A project report on Forensic Accounting and Auditing
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A Project Report On
Durvesh S. Naik
Roll No: - 6025
MULUND COLLEGE OF COMMERCE
SAROJINI NAIDU ROAD,
UNIVERSITY OF MUMBAI
ACADEMIC YEAR 2014-15
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I Durvesh Naik student of Mulund College of Commerce, S. N.
Road, Mulund (W.) Mumbai – 80 of Mcom Part II (Advanced
Accounting) Seat no: - 6025, hereby declare that I have completed
the project on the title “Forensic Accounting and Auditing”
during the academic year 2014-15. The information submitted is
true and best of my knowledge and belief.
Date of submission: - Signature
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Parle Tilak Vidyalaya Association's
MULUND COLLEGE OF COMMERCE
Sarojini Naidu Road, Mulund West, Mumbai 400080.
This is to certify that
Of Mcom. Part II (Advanced Accountancy) Semester _______ has undertaken
completed the project work titled _________________________
______________________________ during the academic year __________
under the guidance of Prof. ______________________________________.
Submitted on _________________ to this college on the fulfillment of the
curriculum of Mcom (Advanced Accountancy) University of Mumbai.
This is a bonafide project work & the information presented is true/ and
original to the best of our knowledge and belief.
PROJECT COURSE EXTERNAL PRINCIPAL
GUIDE CO-ORDINATOR EXAMINER
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I acknowledge with gratitude my indebtness to Professors for giving me the
opportunity to work on this project and gave valuable guidance for preparing
I would like to thanks those people those people who directly or indirectly help
me to enhance my practical knowledge in the field of commerce and express my
sincere gratitude to all those who share valuable thoughts with me.
This is being my first effort, the possibilities of errors and omissions in its
contents and presentation cannot be completely ruled out. I shall, however,
grateful to my teachers, colleagues and other readers from their suggestions for
WHAT IS FORENSIC ACCOUNTING? ........................................................................9
FORENSIC ACCOUNTING IMPLEMENTATION IN INDIA ............................. 10
OBJECTIVES OF STUDY: ............................................................................................. 11
RESEARCH METHODOLOGY: .................................................................................. 11
HISTORICAL PERSPECTIVE OF FORENSIC ACCOUNTING IN INDIA .... 12
NATURE OF FORENSIC ACCOUNTING................................................................. 13
TYPES OF FRAUDS: ....................................................................................................... 14
THE SCAMS IN INDIA:-................................................................................................. 15
USES OF FORENSIC ACCOUNTING:....................................................................... 17
FORENSIC ACCOUNTANTS - THE BLOODHOUNDS OF BOOK-KEEPING
WHAT DOES A FORENSIC ACCOUNTANT DO? ................................................ 20
APPLICATION OF PRINCIPLES OF FORENSIC ACCOUNTING TO AN
ORGANISATION .............................................................................................................. 21
THE TECHNIQUES OF FORENSIC ACCOUNTING: .......................................... 22
COMMON ACCOUNTING FRAUD AREAS ............................................................ 24
WHY ENGAGE A FORENSIC ACCOUNTANT? .................................................... 25
ROLE OF FORENSIC ACCOUNTANT...................................................................... 26
ROLE OF FORENSIC ACCOUNTANTS UNDER INDIAN STATUTES .......... 28
WHAT CHARACTERISTICS/SKILLS SHOULD FORENSIC ACCOUNTANT
POSSES? .............................................................................................................................. 30
ADVANTAGES AND DISADVANTAGES OF FORENSIC ACCOUNTING ... 32
CURRENT AFFAIRS:- .................................................................................................... 34
CONCLUSION ................................................................................................................... 35
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Corporate fraud is on the rise in India, compelling more management to conduct
forensic audits. Experts on white-collar crimes say forensic accounting is not
just gaining prominence, the methods are changing fast. Unofficial estimates
value the practice at Rs 400-500 crore annually but it is believed this could
double in the next three or four years.
That’s not surprising given how the incidence of corporate fraud is on the rise.
Investigations and risk consulting firm Kroll unearthed in a recent survey that
69% of companies studied were affected by fraud in FY13, up from 68% in the
previous year. The value of fraud, the study found, rose, to 71% from 67%.
Crimes are of all hues, seven in particular — theft of physical assets, theft of
information, corruption and bribery, internal financial fraud, vendor fraud,
management conflict of interest and regulatory breach.
Insider fraud was particularly rife in India, with 89% of respondents indicating
the perpetrator was an insider of some sort — a junior, middle management or
senior employee, or an agent.
Which is why, as Rohit Mahajan, Deloitte Forensic (India) national leader and
senior director, points out, forensic audit practices have evolved significantly
over the last 10-15 years? “Earlier the investigations were restricted to books
and records but now there is a significant element of intelligence gathering,” he
explains. Mahajan adds that technology and analytics have a greater play in
every aspect of forensic accounting today, whether it’s market intelligence or
human resources (HR) intelligence.
Not surprisingly, the financial sector finds itself most vulnerable to fraud. As
Sandeep Dhupia, head of KPMG’s forensic services in India, explains, this is
due to misuse of technology and despite the presence of a strong regulator.
