The Role of Forensic Accounting in Detecting Earnings Management and Frauds
DOI:
https://doi.org/10.31305/rrjss.2025.v05.n02.035Keywords:
Forensic Accounting, Earnings Management, Financial Fraud, Secondary Sources, Satyam Scandal, Enron, Benford's Law, Red FlagsAbstract
Earnings management is a practice where; companies intentionally abuse accounting policies to report their financial performance at an optimum level. This is a deception to investors, lenders, and other stakeholders. Forensic accounting identifies financial frauds through a combination of accounting, auditing, and investigation methods. The current research paper is founded on the review of different secondary sources, including peer-reviewed journals, governmental reports, case studies (Satyam, Enron, Willful Fraud), and the publications of international accounting organizations (AICPA, ICAI). The paper is based on a detailed review of over 15 scholarly articles published in 2010-23, case studies of 5 large corporate scandals, and 3 international/national reports. It is analyzed that the forensic accounting methods (Law of Benford, data mining, red flags analysis, comparison of cash flow with incomes) are effective to identify the cases of earnings manipulations with 75-90% success rate. The forensic examination of the Satyam scandal revealed a ₹7,000 crore fraud. In the Enron case, misuse of mark-to-market accounting was revealed by forensic accountants. The paper concludes that forensic auditing is much better than conventional auditing and it should be compelled to be a part of corporate governance.
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