Forensic Accounting

Abstract

Forensic accounting serves as a regulatory and investment tool that allows interested professionals to predict whether firms are engaged in financial reporting misconduct. Financial reporting misconduct has severe economic and personal consequences. Not only does such misconduct distort the allocation of economic resources, but investors and employees of these firms incur substantial financial and psychological harms. In essence, forensic accounting aims to mitigate these harms by predicting the likelihood a firm has committed financial reporting misconduct—thus allowing for early detection of such misconduct. In this review, I provide an overview of the most popular forensic accounting techniques in the literature and the effectiveness of such techniques. Although traditional forensic models tended to focus on behavioral characteristics of the executives who commit financial misconduct or to take a purely numerical approach based on financial data, more recent models combine big data analysis with psychological intuitions.