Data released by the Reserve Bank of India (RBI) show that public sector banks
lost money to the tune of Rs 8,734 crore in the last three years on account of
loans (personal, housing, corporate and others) that were disbursed against fake
documents. The amount was nearly four times higher than that in 2010 of Rs
But other spaces too are exposed to fraud, which is why the scope of forensic
auditing is getting wider. What’s more, chartered accountants, MBAs and
lawyers are no longer solely relied upon. While they do form the core part of
forensic accounting, there is now a need for financial research analysts,
engineers, journalists, artists and even former law enforcement officials. As
experts point out, fraud related to a toll road or competitive bidding would call
for the services of a professional with insights into the infrastructure industry
while a white-collar crime in financial services and issues related to stressed
assets or anti-money laundering would require an understanding of the working
of banks and financial intermediaries. The nature of crimes is complicated and
issues such as conflicts of interests, code-of-conduct violations and regulatory
non-compliance require a strong working knowledge of the sector.
More companies are waking up to the fact that corporate offences can’t be
wished away. Indeed, the Kroll report showed India was well above the average
when it came to most crimes. Theft of physical assets — 33% of companies
were affected versus 28% for the survey as a whole, and corruption — 24%
compared with 14%. India also beat the average on internal financial fraud —
22% against 16% — and had an above- average incidence of information theft
— 24% compared with 22%. “Indian companies were aware they operated in a
high-corruption environment... Companies need to avoid accepting that fraud is
just a normal part of business,” Kroll observed.
But there are other reasons why demand may be rising. Provisions of the new
Companies Act mean that every company now has to have proactive fraud risk
management policies. The Act requires independent directors to increase
safeguards against fraud and reminds them of their whistleblowing
responsibilities. Objections must be documented, and now that the Act defines
fraud and safeguards explicitly, ignorance of the parameters of either will no
longer be a defense.
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WHAT IS FORENSIC ACCOUNTING?
Forensic accounting is a rapidly growing area of accounting concerned with the
detection and prevention of financial fraud and white-collar criminal activities.
George A. Manning in his book "Financial Investigation and Forensic
Accounting" defines Forensic Accounting as the science of gathering and
presenting financial information in a form that will be accepted by a court of
jurisprudence against perpetrators of economic crimes. The integration of
accounting, auditing, and investigative skills yields the specialty known as
Forensic Accounting which focuses very closely on detecting or preventing
"Forensic", according to the Webster's Dictionary means, "Belonging to, used in
or suitable to courts of judicature or to public discussion and debate."Â The
word accounting is defined as "a system of recording and summarizing business
and financial transactions and analyzing, verifying, and recording the results."
The term forensic accounting' refers to financial fraud investigation which
includes the analysis of accounting records to prove or disprove financial fraud
and serving as an expert witness in Court to prove or disprove the same. Thus,
basically, the forensic accounting is the use of accounting for legal purposes.
Forensic accounting is very important tool to detect, investigate and prevent the
frauds .Whether it is stock market fraud or bank fraud or cyber fraud; forensic
accounting has become an indispensable tool for investigation. With India being
ranked as the 88th most corrupt nation, the needs for forensic accountants
become all the more profound.
The utilization of specialized investigative skills in carrying out an inquiry
conducted in such a manner that the outcome will have application to a court of
law. A Forensic Investigation may be grounded in accounting, medicine,
engineering or some other discipline.
An examination of evidence regarding an assertion to determine its
correspondence to establish criteria carried out in a manner suitable to the
court. An example would be a Forensic Audit of sales records to determine the
quantum of rent owing under a lease agreement, which is the subject of
FORENSIC ACCOUNTING IMPLEMENTATION IN
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In India, Forensic Accounting has not got its due recognition even after
alarming increase in the complex financial crimes and lack of adequately trained
professionals to investigate and report on the complex financial crimes. The task
of Forensic Accountants is handled by Chartered Accountants who apart from
handling traditional practice of auditing as required under the Companies Act,
1956 or Income Tax Act are called upon by the law enforcement agencies or the
companies or private individuals to assist in investigating the financial crime or
The CA or CMAs in India are best suited for this profession due to their
financial acumen acquired during their rigorous training which can be further
honed by introducing post qualification degree or diploma in Investigating and
Forensic Accounting similar to one introduced by CICA.
The CA or CMA who acquire post qualification in Investigative & Forensic
Accounting can use the designation CA-IFA or CMA-IFA and be legally
recognized as the Forensic Accounting Experts to handle the investigation of
financial crimes and give expert testimony in the Court of Law. However, no
efforts has so far been made by the ICAI and ICMAI, the two leading statutory
accounting professional bodies to move in this direction and set up a institute
which can offer the post qualification diploma in Investigative and Forensic
Accounting to its members.
However, growing financial fraud cases, recent stock marker scams, failure of
non financial banking companies, phenomena of vanishing companies and
plantation companies and failure of the regulatory mechanism to curb it has
forced the Government of India to form Serious Fraud Investigation Office
(SFIO) under Ministry of Corporate Affairs which can be regarded the first step
of Government of India to recognize the importance and advance the profession
of forensic accountants. The SFIO is a multidisciplinary organization having
experts from financial sector, capital market, accountancy, forensic audit,
taxation, law, information technology, company law, customs and investigation.
These experts have been taken from various organizations like banks, Securities
& Exchange Board of India, Comptroller and Auditor General and concerned
organizations and departments of the Government. However, the main
important law enforcement agency involved directly in combating frauds is the
Police, CBI, DRI etc.
OBJECTIVES OF STUDY:
1. To know the various uses of forensic accounting in India.
2. To know the role of Forensic Accounting (techniques) in fraud
The paper is based on secondary data and some discussion with eminent
persons in the corporate sector. Forensic Accounting is investigation
accounting which involves analyzing, testing, inquiring and examining the
civil and criminal matters and finally giving an unbiased and true report.
