How Forensic Examination Detects Understated Business Revenue

Understating revenue is one of the questions I am asked most often — by investigators, defence lawyers, and business owners themselves. The essence is almost always the same: part of the real revenue never entered the books and therefore never formed a taxable object. The task of a forensic economic expert here is a delicate one. It is not to “catch someone on their intent,” but to show, on documentary evidence, how much goods actually moved, how much money should have been recorded, and precisely where the figures diverge. Below I explain how this kind of examination is built — from the list of documents to the line an expert must never cross.

What an economic examination investigates

Understated income is a state in which the documented revenue is smaller than the revenue that actually arose from business operations. For a company, the consequence is direct: an understated object of corporate profit tax, and frequently an understated VAT base as well. For an investigator or a court, it is a fact that must be proven and cannot be “seen with the naked eye” — it requires the comparison of primary documents against accounting registers.

That is exactly why a forensic economic examination is ordered under the specialisms of area 11 — the examination of accounting, tax, and reporting documents, documents on the economic activity of enterprises, and documents on financial and credit operations. The procedure for ordering it is set out in Ukraine’s procedural codes — the Criminal Procedure Code (KPK), the Commercial Procedure Code (HPK), the Civil Procedure Code (TsPK), and the Code of Administrative Procedure (KASU) — together with the specialised Law of Ukraine “On Forensic Expert Activity.” The methodology and formal requirements come from the Instruction on the Assignment and Conduct of Forensic Examinations, approved by Order No. 53/5 of the Ministry of Justice of Ukraine. The examination is usually initiated by the Bureau of Economic Security (BEB), the State Tax Service (DPS), an investigator, or a party to the case. Unofficial cash flows may additionally fall within the view of the State Financial Monitoring Service (Derzhfinmonitoring) where there are signs of money laundering — but that is a separate procedural track.

Typical ways revenue is understated

Over years of practice, a handful of schemes recur. All of them leave a trace — the only question is which document to look in.

• “Off-the-books” cash and sales past the register. The goods are released and the money is received, but the transaction never passes through the cash register (RRO/PRRO). The takings settle unofficially.
• Failure to record revenue. The money arrives — into the till or the bank account — but is reflected in the books only partly, or not at all.
• Understated selling price. The documents show a price lower than the actual one — sometimes below cost, sometimes with an unrealistically thin markup.
• Substitution of the product line. A more expensive item is recorded as a cheaper analogue, “diluting” the difference in value.
• Splitting and “shell” counterparties. Part of the sales is routed through related parties or fictitious intermediaries to artificially reduce the figures of the main enterprise.

It is important to understand that an expert treats each of these facts cautiously on its own. I state a discrepancy in the accounting data; the legal characterisation — intent, “evasion,” the elements of an offence — is given by the investigator and the court.

Source documents: where the examination begins

An examination does not work with assumptions — only with documents. The standard set that I request in the ruling or resolution ordering the examination is:

• Fiscal data — Z-reports and periodic reports from the cash registers (RRO/PRRO), and records from the DPS information systems on settlement operations.
• The cash book and cash documents — incoming and outgoing cash orders, cashier’s reports.
• Bank statements for all accounts over the period under review.
• Contracts of sale, supply, and commission, together with their specifications.
• Warehouse records — goods-received notes, dispatch documents, warehouse stock cards, and inventory-count data.
• Primary documents for each transaction — it is these that, under Article 9 of the Law of Ukraine “On Accounting and Financial Reporting in Ukraine,” are the basis for any entry in the books.

If part of the documents is not provided, that too is recorded: in my opinion I note that the examination is limited to the materials available, and which data are needed for completeness.

The comparison method: how the figures “fail to reconcile”

The key instrument is not intuition but the cross-checking of independent sources that ought to agree with one another. The logic is simple: goods do not vanish without a trace, and money does not appear from nowhere.

Movement of goods against recorded revenue

I build a goods balance: opening stock plus receipts minus sales equals closing stock. If the warehouse documents show that a certain quantity of goods was sold, then the revenue from that sale should match the quantity multiplied by the price. When the fiscal reports show a sum materially smaller than the movement of goods “allows,” that is the first sign for deeper analysis.

