Reinventing accounting in forensic accounting

Accounting under pressure

As companies prepare for IPOs or private funding rounds, accounting decisions become unusually strategic, andsometimes, deceptive:

• Capital market vulnerability: Pressure to present attractive financials tempts firms to bend accountingnorms, risking derailment of IPOs under regulatory scrutiny.
• Selective accounting: Private capital raises see questionable accounting choices — earnings management,biased policy application, and misrepresentation of results to meet investor expectations.
• Competitive distortion: Company management may engage in accounting "jugglery" to portray a successstory, to appear at par with industry peers, while actuals tell a different story.
• Deferred transparency: Suppression of both financial and non-financial disclosures, that could affectvaluations, is alarmingly routine. Adverse news is strategically postponed for more "palatable" reportingwindows.
• Insider advantage: The modern menace is not embezzlement — it is insider exploitation of financial data.Regulators are scrutinising ESOP trading and market plays based on undisclosed accounting effects morediligently now.

Behavioural red flags: What to watch out for

There are subtle signs that could hint at underlying manipulation:

• Uncanny accuracy: Consistently hitting financial targets with precision suggests "earnings smoothing" orusage of "cookie jar" reserves.
• Journal entry volume: Excessive manual entries at period-end in automated environments may indicatesigns of inappropriate reversals or manipulations.
• Poor documentation: Lack of justification for accounting changes, especially mid-period, raises suspicion.
• Vendor advances: Disproportionate advances at period-end could be attempts to shift expenses out of the current period.

Unusual account movements: Transactions between logically disconnected accounts — for example,expenses moved between expense heads, movement within asset or liability or income or expense heads —signal possible earnings management or larger financial statement fraud.

Best practices: Protecting integrity in financial reporting

To combat these challenges and uphold credibility, organisations must adopt robust governance:

• Stricter journal controls: Period-end entries should undergo heightened scrutiny and approval, distinctfrom routine accounting.
• Change justification protocol: All accounting changes must be transparent and pass the "smell test"—timing and motive should be justified, not just technically aligned.
• Prioritise automation: Organisations should limit manual interventions by maintaining journals that areminimal, pre-approved, and subject to strict monitoring.
• Monitor account pairing: Unconventional ledger combinations that defy accounting principles or seemengineered to shape optics should be tracked and questioned.
• Skeptical oversight during high stakes: When facing IPOs or market downturns, teams must challengeaccounting decisions more rigorously — protecting not just investors, but reputations.

Therefore, the forensic accountant's role now extends beyond chasing fraudulent trails — it is about preemptingfinancial manipulation before it warps reality. In this high risk and high stakes world we live in, every company mustreassert its foundational purpose — delivering truth, not tailoring perceptions.

This article first appeared in the Taxmann on 5th September 2025. 

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