Rule 702 of the Federal Rules of Evidence states that the expert opinion of forensic
accountants must be grounded in sufficient relevant data. Finding sufficient and relevant data
can be tricky, as what is relevant or sufficient in one engagement may not be in another. Some
engagements may have an immense amount of data available, while others may have very
little. Time will always be an issue where there is a lot of data, additionally, access to the data
and availability/access to technology both play a role as well. Data can also be categorized
into four levels, first, second, third, and forth. As a forensic accountant I would strive to
collect as much first and third party data as I can. First party data is first hand information,
second party is second hand (one degree of separation). Third party is data that comes from
the people/entities who maintain records on the subject and fourth is scholarly articles
(including news publications and government statistics). Each level has its own pros and
cons, however I feel that the strength and validity of data most often lies mostly in first and
third party data (Rufus, Miller, & Hahn, 2015).
There are five main ways that forensic accountants typically gather data: interview,
observation, public record, social media, and financial statement analysis. But the type of data
I would collect and analyze would be case dependent. However, in order to be sure that I have
sufficient and relevant data I would choose to vary my data gathering techniques (Rufus,
Miller, & Hahn, 2015).
Forensic accounting is the specific type of accounting that involves the use of accounting
knowledge and principles for performing investigation activities in order to locate evidence of
crime or fraud. Forensic accountants rely on a diverse range of data and information for
conducting in-depth analysis and assessment. For identifying the key issues that may exist in
a situation, it is essential for forensic accounting engagement to ascertain the particular type
of data that they need to gather so that they can investigate a matter in an integrated manner.
Some of the chief factors that come into play and determine the type of data that must be
analyzed in a forensic accounting engagement are the appropriateness of data to the specific
scenario that is being investigated and the alignment of the data with the analytical needs of
the forensic accountant. The data that is collected must have a purpose in the specific
situation so that it can add value to the investigation and analysis process. Forensic
accountants possess the skills and capabilities that help them to look beyond numerical data
and uncover below the surface to capture evidence indicating criminal activities (Wijerathna
& Perera, 2020).
A forensic accountant has to be sure that he has access to sufficient, relevant as well as
reliable data that will aid in the investigation process. In order to be sure about these aspects,
it is essential for a forensic accountant to give due importance to the authenticity of the source
from where the data is collected and the application of appropriate methods for collecting the
data so that the data that is ultimately available is comprehensive and accurate. While
gathering the data, it is necessary for forensic accountants to make sure that the data that has
been collected adheres to the requirements that have been laid down by Generally Accepted
Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). The
data that has been gathered needs to be verified by making a comparison with varying sources
(Afriyie et al., 2022). For instance, important individuals that may have an insight into the
data that is being collected may be interviewed, or analytical procedures need to be carried
out to ensure the reliability as well as the correctness of the data. A forensic analysis needs to
adhere to appropriate ethical and legal requirements so that there can be higher assurance
regarding the quality of data that can add value to forensic investigation engagement.
As a forensic accountant, there are a few things that will determine the types of data that the
forensic accountant will analyze. The main thing is that the accountant is required to analyze
data that is relevant to the case that is being examined. The data must be suitable for the
analytical purpose and needs of the case. The forensic accountant must isolate their data
sources because this gives an insight into the isolated issue that is being investigated. Also,
the data needs to be of great accuracy and dependable. The accountant must determine if the
data has been recorded in a reliable and accurate way. The data must also meet standards set
by the GAAP and IFRS. This allows the accountant to conduct themselves with impartiality
and objectivity. It is also important that the data is equally objective. “An accountant would
look at factors like historical sales numbers, employee retention patterns, organizational
spending and equipment life-cycles. Structure Business Improvements: When an area of the
company isn’t performing up to expectations, data analytics can pinpoint where
improvements might be needed” (Franklin University, 2023).
The forensic accountant can be sure that they have sufficient, relevant, and reliable data by
making sure that the accountant prepares the data and examine the process and internal
controls within the organization. Understanding the contextual clues is extremely critical for
the accountant. Gathering reliable data that was generated from various areas can be
interpreted by understanding the environment and the circumstances for which the data needs
to be collected for. Once the accountant gets a full understanding about what kind of data or
evidence is needed and what it is going to be used for, then they will be in a better position
and be able to provide the right kind of information needed.
