FORENSIC ACCOUNTING: Exploring the Dark Side and Strengtehing the Bright Side of Accounting By I Gusti Agung Rai (The Board Member of BPK-RI) Note from Brawijaya Accounting Fair 2008

Indonesia is in high ranking position for the most corrupted countries.  Corruption has penetrated into all sectors and activites.  To combating the corruption, we need knowledge and experience in Forensic Accounting (FA).  FA is a good tool to overcome and disclose the impact of accounting fraud.

What is the Forensic Accounting and Accounting Fraud

Merriam Webster’s Collegiate Dictionary 10th Edition define that “forensic (1) used in or suitable to court or judicature or to public dicussion and debate; (2) argumentative  or rhetorical; (3) relating or dealing with the application of scientific knowledge to legal problems.  So, forensic covers the application of various knowledge and science into legal problems.  In fact, there are already many examples of the uses of forensic in other disciplines such as forensic anthropoloist, forensic chemist, and forensic dentist.  Forensic accounting in another example of the use of forensic that relates to accounting discipline.

Regarding the forensic in accounting discipline, D.L. Crumbley (Editor in Chief of Journal of Forensic Accounting) has written: “Simply put, forensic accounting is legally accurate accounting.  That is, accounting that is sustainable in some adversarial legal proceeding or within some judicial of administrative review.”  He used more general terms like legal proceeding and judicial or administrative review to describe the use of forensic in accounting discipline.  As such, Forensic Accounting involve three discipline like The Accountancy, The Law, and The Audit.

There are other terms that relate to be percieved to have the same meaning with Forensic Accounting like Fraud Auditing, Investigative Accounting, Ligitation Support, and Valuation Analysis.  However, there are no clear definintions regarding to these terms yet.

Bologna & Lindquist () explained tha some traditional accountants differentiated Forensic Accounting to Fraud Auditing. According to traditional group, The Forensic Auditing relates to the proactive methods and approach to investigate fraud.  The purpose of the Fraud Auditing is to obtain evidence to proof that fraud has happened.  Then, the Forensic Accountant will be called when evidence already gathered, or when the suspicions become allegations, complaints, or discovery.

The Associaon of Certified Fraud Examiners (ACFE) identified some differences between traditional Audit and Frauyd Examination (Forensic Accounting).

Issue Auditing Fraud Examination
Timing Recurring:

Audit are conducted on a regular recurring basis.

Non Recurring:

Fraud examinations are non recurring.  They are conducted only with sufficient predication.

Scope General:

The scope of the audit is a general examination of financial data.


The fraud examination is conducted to resolve specific allegations.

Objective Opinion:

An audit is generally conducted for the purpose of expressing an opinion on the financial statement or related information.

Affix Blame:

The fraud examination’s goal is to determine whether fraud has/is occuring and to determine who is responsible.

Relationship No Adversial:

The audit process is non adversial in nature


Fraud examinations, because they involve efforts to affix blame are adversial in nature.

Methodology Audit techniques:

Audits are conducted primanly by examining financial data.

Fraud Examination:

Fraud examinations are condusted  by (1) document examination; (2) review of outside data such as public records; and (3) interviews.

Presumption Professional Skepticism:

Auditors are required to apporach audits with professional skepticism.


Fraud examiners approach the resolution of a fraud by attempting to establish sufficient proof to support of refure an allegation of fraud.

Source: ACFE

In Indonesia, the development of forensic accounting got its momentum when we experienced financial crisis in 1998—1999. During this period, many forensic accountings have been undertaken as part of the loan provisions.  This development then accelerated when new elected government created Corruption Eradication Commission (Komisi Pemberantasan Korupsi).

In public sector, the pracitice forensic aacounting usually carried out by govermental institutions dealing with legal matter, such as the Police, the Attorney General, PPATK, and KPK.  In addition to the institutions, the BPK also has authority to perform and has performed forensic accounting for several years.  This authority stipulated in Law 15/2004 and Law 15/2006.  According to these laws, BPK has a mandate to conduct three types of audit: Financial Audit, Performance Audit, and Special Purpose Audit. The forensic accounting comes under the definition of Special Purpose Audit.

