Core Concepts

Forensic Accounting

The application of accounting, auditing, and investigative skills to examine financial records for evidence of fraud, financial misconduct, or disputes suitable for use in legal proceedings.

Fraud Triangle

A framework describing the three conditions typically present when fraud occurs: pressure (an incentive or financial need), opportunity (a weakness in controls that allows the fraud to be committed and concealed), and rationalization (the perpetrator's justification for the act).

Red Flag Indicator

An observable pattern, anomaly, or piece of behavior that, on its own, does not prove fraud but is statistically associated with it and warrants closer examination.

Predication

The totality of circumstances that would lead a reasonable, professionally trained person to believe a fraud has occurred, is occurring, or will occur — the documented basis required before opening a fraud investigation.

Forensic Audit

An examination of an organization's financial records conducted specifically to develop evidence for use in a legal or disciplinary proceeding, distinct from a routine financial-statement audit which is designed to give reasonable, not absolute, assurance against fraud.

Benford's Law

A statistical observation that in many naturally occurring sets of numerical data, the leading digit is more often a small number (1 much more than 9) than a uniform distribution would predict — used by forensic accountants to flag transaction data sets whose digit distribution deviates unusually, a common indicator of fabricated numbers.

Financial Statement Fraud

Financial Statement Fraud

The intentional misstatement or omission of amounts or disclosures in financial statements to deceive users — most often to inflate reported earnings, assets, or revenue, or to understate liabilities and expenses.

Revenue Recognition Fraud

Recording revenue before it has actually been earned, or recording revenue that does not exist at all — one of the most common forms of financial statement fraud because revenue is the figure most closely tied to reported profitability and stock price.

Channel Stuffing

A revenue recognition scheme where a company ships more product to distributors than they can realistically sell, recording the shipment as revenue in the current period while distributors are typically given extended return rights or informal understandings that the excess will come back.

Round-Tripping

A scheme in which two or more parties exchange assets, services, or funds with each other in a way that creates the appearance of new, arm's-length revenue or activity for both sides, when no real economic substance changed hands.

Cookie Jar Reserves

Excess reserves or accruals deliberately overstated in a strong period, then released back into income in a weaker period to smooth reported earnings and disguise the company's real volatility.

Frauds Against the Business

Payroll Fraud

Any scheme in which an employee causes a business to issue an improper or inflated payment through its payroll system — including ghost employees, falsified hours, and unauthorized rate changes.

Ghost Employee Scheme

A payroll fraud where a fictitious person, or a real person no longer employed, is kept on the payroll so that paychecks continue to be issued and diverted to the perpetrator or an accomplice.

Commercial Bribery

A payment or benefit given to an employee of one company by an outside party (often a vendor) to influence that employee's business decisions against their employer's interest, without the employer's knowledge or consent.

Kickback

A specific form of commercial bribery in which a vendor returns a portion of an inflated payment to the employee who approved or steered the purchase, usually in exchange for continued or preferential business.

Inventory Shrinkage

The loss of inventory between what accounting records show should be on hand and what a physical count actually finds — a red flag that can result from theft, but also from legitimate causes, which is why forensic review of shrinkage looks at pattern and concentration, not the raw number alone.

Lapping

A cash-fraud concealment technique where an employee who has stolen a customer payment covers the shortfall by applying a later customer's payment to the first customer's account, and so on — a rolling concealment that unravels quickly once payments are reconciled independently.

Skimming

The theft of cash or receivables before they are ever recorded in the accounting system — because the funds never appear on the books at all, skimming leaves no direct accounting discrepancy and is typically detected through surveillance, tips, or statistical analysis rather than a books-and-records mismatch.

Financial Sector & Banking Fraud

Check Kiting

A scheme exploiting the time delay ("float") between when a check is deposited and when it actually clears, by moving funds between accounts at different banks to create artificial, temporary balances that do not reflect real, available funds.

Related-Party Transaction

A transaction between a company and a party with whom it has a pre-existing relationship (an officer, a major shareholder, an affiliated entity) — not inherently fraudulent, but a common vehicle for concealing self-dealing, asset diversion, or artificially inflated results, and therefore a standard area of forensic scrutiny.

Suspicious Activity Report (SAR)

A report a financial institution files with its national Financial Intelligence Unit when it detects a transaction or pattern of transactions it has reasonable grounds to suspect involves fraud, money laundering, or other criminal activity — the same reporting concept forensic investigators in a banking-fraud engagement need to recognize, even though preparing one is primarily an AML/compliance function.