Data can be classified as either qualitative or quantitative. Qualitive data cannot be measured
like a sight, sound, documents, or interviews. Quantitative data can be measured like profit,
age, time, or weight. As a forensic accountant not all data is of interest, “…we seek to identify
data that are sufficient to support an expert opinion and relevant to the specific objectives of
the engagement” (Rufus et al., 2015, p. 227). Rule 201 of the AICPA’s Code of Professional
Conduct and Rule 702 of the Federal Rules of Evidence both discuss that an expert witness’s
opinion must be based on sufficient relevant data. Rule 201 states accountants must comply
with the standards and interpretations of said standards designated by the council. These
standards include professional competence, due professional care, planning and supervision,
and sufficient relevant data (AICPA, 2013, p. 2935). Rule 702 describes what qualifies a
witness as an expert. To be an expert witness, the accountant must have specialized
knowledge that will help understand evidence, a testimony that has sufficient facts or data, a
testimony that is a result of reliable principles and methods, and that said principles and
methods are applied reliably to the facts (Federal Evidence Review, 2016).
In identifying data, it is important to ensure the data meets sufficiency and relevance. Meeting
these standards is relative as it depends on the specific engagement. Data for one engagement
may not be relevant in another engagement. “When evaluating sufficiency, a key
consideration is the availability of data” (Rufus et al., 2015, p. 229). Limited data may lead to
a lower threshold. Relevance is tied to how pertinent the data is to the engagement.
Another element of sufficiency is the reliability of data. Most of the time, reliability is tied to
its source. Data can be obtained via first-party, second-party, third-party, and fourth-party.
First-party data can pose some implications as it comes directly from the subject. Second-
party data may be more reliable as first-party data as it comes from a related party. Third-
party data is generally considered reliable as they are usually items like bank statements.
Fourth-party is variable as the quality depends on the source. d (Rufus et al., 2015, p. 232).
As a forensic account, the type of data that will be analyzed is determined by each specific
engagement. Different types of data will be analyzed for different types of engagements.
Sufficient, relevant, and reliable data is all subject to the experts opinion, and can vary from
person to person. Because ever engagement differs in some way, whether minute differences
or large ones, so there is no "one-size-fits-all approach" to defining relevant and sufficient
data (LaGrossa, 2023). LaGrossa continues to explain that the AICPA's professional guidance
proclaims assumptions that have the biggest effect deserve the most attention (2023). Thus, it
is of the utmost importance that forensic accountants thoroughly analyze each engagement to
have the best opportunity to obtain the most relevant and sufficient data. The Federal Rules of
Evidence (FRE) have specific rules for evidence and date, Rule 401 states evidence is
relevant if it makes the fact more or less probable than without the evidence and that "the fact
is of consequence in determining the action" (Rule 401. Test for Relevant Evidence, 2011).
The forensic accountant must follow the objectives of the specific engagement, and use their
expert knowledge to develop their hypothesis and collect relevant, sufficient, and reliable
data.
Gathering Data in Forensic Accounting
Forensic accounting stands at the intersection of accounting and criminal investigation.
Similar to a traditional colleague, a forensic accountant works with financial records.
However, instead of noting trends and providing suggestions to the management, this
specialist searches for evidence of fraud (Jordan, 2022). As a forensic accountant, I would
analyze information from multiple sources in order to reveal discrepancies and errors pointing
to potential fraud schemes. Specifically, I would study audit results to determine the validity
of financial statements. In addition, I would study supply and service contracts to find strange
patterns and trace corporate fraud disguised as legit business deals. Furthermore, I would
interview staff members of companies involved in suspicious activities to confirm the
evidence gathered after financial records and contract analysis. Overall, the type of data
analyzed in forensic accounting is determined by the initial source of suspicion. However,
financial statement analysis is usually the first step, whereas contract analysis and interviews
act as a failsafe that helps reveal the truth or prevent false accusations.
Since forensic accounting is a complex profession, an analyst has to rely on special tools to
ensure the quality and reliability of the gathered data. The fundamental principle of forensic
accounting lies in finding patterns, actions, relationships, and transactions pointing to fraud
schemes. For that purpose, professional accounting companies utilize analytics repositories
that identify and consolidate warning signals and conduct network mapping to explore
potential fraudster relationships (Deloitte, 2018). In addition, forensic accountants employ
algorithms that sift through massive amounts of data to identify deviations from ordinary
behaviors or compare cases to historical fraud schemes (Deloitte, 2018). Ultimately, the data
gathered by a human analyst gets extensively checked by powerful data-mining algorithms
that help identify rare events and prepare the evidence for presentation.