Just as forensic investigations and lab reports are needed in the court to
solve the murder and dacoit mysteries. Similarly forensic accounting plays
a key role in tracing the financial frauds and white-collar crimes.
However, forensic accounting covers a wide range of operations of which fraud
examination is a small part where it is most prevalent.
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HISTORICAL PERSPECTIVE OF FORENSIC
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ACCOUNTING IN INDIA
Maurice E. Peloubet who coined the term Forensic Accountant in 1946 essay
"Forensic Accounting: Its Place in Today's Economy." Archaeological findings
reveal that, during 3300-3500 BC, accountants of their day in Egypt, were
involved in the prevention and detection of fraud. During 1800‟ close
relationship developed between accountancy and legal profession. Many
amendments to financial statement disclosure can be attributed to frauds in
corporate. In 1930‟s America Eliot Ness was credited to bring down gangster
Al Capone, but his case was based on the investigative work done by Elmer
Irey, an accountant with the Internal Revenue Service that ensured Capone‟s
conviction for tax evasion. He was probably America’s first high-profile
But in Indian context history of investigative accounting goes back to ancient
times of Mauryan Times. Kautilya was the first person to mention the famous
forty ways of embezzlement in his famous Kautilya Arthashastra.
A fraud examination is the area that is considered to be the monopoly of the
Chartered accountants because of the nature of the expertise it involves in
accounting. In India Chartered Accountants are called upon to take up such
investigative assignments. Very few Chartered Accountant firms have fraud
examination as separate practice. But by and large this area is dominated by the
big four consultancy firms such as Deloitte, KPMG, Price water House Coopers
and Ernst and Young.
In India the formation of Serious Fraud Investigation Office is the landmark
creation for the Forensic Accountants. Growing cyber-crimes, failure of
regulators to track the security scams, series 101 of co-operative banks bursting
- all are pinpointing the need of forensic accounting, irrespective of whether we
understand the need or not.
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NATURE OF FORENSIC ACCOUNTING
Forensic accounting is the specialty area of the accountancy profession which
describes engagements that result from actual or anticipated disputes or
litigation. „Forensic‟ means „suitable for use in a court of law‟ and it is to that
standard and potential outcome that forensic accountants generally have to work
(Crumbley et al. 2005). It is often said „Accountants look at the numbers but
Forensic accountants look behind the numbers (Okoye 2009). Forensic
accountants are trained to look beyond the numbers and deal with the business
realities of the situation. Analysis, interpretation, summarization and
presentation of complex financial and business related issues are prominent
features of the profession (Bhasin 2007).
The services provided by Forensic Accountants are as follows
Divorce proceedings and matrimonial disputes
Personal injury and fatal accident claims
Insurance claims evaluations
Partnership and corporation disputes
Shareholder disputes (minority shareholders claiming
Civil and criminal actions concerning fraud and financial irregularities –
cross examination, formulate questions
Fraud and white-collar crime investigations
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TYPES OF FRAUDS:
Following are the types of frauds:
1) Bank frauds
2) Corporate frauds
3) Insurance frauds
4) Cyber frauds
5) Securities frauds
1) Bank Frauds:
The number of bank frauds in India is substantial. It is in increasing with the
passage of time in all the major operational areas in banking. There is different
area in Bank Deposits, loan, inter branch, accounting, transaction etc. Bank
fraud is a big business in today's world.
2) Corporate Frauds:
In India, is rising 45% from leading Indian business declared that fraud e.g.
Satyam Computers stunned the national financial world in 2009 Satyam
Founder B. Ramalingan Raju declared he had inflated profit and jacked up the
company’s Balance Sheet by more than one billion dollars.
3) Insurance Frauds:
There is different type of frauds in insurance sectors. E.g. health insurance,
claims fraud, false claims, insurance speculations, application frauds etc.
4) Cyber Frauds:
Who says Indian cyber crimes are still in the infancy? This is a man who
penetrated the Ecommerce for his personal benefits to a great use credit card,
ATM card, cyber taking
Work at home etc.
5) Securities Frauds:
Although not corruption scams these have affected may people there is no way
that the investor community forget the under truncate Rs. 4000 crore Harshad
Metha scam and over Rs. 1000 Crore Ketan Parekh scams which ended the
shareholder wealth in form of big market.
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THE SCAMS IN INDIA:-
Table: Statistics of scam in India
Key Players Summary
Abdul Karim Telgi &
his associates, Police
employees & politicians
Counterfeiting of stamp
papers. Selling fake to
bulk purchasers like
companies & stock
broking firms. Sentenced
to 30 years of rigorous
Ramalinga Raju & his
family, CFO & other
top level management,
Auditors & Board of
Inflated figures of cash &
bank balance, operating
profit artificially boosted
from 61 crores to 649
crores, fictitious names of
A Raja, MK
Irregularities in awarding
License issued on first
cum first serve basis
instead of auction.
Advancing of cutoff date
which is illegal.
Suresh Kalmadi & other
members, 2 private
companies & Govt
mismanagement by the
delay in the construction
of main venue leading to
misuse of funds,
payments made in the
name of non-existing
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Top Army officials, IAS
officers, politicians &
Originally meant to be a
six-storey structure to
house Kargil war heroes
and widows, got
converted into a 31-storey
and allotted to
bureaucrats, top defence
officers, a former
environment minister and
legislators. The market
rate was 6-8.5 crores &
was allotted at a throw
away price of 60-85
lakhs. Violations in
Govt of India, private &
public sector companies
Govt of India allocating
coal blocks in an
leading to windfall gain
to allottees (chose not to
go through the
Company, Former IAF
chief SP Tyagi & his
Govt officials & several
It has been alleged that
former IAF chief has
accepted bribes to win
contract worth Rs. 36
billion. Two Indian firms
played key role in the
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USES OF FORENSIC ACCOUNTING:
The services rendered by the forensic accountants are in great demand in the
1. Fraud detection where employees commit Fraud:
Where the employee indulges in fraudulent negativities and are caught to have
committed fraud, the forensic accountant tries to locate any assets created by
them out of the funds defalcated, then try interrogating them and trying to find
out the hidden truth.