Control reconciliation of balances and markup

The second step is reconciling the actual balances from the inventory count against the recorded ones and checking the level of markup. An abnormally low or “floating” markup on homogeneous goods, a shortage not explained by natural loss, a gap between purchase volumes and declared sales — all of this is a matter for calculation. Below is a summary map of where each scheme “shows up” in the documents.

Method of understatement	Where it shows in the documents
Sales past the register / off-the-books cash	Gap between goods movement and the RRO/PRRO sums; balances do not match the records
Failure to record revenue	Fiscal reports smaller than bank and warehouse data
Understated selling price	Price below the usual level or below cost; atypically low markup
Substitution of the product line	Expensive goods recorded as cheaper ones; mismatch with the warehouse stock card

Counter-verification

Separately, the enterprise’s documents are compared against those of its counterparties and its bank. If a buyer records a purchase for one amount while the seller booked a smaller one, the discrepancy is obvious and can be measured precisely. This method is especially effective where the enterprise’s internal documents are incomplete or contradictory.

The link to tax obligations

Understated revenue almost always “drags” two consequences with it under the Tax Code of Ukraine (PKU). First, the object of corporate profit tax is reduced, because unrecorded income never entered the financial result. Second, where supplies go unrecorded, the VAT base is understated — the tax liabilities are not reflected in full.

The expert calculates the amount of the discrepancy between the documented figures and those reconstructed from the primary data. But I stress: the final additional amount of the tax liability is determined by the controlling authority — the DPS — in the manner prescribed by the PKU, not by the expert. My opinion records the size of the deviation; it is neither a tax assessment notice nor a confirmation of guilt.

The role of the inventory count and primary documents

The inventory count is an often underrated but decisive element. It is precisely a recorded shortage or surplus that gives the goods balance its “point of support.” Without inventory descriptions, an assertion of unrecorded goods remains a hypothesis.

In the same way, without primary documents no entry in the books carries evidential weight. Article 9 of the Law “On Accounting and Financial Reporting in Ukraine” requires that every business operation be supported by a primary document with the mandatory particulars. The absence of such a document, defective particulars, or a divergence between the primary records and the registers — this is the substantive field of expert examination.

The limit of competence: discrepancy, not “intent”

This is a boundary I hold to strictly. The economic expert establishes the fact and the size of a discrepancy in the accounting data, not the motive, intent, or guilt. Wording such as “the enterprise concealed income” is outside the expert’s competence: that is a legal characterisation. What it is correct to write in an opinion is “the fiscal reporting data do not correspond to the movement of goods in the amount of…”; the assessment of that non-correspondence is given by the investigation and the court.

This caution is not a formality. An opinion that exceeds its competence is easy to challenge, and it loses its evidential value.

When a comprehensive examination is needed

If the subject is not only the money but also the properties or value of the goods — for example, substitution of the product line, an assessment of the usual price, or determining the real cost — an economic examination alone is not enough. In that case a comprehensive examination is ordered — a merchandising (commodity) examination together with the economic one. The merchandising expert determines the identity, quality, and market value of the goods, and the economist, on that basis, recalculates the revenue and the tax figures. This tandem produces an opinion that is hard to rebut, because every figure has independent corroboration.

Practical advice and common mistakes

• Prepare a complete package of documents. The most common reason for an “incomplete” opinion is not a clever scheme but a shortage of the materials provided.
• Put correct questions to the expert. Instead of “did the enterprise evade tax,” ask “what is the discrepancy between the recorded revenue and the movement of goods over the period.”
• Do not mix periods. A discrepancy is calculated within a clearly defined timeframe and list of operations.
• Remember the usual prices. An understated price is proven not “by eye” but by comparison with comparable transactions.
• Preserve the primary records. Reconstructing the books without primary documents is nearly impossible — and that cuts both for and against a party.

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If you are a lawyer, a manager, or an investigator facing the question of whether income was in fact understated and by how much, a professional examination will help you make sense of the figures. I would be glad to advise on whether an examination is warranted and on how to frame the questions correctly in your case.