The types of data that a forensic accountant will need to analyze will be determined by the
type of case that they are working on. Even if two cases are the same, they may still require
different data analysis (Rufus et al., 2015). As the text states, a business valuation case could
require different data than the next due to what is being looked at in the case. Doing due
diligence will better allow the accountant to decide what data is necessary. Having sufficient
and relevant data can be a matter of professional judgement (Rufus et al., 2015). While it is
easy to see when data is insufficient and irrelevant, it can be much more difficult to determine
what is. An like most things in business, opinions will vary on what is sufficient and what is
relevant to a certain case. The best way that anyone can know that they have a sufficient
amount of data is to make sure to do due diligence for every case. Getting into a mindset
where they think that the same data will work for every case of a certain type can be very
dangerous. It can also be noted that depending on if the case is one looking for fraud or just an
analysis will change the type of data that is needed. Reliable information can be difficult to
obtain in some situations also. In the case study that I am working on for my final, the
company had two sets of books going at the same time. While the auditing firm was able to
say that nothing stood out to them as fraud from the made up set of books, does not mean that
it was not reliable information. Some of the information provided was accurate, however not
all was. One needs to be able to decide if they are taking everything at face value or
questioning just parts of the information and data.
Rufus, R., Miller, L., & Hahn, W. (2015). Forensic accounting. Upper Saddle River, NJ:
Pearson Education.
Data analysis is the breakdown of information (data) into segments that help to make
informed decisions. For the information to be useful, there must be a well thought out
approach answering several questions; what data is required, how will the data be analyzed,
and how will the results help support the response. It is important to take into regard the
limitations of the data as well, such as missing data, altered data, data form, data definition,
unretained data (Robert Rufus, 2015). Other considerations are time constraints, access to
the data, and technological resources.
To obtain the data it must come from a reliable source.
The first party data comes directly from the individual or entity and is the most meaningful.
The second party is a source that is connected to the subject and may have firsthand
information.
Third party data is data that has been retained from an outside source such as a governmental
agency or financial institution.
Fourth party data is not specific data but more informative of the subject’s environment
(Robert Rufus, 2015).
A good analysis is dependent on the data being sufficient and relevant. AICPA Rule 201
requires there be sufficient data to allow for reasonable conclusions or recommendations.
Sufficient should be in quantity and quality and is supportive of the opinion. Relevant is
dependent on the actual purpose for the engagement which guides what type of data should be
obtained (Robert Rufus, 2015).
References
Robert Rufus, L. M. (2015). Transforming Data into Evidence (Part 1). In L. M. Robert
Rufus, Forensic Accounting 1st Edition (pp. 227-246). Pearson Education.
Deloitte. (2018). Forensic analytics in fraud investigations: Identifying rare events that can
bring the business down.
https://www2.deloitte.com/content/dam/Deloitte/us/Documents/finance/us-forensic-analytics-
in-fraud-investigations.pdf
Jordan, J. (2022, March 27). What is forensic accounting & how do forensic accountants
investigate? NarraSoft. https://narrasoft.com/how-to-forensic-accounting/
LaGrossa, J. (2023, February 7). What constitutes sufficient relevant data in CPA forensic
services engagements? The Legal Intelligencer. Retrieved March 9, 2023, from
https://www.law.com/thelegalintelligencer/2023/02/07/what-constitutes-sufficient-relevant-
data-in-cpa-forensic-services-engagements/
Rule 401. Test for Relevant Evidence. (2011). LII / Legal Information Institute. Retrieved
March 9, 2023, from https://www.law.cornell.edu/rules/fre/rule_401
AICPA. (2013, June 1). Code of Professional Conduct and Bylaws. AICPA. Retrieved March
9, 2023, from https://us.aicpa.org/content/dam/aicpa/research/standards/codeofconduct/
downloadable documents/2013june1codeofprofessionalconduct.pdf
Federal Evidence Review. (2016). Federal Rules of Evidence (2015). Retrieved from d d d d d d
https://web.archive.org/web/20180831001530/http:/federalevidence.com/rules-of- evidence
Rufus, R., Miller, L., & Hahn, W. (2015). Forensic accounting. Upper Saddle River, NJ:
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Franklin University. (2023). Accounting & Data Analytics: What You Need to Know.
Retrieved from: https://www.franklin.edu/blog/accounting-mvp/accounting-data-
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might%20be%20needed.
Afriyie, S. O., Akomeah, M. O., Amoakohene, G., Ampimah, B. C., Ocloo, C. E., & Kyei, M.
O. (2022). Forensic accounting: a novel paradigm and relevant knowledge in fraud detection
and prevention. International Journal of Public Administration, 1-10.
Wijerathna, A. G. H. S. K., & Perera, H. A. P. L. (2020, November). A systematic literature
review on forensic accounting. In Proceedings of the International Conference on Business &
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Rufus, R. J., Miller, L. S., & Hahn, W. (2015). Forensic accounting. Pearson.