2. Criminal Investigation:
Matters relating to financial implications the services of the forensic
accountants are availed of. The report of the accountants is considered in
preparing and presentation as evidence.
3. Cases relating to professional negligence:
Professional negligence cases are taken up by the forensic accountants. Non-conformation
to Generally Accepted Accounting Standards (GAAS) or non
compliance to auditing practices or ethical codes of any profession they are
needed to measure the loss due to such professional negligence or shortage in
4. Arbitration service:
Forensic accountants render arbitration and mediation services for the business
community, since they undergo special training in the area of alternative dispute
5. Settlement of insurance claims:
Insurance companies engage forensic accountants to have an accurate
assessment of claims to be settled.
Similarly, policyholders seek the help of a forensic accountant when they need
to challenge the claim settlement as worked out by the insurance companies. A
forensic accountant handles the claims relating to consequential loss policy,
property loss due to various risks, fidelity insurance and other types of
6. Dispute settlement:
Business firms engage forensic accountants to handle contract disputes,
construction claims, product liability claims, infringement of patent and trade
marks cases, liability arising from breach of contracts and so on.
FORENSIC ACCOUNTANTS - THE BLOODHOUNDS
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Forensic accounting requires the most important quality a person can possess:
the ability to think. There is no book that tells you how to do a forensic
investigation. It is about solving a puzzle or peeling an onion. It takes creativity.
All of the larger accounting firms, as well as many medium-sized and boutique
firms have specialist forensic accounting departments. Within these groups,
there may be further sub-specializations: some forensic accountants may, for
example, just specialize in insurance claims, personal injury claims, fraud,
construction, or royalty audits.
Forensic accountants may be involved in recovering proceeds of crime and in
relation to confiscation proceedings concerning actual or assumed proceeds of
crime or money laundering. In the United Kingdom, relevant legislation is
contained in the Proceeds of Crime Act 2002. In India there is a separate breed
of forensic accountants called Certified Forensic Accounting Professionals.
Some forensic accountants are also Certified Fraud Examiners, Certified Public
Accountants, or Chartered Accountants.
Forensic accountants utilize an understanding of business information and
financial reporting systems, accounting and auditing standards and procedures,
evidence gathering and investigative techniques, and litigation processes and
procedures to perform their work. Forensic accountants are also increasingly
playing more proactive risk reduction roles by designing and performing
extended procedures as part of the statutory audit, acting as advisers to audit
committees, fraud deterrence engagements, and assisting in investment analyst
The forensic Accountant is a bloodhound of Bookkeeping. These bloodhounds
sniff out fraud and criminal transactions in bank, corporate entity or from any
other organization’s financial records. They hound for the conclusive evidences.
External Auditors find out the deliberate misstatements only but the Forensic
Accountants find out the misstatements deliberately. External auditors look at
the numbers but the forensic auditors look beyond the numbers.
Forensic accountant takes a more proactive, skeptical approach in examining the
books of Accounting. They make no assumption of management integrity (if
they can assume so then there is no need for their appointment) show less
concerns for the arithmetical accuracy have nothing to do with the Accounting
or Assurance standards but are keen in exposing any possibility of fraud.
In addition to the specialized knowledge about the techniques of finding out the
frauds one needs patience and analytical mindset. One has to look beyond the
numbers and grasp the substance of the situation. It is basically the work of the
intelligent accountants. He needs to question seemingly benign document and
look for inconsistencies. He searches for evidence of criminal conduct or assists
in the determination of, or rebuttal of, claimed damages.
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WHAT DOES A FORENSIC ACCOUNTANT DO?
A Forensic Accountant is often retained to analyze, interpret, summarize and
present complex financial and business related issues in a manner, which is both
understandable and properly supported. He is trained to look beyond numbers
and deal with the business realities of the situation.
A Forensic Accountant is often involved in the following:
Investigating and analyzing financial evidence;
Developing computerized applications to assist in the analysis and
presentation of financial evidence;
Communicating their findings in the form of reports, exhibits and collections
of documents; and
Assisting in legal proceedings, including testifying in court as an expert
witness and preparing visual aids to support trial evidence.
As mentioned earlier a Forensic Accountant can be of assistance is two
ways: Investigative Accounting
Review of the factual situation and provision of suggestions regarding
possible courses of action.
Assistance with the protection and recovery of assets.
Co-ordination of other experts, including:
Forensic document examiners;
Assistance with the recovery of assets by way of civil action or criminal
Assistance in obtaining documentation necessary to support or refute a
Review of the relevant documentation to form an initial assessment of the
case and identify areas of loss.
Assistance with Examination for Discovery including the formulation of
questions to be asked regarding the financial evidence.
Attendance at the Examination for Discovery to review the testimony; assist
with understanding the financial issues and to formulate additional questions
to be asked.
Review of the opposing expert's damages report and reporting on both the
strengths and weaknesses of the positions taken.
