The definition of Forensic accounting[1] is a method of investigating financial transactions and business situations in order to obtain the truth and to develop an expert opinion regarding possible fraudulent activity.

Two areas of expertise make up the field of forensic accounting:

  1. Litigation support and investigative or fraud accounting.
    1. Litigation support includes business valuation, revenue analysis, expert witness testimony, and future earnings evaluation.
    2. Investigative accounting is the process of gathering evidence of criminal conduct and substantiating or disproving damages (Fillmer, 2003).[2] It also includes an investigation of financial misconduct that is handled as a civil matter, and the efforts of a consulting expert for the investigative aspect and the testifying expert when in a court setting.

The earliest known evidence of forensic accounting has been traced to an advertisement in a newspaper in Glasgow, Scotland, appearing in 1824. At that time, arbiters, courts, and counsels, used forensic accountants to investigate fraudulent activity.

The need for forensic accounting has resulted from regulatory and criminal statutes passed over time.

  1. In the early 1900s, the adoption of the Federal Income Tax created a demand for forensic accountants, due to income tax evasion.
    1. As a result, the Internal Revenue Service (IRS) Criminal Investigation developed many of the forensic techniques used to detect tax evaders, including indirect method: Net Worth, Bank Deposits and Currency Expenditures, and Expenditures methods[3].
    2. One of the first income tax evasion cases uncovered by a forensic accountant was that of the infamous gangster, Al Capone.

Forensic Accounting is Investigative Accounting:

Forensic – as an adjective, describes scientific methods used to investigate crimes.

Accounting – The systematic and comprehensive recording of financial transactions pertaining to business and person matters. Accounting also refers to the process of summarizing, analyzing, and reporting these transactions.

  • Generally, this all winds up in a court proceeding such as criminal cases in trial, civil cases in depositions, arbitration, or litigation.

Federal Rule 702 Testimony by Expert Witnesses:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:

(a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;

(b) the testimony is based on sufficient facts or data;

(c) the testimony is the product of reliable principles and methods;

(d) and the expert has reliably applied the principles and methods to the facts of the case.

Testifying as an expert in Federal and State courts:

Under the federal rule, the expert may be a Certified Public Accountant, Certified Fraud Examiner, or a Specialist with particular knowledge in their area of specialty, i.e., a retired IRS Special Agent or FBI Special Agent. Having a degree in accounting, experience in bookkeeping and financial statement analysis, and having received specialized training and experience with the US Treasury Department investigating cases for income tax violations, money laundering, Ponzi and advanced free schemes, and public corruption helps to establish “other specialized knowledge.”

Forensic accounting includes: consulting expert and testifying expert. They can work for the defense or the plaintiff in civil cases and assist a special prosecutor in criminal prosecution.

  • Consulting Experts are investigators that help with gathering physical and documentary evidence and talk to witnesses in preparation for deposition, as is done by a Private Investigator.
  • Testifying Experts receive case data developed by attorneys, private investigators and /or the client for review, organization, and analysis, to render a report with exhibits to support opinions presented in the report. ( ROAR)

These two disciplines Forensic Accounting {#1} and Expert Witness {#2} coalesce in investigations of fraudulent activities because through testimony, they come together to help the trier of fact, a court (Judge & Jury) understand a complex matter.

Civil and criminal matters require the in-depth review of voluminous records, the preparation of analyses documented by exhibits, the preparation of a report with conclusions, followed by testimony in deposition, arbitration, or a court.

These cases generally deal in volumes of records in PDF, Excel, and Word documents. Images from photographs and videos may be involved. (1,000’s of files to 1-TB of data files representing tens of thousands of documents.) The records also may contain the following:

Testimony –witness declarations, affidavits, depositions,
Admissions to Interrogatories – admissions of the defendant or plaintiff,
The creation of analyses in Excel format or SQL databases, timelines,
All maintained in confidence until reported.

As an Expert Witness, the Forensic Accountant can contract for services as a Consulting Expert. Once the evidence and testimony are gathered or an attorney or individual requests services as an Expert, a different contract is entered into with the client.

The Expert Witness must remain objective and avoid bias in rendering his opinion. He is not a hired gun for the person who hires him/her.

At other times, the Expert Witness will meet with the attorney or the individual client to review the scope of the case. With the contract and a retainer in hand, the Expert will proceed to review the evidence, create an inventory of the evidence, create a timeline of the matter, organize the evidence and assimilate the content to prepare a report.

Generally, the Expert Witness will be designated by the Attorney and identified to the court.

There is no standard format for a forensic accounting report, but certain areas must be covered. The report must meet all the required criteria under FRCP 26(a)(2)(B) or other rules, including:

  1. The qualifications of the expert witness;
  2. A list of all publications authored by the witness in the preceding ten years;
  3. The compensation to be paid for the study and testimony;
  4. A listing of any other cases in which the witness has testified as an expert at trial or by deposition within the preceding four years;
  5. A complete statement of all opinions to be expressed;
  6. The basis and reasons for the opinions;
  7. The data or other information considered;
  8. and any exhibits to be used in summary of the opinions.

All the evidence used in arriving at the contents of the report and the conclusions must be identified as exhibits in the report.

The report can be supplemented as evidence comes forth.

The Expert witness must understand the evidence in the case and be able to support his/her conclusions.

In a criminal case, the findings will be presented in reciprocal discovery and as part of the testimony of the expert during the trial.

Before trial and depending on the matter, the defense will present a Daubert where the validity and admissibility of the expert testimony are challenged by the opposing counsel before a judge. The expert is required to demonstrate that his/her methodology and reasoning are scientifically valid and can be applied to the facts of the case.

The judge is designated the gatekeeper to allow or disallow testimony of the Expert Witness.

  • Testifying in court is an art that is obtained through training and experience.
  • The Expert, when testifying in court, must be a teacher using terms the jury will understand and not testify arrogantly. Experience has shown that a $600.00 per hour expert offering his testimony in an arrogant, know-it-all manner does not ingratiate himself with the judge and jury. This type of testimony does not impress federal judges and can result in the expert’s report not being considered in the ruling.
  • Many times, the issues are complex, and the expert should have the ability to turn complex issues into simple language the judge or jury can understand.
  • With the computer age, Experts can communicate via email, cell phones, audio/video conference, dropbox, scanners, and all kinds of communication devices.

If your law firm requires financial investigative expertise as a consulting expert or a testifying expert witness contact Chief Investigator Edmond Martin of Sage Investigations, LLC at 512-659-3179 for a free 20-minute consult, email: ,visit our new website at www.Sageinvestigations.Com and review our team and their CV’s.

[1] Journal of Business &: Economics Research – February 2006 – Forensic Accountants: Financial Investigators by Les Nunn, Brian L. McGuire Carrie Whitcomb, and Eric Jost, all of the University of Southern Indiana.

[2] Fillmer, Scott. Forensic Accounting Defined., 27 MY 2003, online posting

[3] Edmond J. Martin – Sage Investigations, LLC, the Beacon, Auditing Attestation vs. Investigative Accounting.