggested that a forensic accountant should be able to demonstrate specialized
skills in rules of evidence and the law, analytical and investigative skills, identification of
patterns of abuse, excellent interpersonal and communication skills, and outstanding
organizational skills. Buckhoff and Hansen (2001) revealed that not only would excellent
communication skills be important, but the fraud investigator should also be asking the right
questions and he or she may not know to ask the right questions if not well versed in AIS.
Harris and Brown (2000) and Buckhoff and Kramer (2005) recommended the Fraud
Assessment Questioning technique (FAQ) and they provided a sample of fraud assessment
questions and skills to interpret verbal and non-verbal interviewee responses. These authors also
warned the reader that FAQ is an art, not a science and that an interviewee responding in a way
that could be construed as a dishonest response, does not necessarily mean that the person is
lying. The interviewer should be looking at multiple responses as well as non-verbal reactions to
the investigations questions. However, even if the investigator has excellent interview skills, if
he or she is not well versed in accounting information systems, the investigator may not be
asking the right questions.
LIMITATIONS
A limitation to this paper is that this qualitative study merely demonstrated the
importance of AIS in forensic investigation. This study would benefit from empirical research
endeavors investigating whether judges and attorneys involved with fraud trials believe that their
cases might have resulted in a different verdict if those involved with the cases had a better
understanding of the AIS evidence provided in the fraud trials.

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FUTURE RESEARCH

Limited research has been conducted on the importance of AIS in forensic investigation,
and even less research exists on opinions of those involved with the legal process, i.e., judges
and attorneys. Future studies on how essential knowledge of AIS is when one deals with AIS
evidence in the numerous fraud cases brought to court is an important topic. It might be
interesting to conduct an empirical research project on the perceptions of individuals involved
with fraud cases brought to trial. In addition, it would be especially helpful to inquire as to what
AIS evidence was put aside or not allowed as expert testimony and find out why these rulings
were made.
CONCLUSION
Fraud investigators usually spend weeks working on a case to prosecute fraud. Forensic
accountants must be well trained in the rules of evidence, financial data, AIS software,
communication skills as well as be able to convince a judge that they should be viewed as an
expert in their field. Since most of the fraudulent cases use evidence consisting of accounting
data and specifically accounting data retrieved from an AIS system of some sort, these
investigators must be well trained in the AIS documentation processes as well as being
experienced with the identification and understanding of the effect of inadequate internal
controls of AIS systems. In addition, forensic accountants do not need to not only be able to
understand AIS data, but they must also be able to articulate and explain sometimes highly
technical and complex evidence to the court in simple enough terms to be understood.
Perhaps the most successful fraud investigation would be when the forensic accountants
existing skill set is matched with the nature and operation of the fraud examination under
investigation. It would be interesting to note: (1) the perceptions of attorneys and judges in the
court system as to the importance of forensic investigators knowledge of AIS, (2) the ability to
explain when testifying on fraud cases, (3) whether such testimony might be more convincing
with a good background, and (4) understanding of the AIS systems for which the fraud has been
perpetuated.
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About the Author:

Linda Bressler is an Associate Professor of Accounting at the University of Houston-Downtown where she teaches
online and traditional accounting courses including Accounting Information Systems, EDP Auditing, Forensic
Accounting, and Financial Accounting. A Certified Internal Auditor, Dr. Bressler gained industry experience as a
Financial Analyst, Corporate Controller, and State Auditor. Dr. Bressler has authored a number of articles on
distance learning and student success, prevention and detection of fraud in small business, as well as accounting
information systems use in small businesses.

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