Assistance with settlement discussions and negotiations. Attendance at trial
to hear the testimony of the opposing expert and to provide assistance with
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APPLICATION OF PRINCIPLES OF FORENSIC
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ACCOUNTING TO AN ORGANISATION
• One premise of forensic accounting is to look for indications of abnormal
occurrences in the accounting and financial reporting systems.
• Having a forensic accounting orientation to designing the accounting
processes will provide an opportunity to design in steps for verification of key
assumptions and data while also providing the opportunity for identifying
• The related area of forensic auditing can help in reducing the transaction
processing risk by helping to perform audit type procedures on a routine
• Timely performance of audit type procedures can help management and
internal audit function is more effective by helping to identify and resolve
potential internal control breakdowns quickly and thoroughly. It can reduce
external audit costs by regularly completing testing procedures that are part of
the annual certified audit.
• In instances where information processing systems cover a broad array of
businesses and/or locations establishing routine or continuous monitoring of all
transaction processing systems, it can be considered as a type of forensic
Some of the areas that the principles and activities of forensic accounting
can apply in an organization include:
• Reviewing operational transactions for compliance with standard operating
procedures and approvals.
• Completing analysis of financial disbursement transactions in the accounting
system to determine if they are normal or outside company policy and, thus,
• Reviewing general ledger and financial reporting system transactions for
possible improper classification or manipulation of data or accounts and its
impact on the resulting financial reports.
• Examining warranty claims or returns for patterns of fraud or abuse.
THE TECHNIQUES OF FORENSIC ACCOUNTING:
The conventional accounting and auditing with the help of different accounting
tools like ratio technique, cash flow technique, a standard statistical tool
examination of evidences are all part of forensic accounting. In cases involving
significant amounts of data, the present-day forensic accountant has technology
available to obtain or source data, sort and analyse data and even quantify and
stratify results through computer audit and various other techniques.. Some of
the techniques involved in Forensic Accounting to examine the frauds are:
(1) Benford’s Law:
It is a mathematical tool, and is one of the various ways to determine whether
variable under study is a case of unintentional errors (mistakes) or fraud. On
detecting any such phenomenon, the variable under study is subjected to a
detailed scrutiny. The law states that fabricated figures (as indicator of fraud)
possess a different pattern from random figures. The steps of Benford’s law are
very simple. Once the variable or field of financial importance is decided, the
left most digit of variable under study extracted and summarized for entire
population. The summarization is done by classifying the first digit field and
calculating its observed count percentage. Then Benford’s set is applied. A
parametric test called the Z-test is carried out to measure the significance of
variance between the two populations, i.e. Benford’s percentage numbers for
first digit and observed percentage of first digit for a particular level of
confidence. If the data confirms to the percentage of Benford’s law, it means
that the data is Benford’s set, i.e. there is68% (almost 2/3rd) chance of no error
or fraud. The first digit may not always be the only relevant field. Benford has
given separate sets for 2nd, 3rd ,… and for last digit as well. It also works for
combination numbers, decimal numbers and rounded numbers.
There are many advantages of Benford’s Law like it is not affected by scale
invariance, and is of help when there is no supporting document to prove the
authenticity of the transactions.
(2) Theory of relative size factor (RSF):
It highlights all unusual fluctuations, which may be routed from fraud or
genuine errors. RSF is measured as the ratio of the largest number to the second
largest number of the given set. In practice there exist certain limits (e.g.
financial) for each entity such as vendor, customer, employee, etc. These limits
may be defined or analyzed from the available data-if not defined. If there is any
stray instance of that is way beyond the normal range, then there is a need to
investigate further into it. It helps in better detection of anomalies or outliners.
In records that fall outside the prescribed range are suspected of errors or fraud.
These records or fields need to relate to other variables or factors in order to
find the relationship, thus establishing the truth.
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(3) Computer Assisted Auditing Tools (CAATs):
CAATs are computer programs that the auditor use as part of the audit
procedures to process data of audit significance contained in a client’s
information systems, without depending on him. CAAT helps auditors to
perform various auditing procedures such as: (a) Testing details of transactions
and balances, (b) identifying inconsistencies or significant fluctuations, (c)
Testing general as well as application control of computer systems. (d)
Sampling programs to extract data for audit testing, and (e) Redoing
calculations performed by accounting systems.
(3) Data mining techniques:
It is a set of assisted techniques designed to automatically mine large volumes
of data for new, hidden or unexpected information’s or patterns. Data mining
techniques are categorized in three ways: Discovery, Predictive modeling and
Deviation and Link analysis. It discovers the usual knowledge or patterns in
data, without a predefined idea or hypothesis about what the pattern may be, i.e.
without any prior knowledge of fraud. It explains various affinities, association,
trends and variations in the form of conditional logic. In predictive modeling,
patterns discovered from the database are used to predict the outcome and to
guess data for new value items. In Deviation analysis the norm is found first,
and then those items are detected that deviate from the usual within a given
threshold (to find anomalies by extracted patterns). Link discovery has emerged
recently for detecting a suspicious pattern. It mostly uses deterministic graphical
techniques, Bayesian probabilistic casual networks. This method involves
“pattern matching” algorithm to ‘extract’ any rare or suspicious cases.
(4) Ratio Analysis:
Another useful fraud detection technique is the calculation of data analysis
ratios for key numeric fields. Like financial ratios that give indications of the
financial health of a company, data analysis ratios report on the fraud health by
identifying possible symptoms of fraud.