Similar to general practices, the practicie of forensic accounting in public sector deal with the fraud.  The already well known type of fraud is corruption.  There many examples of corruption that will be elaborated further in the following sessions.

What is Accounting Fraud

Our understanding about the nature of accounting is the services activities, which provide quantitative information regarding business or economic activities.  The objective of accounting is to provide management with financial-related information that will be used in decision making.  The information is provided through a set of financial reports, which are the output of series procedures to record, summarize, and report economic transactions and activities.  We might never imagine that such well-developed process of recording and reporting transactions could be used as a tool to commit fraud.

Simply defined, fraud is a violation of the laww, planned deceit, and dishonesty.  Its consists of various types of white collar crime, including embezzlement, larcerny, concealment of informataion, concealment of liabilities, concealment of facts, engineering of facts, and corruption (Rezaea, 2002).  In termes of business, frauds related to financial accounting sometimes referred to as occupational fraud and abuse.  The ACFE defined this type of raud as “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”  Three major types of occupational fraud are corruption, asset misappropition, and fraudelents statements (which include financial statement schemes).

There are many theories explaining why people commit fraud.  One of them is agency problem that derived from the agency theory.  The agency theory, firstly intriduced by Jensen & Mackling (1976).  Explained the principal – agent relationship, relationship between management and the owners.  Referrinng to this theory, fraud happens becuase managements (the agents) behave not in the interest of the owners, but for his/her individual interest as opportunistic behaviors.

Another theory is called asymmtric information.  This theory is based upon the asymmetric access to information between the principals (owners) and the agents (management).  This differences generate two types of agent’s behaviors like hidden action and hidden information.  By hiddening some actions and/or information, managements could commit fraudulent activities for their benefit.

Cressey (Fraud Examiners Manuals, 2006) identified three common causes that trigger fraud.  He depicted the causes in a triangle, which then is known as the fraud triangel.  First, there is pressure engage in fraud, such as economical needs.  Second, there is opportunity that allows individual to commit fraud or to causal dishonest act.  Third, the ability to justify an act and to exploit legal loopholes to cover up/conceal fraud.

More over, ACFE has identified types of fraud and presented in a chart that is called fraud tree.

The Relation between Forensic Accounting and Accounting Fraud

Referrig to above explanations, we could see that forensic accounting is carried out to investigate financial statement related fraud, by using some investigative audit techniques.  Several traditional audit techniques can be used to perform investigative audit, such as physical examination, documentation review, reperformance, an inquiries.

With the increase in importance and demand, the forensic accounting and invesitigative audit har emerged to be a profession.  Being a certified fraud investigator, which is called Certified Fraud Examiner (CFE), give the accountants/auditors credentials that highly valued by business society.  However, to be a good fraud auditors/forensic accountants need additional skills and knowledge.  Davia (2010) advised five rules that should be followed when performing forensic accountants/audit:

  • Avoid becoming premturely entangled in developing endless facts and circumtances of a case of fraud, to the exclusion of identifying a perpetrator or perpetrators, and providing their involement.
  • Fraud auditors must constantly strive to prove perpetrator’s intent to commit fraud.
  • Be creative, think like perpetrator, do not predictable.
  • Fraud auditing detecting procedures must take into account that much fraud involves conspiracy.
  • Proactive fraud detection strategy must consider that fraud may appear accounting records as distinct entries or hosted entries, and in some instances may not appear in the records at all.


Frauds In Indonesia

Let’s see where Indonesia in Global Corruption Index.  One of the indicators of corruption index widely used is Corruption Perception Index (CPI).  This index is developed by Transparency Intenational 9TI), a Non Govermental Organization (NGO) concerned with the fighting against corruption in the world.  In 2007, Indonesia is number 143 from 179 countries in the world. Very low position, it’s mean corruption in Indonesia is very high.