Three commonly employed ratios are: -
1. The ratio of the highest value to the lowest value (max/min);
2. The ratio of the highest value to the second highest value (max/max2); and
3. The ratio of the current year to the previous year
Using ratio analysis, a financial expert studies relationships between specified
costs and some measure of production, such as units sold, dollars of sales or
direct labor hours. For example, to arrive at overhead costs per direct labor hour
– Total overhead costs might be divided by total direct labor hours. Ratio
analysis may help a forensic accountant to estimate expenses.
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COMMON ACCOUNTING FRAUD AREAS
Usually in any typical fraud investigation, the forensic accountant and his
team would encounter similar factual scenarios or frauds, which are not
peculiar to any organisation. The more common types are illustrated in the
Accounting Items Possible Fraud Scenarios
Revenue Recognition (a) Premature recognition of sales
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(b) Phantom sales
(c) Improperly valued transactions
Reserves (a) Bad faith estimates
(b) One time charges
Inventory (a) Over-valuation
(b) Non-existent inventory
Expenses (a) Delayed expense recognition
(b) Improper capitalisation of expenses
Others (a) Related party transactions
(b) Acquisition accounting
WHY ENGAGE A FORENSIC ACCOUNTANT?
A logical question to pose is why bring in a forensic accountant and his team
when the organisation's internal auditor and management team can handle the
situation which can range from a simple employee fraud to a more complex
situation involving management itself? The answer would be obvious when
management itself is involved and the fallout to the discovery of the fraud leads
to low employee morale, adverse public opinion and perception of the
company's image and organisational disarray generally. Engaging an external
party can have distinct advantages from conducting an internal investigation.
Key Benefits of Using Forensic Accountants
Objectivity and credibility –
There is little doubt that an external party would be far more independent and
objective than an internal auditor or company accountant who ultimately reports
to management on his findings. An established firm of forensic accountants and
its team would also have credibility stemming from the firm's reputation,
network and track record.
Accounting expertise and industry knowledge –
An external forensic accountant would add to the organisation's investigation
team with breadth and depth of experience and deep industry expertise in
handling frauds of the nature encountered by the organisation.
Provision of valuable manpower resources –
An organisation in the midst of reorganisation and restructuring following a
major fraud would hardly have the full-time resources to handle a broad-based
exhaustive investigation. The forensic accountant and his team of assistants
would provide the much needed experienced resources, thereby freeing the
organisation's staff for other more immediate management demands. This is all
the more critical when the nature of the fraud calls for management to move
quickly to contain the problem and when resources cannot be mobilized in time.
Enhanced effectiveness and efficiency –
This arises from the additional dimension and depth which experienced
individuals in fraud investigation bring with them to focus on the issues at hand.
Such individuals are specialists in rooting out fraud and would recognise
transactions normally passed over by the organisation's accountants or auditors.
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ROLE OF FORENSIC ACCOUNTANT
A Forensic Accountant is often retained to analyze, interpret, summarize and
present complex financial and business-related issues in a manner that is both
understandable and properly supported. Forensic Accountants can be engaged in
Public Practice or employed by insurance companies, banks, police forces,
government agencies and other organizations.
(i) Criminal Investigations: Practicing forensic accountants could be called
upon by the police to assist them in criminal investigations which could either
relate to individuals or corporate bodies. The forensic accountant would use
his/her investigative accounting skills to examine the documentary and other
available evidence to give his/her expert opinion on the matter. Their services
could also be required by Government departments, the Revenue
Commissioners, the Fire Brigade, etc for investigative purposes.
(ii) Personal Injury Claims: Where losses arise as a result of personal injury,
insurance companies sometimes seek expert opinion from a forensic accountant
before deciding whether the claim is valid and how much to pay.
(iii) Fraud Investigations: Forensic accountants might be called upon to assist
in business investigations which could involve funds tracing, asset identification
and recovery, forensic intelligence gathering and due diligence review. In cases
involving fraud perpetrated by an employee, the forensic accountant will be
required to give his/her expert opinion about the nature and extent of fraud and
the likely individual or group of individuals who have committed the crime. The
forensic expert undertakes a detailed review of the available documentary
evidence and forms his/her opinion based on the information gleaned during the
course of that review.
(iv) Professional Negligence: The forensic accountant might be approached in
a professional negligence matter to investigate whether professional negligence
has taken place and to quantify the loss which has resulted from the negligence.
A matter such as this could arise between any professional and their client. The
professional might be an accountant, a lawyer, an engineer etc. The forensic
expert uses his/her investigative skills to provide the services required for this
(v) Expert Witness Cases: Forensic accountants often attend court to testify in
civil and criminal court hearings, as expert witnesses. In such cases, they attend
to present investigative evidence to the court so as to assist the presiding judge
in deciding the outcome of the case.
(vi) Meditation and Arbitration: Some forensic accountants because of their
specialist training they would have received in legal mediation and arbitration,
have extended their forensic accounting practices to include providing
Alternative Dispute Resolution
(ADR) services to clients. This service involves the forensic accountant
resolving both mediation and arbitration disputes which otherwise would have
been expensive and time consuming for individuals or businesses involved in
commercial disputes with a third party.
(viii) Litigation Consultancy: Working with lawyers and their clients engaged
in litigation and assisting with evidence, strategy and case preparation.
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ROLE OF FORENSIC ACCOUNTANTS UNDER
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There is no mention of Forensic accountants in the Indian statutes so far but
there are various provisions related to Forensic accountants/auditors in the
statutes. It can be categorized under the following heads:
(1) INVESTIGATION AND INSPECTION: Forensic auditors may help the
Police, ACB and other investigating authorities in collecting evidences and
other investigation purposes. For example section 157 Cr.P.C, 1973; section
17,18 of Prevention of
Corruption Act, 1988; Section 6 of The Bankers Books Evidence Act, 1891;
Section 78 of Information Technology Act, 2000; Section 209A, 227 of the
Companies Act, 1956 wherein the Court or Police may require the skills of
Forensic accountants while inspecting any books in so far as related to the
accounts of an accused.
(2) EXPERT OPINION: Forensic accountants may see and carefully examine
the accounts and balance sheets and use his skills to find out whether there is
any fraud committed or any anomaly associated with it by giving his expert
opinion. This finds place in for example s.45, s.118 of Indian Evidence Act,
1872; s.293 of Cr.P.C, 1973.
(3) FORENSIC ACCOUNTING UNDER CARO (The Companies
Order, 2003): It can be categorised under following heads:
(i) DISPOSAL OF FIXED ASSETS: CARO, 2003 requires the auditor to
report to the effect that if a substantial part of fixed assets have been disposed
off during the year, whether it has affected the going concern status. In order to
carry out the duties, the auditor has to draw a corollary and reference to the
section 293 Companies Act,
1956, AS 24 („Discontinuing Operations‟) and to AAS 16 (Going Concern) and
thereafter make his observations on this matter.
(ii) REPORT ON FRAUDS: If any fraud on or by the company has been
noticed or reported during the year. Following provisions CARO, 2003 are
important in this aspect:
AAS 4(Revised) guides the Auditor to obtain a management representation
letter as the frauds reported and detected during the year because of the
nature of the fraud and the difficulties encountered by the Auditors in
detecting material misstatements in the financial statements resulting from
fraud. Accordingly, it may be concluded that it is enough if the Auditor
expresses his opinion on the frauds noticed and reported by the management
and not expected to be a detective to approach his work with suspicion
Another major issue under this clause is that it also requires reporting of
frauds committed by the Company. The Auditor is left with no clues and is
expected to travel beyond the books to search for market information about
frauds committed by the Company, which is highly illogical.
(iii) TRANSACTIONS WITH RELATED PARTIES: The focus of the
primary reporting under this clause is to report whether transactions that need to
be entered into a Register in pursuance of Section 301 of the Companies Act,
1956 have been so entered. This Clause may be considered as a further step
towards the investor’s protection. However, the major issue here is that the audit
focus has to be shifted/
further intensified towards proprietary areas to find out the transactions that
need to be entered (a thorough scrutiny of all entries in the books of accounts
may be needed); and then to check the Register for actual recording of the same
Mere reliance on the 301 Register is not enough and the Auditor has to
scrutinize Form No.24AA (Disclosure of interest by the Directors) to ascertain
likely transactions that need to be entered in the 301 Register.
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WHAT CHARACTERISTICS/SKILLS SHOULD
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FORENSIC ACCOUNTANT POSSES?
A forensic accountant is expected to be a specialist in accounting and financial
Yet, as companies continue to grow in size and complexity, uncovering fraud
requires a forensic accountant to become proficient in an ever-increasing
number of professional skills and competencies.
The major skills can be divided in to two:
I. Core skills (specialized skills and knowledge).
II. Non-core skills (personal skills).
I. Core skills:
Ability to critically analyze financial statements. These skills help Forensic
Accountants to uncover abnormal patterns in accounting information and
recognize their source.
Ability to grasp internal control systems of the client and to set up a system
that achieves management objectives informs employees of their control
responsibility and monitors the quality of program and changes made to
Proficiency in Information technology and computer network systems. These
skills assist accountants to conduct investigations in the "E-Areas" (E-banking,
Ecommerce etc) and computerized accounting systems.
Knowledge of psychology in order to understand the thinking and motive
behind criminal behavior and to set up prevention programmes that motivate
and encourage employees.
An in-depth understating of the fraud schemes such as misappropriations,
money laundering, bribery and corruption.
Thorough insight and knowledge into company's governance policies and
laws that regulate these policies.
Interpersonal and communication skills, which aid in acquiring information
about the companies ethical policies and assist forensic accountants to
conduct interviews and obtain crucially, needed information.
Command of criminal and civil laws, legal system and court procedures.
II. Non-core skills: includes, but are not limited to
Sound professional judgment.
Look beyond numbers and grasp substance of situation.
A "sixth" sense that can be used to reconstruct details of past accounting
transactions is also beneficial.
A photographic memory that helps when trying to visualize and reconstruct
these past events.
Curiosity, persistence and creativity.
Pay attention to smallest of detail, observe and listen carefully
Ability to maintain his composure when detailing these events on the witness
In addition to personal characteristics accountants needs other requirement i.e. a
professional qualification or a certificate, acknowledging his competence.
However, there is no formal body that provides formal education of the frauds
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ADVANTAGES AND DISADVANTAGES OF
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Advantages of Forensic Accounting
1) Fraud Identification and Prevention:-
Fraud is quite common in big organizations where the number of daily financial
transactions is huge. In such an environment, an employee can easily undertake
fraudulent activities without being caught. Forensic accounting helps in
analyzing whether the company's accounting policies are followed or not, and
whether all the transactions are clearly stated in the books of accounts. Any
deviation observed in the books of accounts can help in identifying fraud, and
necessary measures can be taken to prevent it in the future.
2) Making Sound Investment Decisions:-
As forensic accounting helps in analyzing the financial standing and weaknesses
of a business, it provides a path for investors to make thoughtful investment
decisions. A company dealing with fraud is definitely not a good option for
investment. Therefore, the reports of forensic accountants act as a guide for
potential investors of a company. Many organizations also apply for loans from
various financial institutions. By performing an analysis, such institutions can
come to a decision on whether they would like to fund a company or not.