Prof. Dr. Soemitro once estimated that the fraud procurement process in Indonesia could involve as much as 30% of procurement budget.  However, some procurement fraud cases bring into the court indicated that the amount of money involved could be much larger.

One of the largest fraud incdence is the distribution Bank Indonesia’s Liquidity Supports (BLBI) during and after crisis of 1997.  This fraud involved as large money as RP650 Trillion and spread over 10 years.  The natures od BLBI which involving large amount of money but lacking strong controls is good conditions for fraud to happen.

There are many other examples how fraud has penetrated deeply into sectors and segments in governement suc as (1) laws; (20 defence; (3) banking system; (4) local governemnets; (5) state owned enterprises; and (6) parlement.


How is the Forensic Accountant Disclose the Accounting Fraud

Every perpetrator always tries to find ways to commit fraud succesfully.  The scheme he/she used ussually follows the cycle of accountancy.  This cycle can be divided into three phases: input – process – output.

In the input phases, where transaction document are prepared and captures, the fraud scheme invlove such activities as forging documents, enginering fictitious documents, creating corroborating documents, and omitting illegal transactions.  In the process phases, ussualy committed by exploting the weakness in the internal control systems, issuing internal policies to justify committed planned fraud changing or manipulating financial records, and misapplication of accounting principles.  In the output phases, when the financial reports are produced, the fraud ussually committed by disclosing inadequately and by exploiting the loopholes in the Financial Accounting Standards.

For the govermental sector, the incidence of fraud also follows the same process.  It happens in all phases of budgeting cycle.  Some examples of fraud in govermental sector are (1) reallocating between expenditures account; (2) not recording revenue transactions; (3) recording fake transactions; (4) overlauing assets; and (5) inadequate disclosure.

The fundamental principle that has proven to be effective in conducting forensic accounting, that is follow the money.  One example of the application of this principes is in the Bank Bali Case.


How he Forensic Accounting Deal With Acccounting Fraud

The objective of the forensic accounting is to proof whether the incidence of fraud happened or not.  As such at the end of the audit, the forensic acccountant/investigative auditors should be able to provide adequate, sufficient, and reliable evidence o answer the audit objective.  If the auditors concluded that there is a incidence of fraud, the evidence obtained during the audit could be used for litigation.

In general, the process of identifying and the proofing the incidence of fraud is as follow (ACFE).

  • Develope fraud theory.
  • Who migh be involved?
  • What might have happened?
  • Where are the possible concealmnet places or methods?
  • When did this take place (past, present, or future)?
  • How is the fraud being perpetrated?
  • Determine where the evidence is likely to be.
  • On book versus off book.
  • Direct or circumstantial.
  • Identify potential witness.
  • What evidence is necessary to prove intent?
  • Number of occurences.
  • Other areas of impropnery.
  • Revise fraud theory
  • Prepare chart linking people and evidence
  • Determine defense to allegation
  • Is evidence sufficient to proceed? Yes!
  • Complete the investigation through interviews, document examination, observations.

Article 14 of Law 15/2004 stated, that should during the audit BPK found the indication of fraud, the BPK should report in appropiate time such incidences to the legal institutions authorized by law to deal with such incidences.




The Associaon of Certified Fraud Examiners (ACFE). (2006).  Fraud Examiners Manual.

Bologna, G.J. & Lindquist, R.J. (). Fraud Auditing and Forensic Accounting: New Tools and Technique.

Davia, H.D. (2010).  Fraud 101: Techniques and Stategies for Detection. John Wiley & Sons.

Jensen, M.C. & Meckling, W.H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.  Journal of Financial Economics. No. 3.

Merriam Webster’s Collegiate Dictionary 10th Edition

Zabihollah, R. (2002). Financial Statement Fraud Prevention and Detection.  Canada: John Wiley & Sons Inc.


~ by DanielStephanus on June 16, 2017.

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