3) Formulation of Economic Policies:-
Various cases of fraud that becomes evident after forensic analysis act as a
reference for the government to formulate improved economic policies that
would be able to curb such fraudulent activities in the future. By doing so, the
government can strengthen the economy and prevent such illegal activities in
4) Rewarding Career Opportunity
As a career, forensic accounting is extremely rewarding, as it not only involves
regular accounting activities, but also involves identification, analysis, and
reporting of the findings during an audit. The acceptance of reports generated by
a forensic accountant by the court of law, gives them an upper hand as
compared to other accountants. Good forensic accountants are in high demand
and can easily draw a starting salary between $30,000 and $60,000 per annum.
Disadvantages of Forensic Accounting
1) Confidentiality Issue
Since the scrutiny of a company's financial records is done by an external
forensic accountant, the chances of leakage of confidential matter are always
there. It is true that their code of ethics clearly mentions that forensic
accountants and other members involved in the scrutiny must not engage in
disclosing confidential data to outsiders, but the possibility of disclosure cannot
2) Increased Chances of Threats and Negative Publicity
If the analysis of a company's financial statements points out the involvement of
a particular person in fraudulent activities, there is a significant chance that the
person will try to threaten the company to safeguard himself from the trial.
Also, any trial that confirms a fraud happening in the company comes under
public eye and gains negative publicity, which directly affects the reputation
and investor relations of the company.
3) Costs a Lot of Money
Forensic accounting can be an expensive affair because the procedures which
accountants use involve high-end accounting software. If study results have to
be presented in a trial, the overall expenditure goes up even further, because the
fees of forensic accountants are quite high. This can be a matter of concern for
4) Losing Employee Trust
It is quite obvious for employees to feel offended when they come to know that
their job is under scrutiny by a third person. If no fraud is identified, employees
are left with the feeling that the employer does not have faith in them. Lost trust
can be difficult to regain in such cases.
5) Limited Use of Services
Federal regulations limit the use of services from a single accounting firm.
Suppose a company has tied up with one firm for auditing, it cannot ask the firm
to provide other services to it. Therefore, a company has to reach out to several
firms for carrying out its accounting tasks.
Despite the disadvantages associated with forensic accounting, it is, and will
continue to be an important part in the world of business. This is because it
helps organizations and individuals to figure out whether their financial
accounts are accurate or fabricated to hide illegal activities going on within the
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Finance Ministry orders forensic audit on Dena Bank, OBC
in Rs. 437-cr fraud:-
The Finance Ministry has ordered a forensic audit of Dena Bank and Oriental
Bank of Commerce after some of their Mumbai-based branches allegedly
misappropriated funds worth Rs. 437 crore, mobilised through fixed deposits.
Professional services firm KPMG in India has been given the mandate to
undertake forensic investigations, sources close to the development said.
The report is expected in a month’s time. In the case of Dena Bank, the
misappropriation was to the tune of Rs. 257 crore and related to funds mobilised
from seven corporate. In Oriental Bank’s case, it related to misappropriation of
funds amounting to Rs. 180 crore, reportedly belonging to the Jawaharlal Nehru
The Central Bureau of Investigation is already looking into the alleged fraud.
The developments are disparate ones and took place at different times. But a
common feature could be that they centered on mobilising deposits: fixed
deposits/bulk deposits. The incidents have again brought to the fore the weak
risk management systems in public sector banks.
“The persons responsible have been taken to task; some disciplinary action is
being taken. There are also some suspensions, some transfers…,” said Financial
Services Secretary GS Sandhu. He was speaking on the sidelines of a realty and
banking conclave in Mumbai on Wednesday.
Sandhu added that the Finance Ministry would soon make it mandatory for all
senior officers — Deputy General Managers and GMs — to undergo a
compulsory risk management course before they are considered for promotions.
He said these instances (of misappropriation) have happened at the
lower/branch level because of lack of due diligence and non-adherence to norms
SL Bansal, CMD of Oriental Bank, told Business Line in New Delhi that the
bank had furnished the necessary information to the forensic auditor. The
incident in Oriental Bank of Commerce dated to February 2014 and the bank
had swung into action early in March itself to nip the fixed deposit scam in the
bud, said Bansal. Of the initial amount of Rs. 180 crore, as much as Rs. 110
crore was immediately recovered and handed over to the original remitter, he
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A large global accounting firm believes the market is sufficiently large to
support independent unit devoted strictly to 'forensic' accounting. All of the
larger accounting firms, as well as, many medium-sized and boutique firms
have recently created forensic accounting departments.
Because forensic accounting is relatively a new area of study, a series of
working definitions and sharing of corporate experiences should be undertaken
and encouraged to ensure a common understanding. Indeed, there is great future
in forensic accounting as a separate "niche" consulting.
While the forensic accounting and auditing practice had commenced in the US
as early as 1995, the seed of this specialization has yet to take off in India.
Forensic accountants are only dealing with financial implications of the cases
entrusted to them and not engaging in auditing exercise. On account of global
competition, the accounting profession must convince the marketplace that it
has the "best-equipped" professionals to perform such services.
While majority of CAs have excellent analytical skills, they need to
acknowledge that 'forensic' services require 'specialised' training as well as real-life
'practical' corporate experience.
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1. Preeti Singh, 2012, “Forensic Accounting Concept in India”, International
Journal of Trade and Commerce-IIARTC, Vol. I, NO. I, pp. 100-105.