4. Historical Perspective
ā¢ An environment of āfair dealingsā has always existed, but at the same time,
always tested. The practice of āunfair dealingsā (Fraud) goes back to the origin of
commerce and a feature of every organized culture in the world.
ā¢ Numerous cases of fraud have always existed, as well as the laws to prevent and
detect them. Nevertheless, fraud continues to affects many organizations,
regardless of size, location, or industry.
ā¢ One outcome of frauds and irregularities has been the origination of the
profession of āAuditingā. In Great Britain, the passage of the Joint Stock
Companies Act in 1844 and later the Companies Act in 1879 contributed greatly to
the auditing field in general and to the development of external auditing.
4
The detection of fraud is the most important portion of the Auditorās duties, and there will be
no disputing the contention that the Auditor who is able to detect fraud isāother things
being equalāa better man than the auditor who cannot. Auditor[s] should, therefore,
assiduously cultivate this branch of their functions. - Lawrence R. Dicksee (1892)
5. Recent Developments .. 1/2
(Enron Era)
5
S.N. Organisation
(Year)
Exposure Modus Operandi
1 Enron (2001) ā¢ US$ 74bn investor loss
ā¢ Jobs of 1000ās employees
ā¢ Customers/vendors
ā¢ Overstatement of revenues
ā¢ Off balance sheet liabilities
2 WorldCom
(2002)
ā¢ US$ 11bn +US$ 180bn
losses for investors
ā¢ Loss of 30,000 jobs
ā¢ Overstatement of capital assets
ā¢ Payments for fictitious expenses
3 Lehman
Brothers (2008)
ā¢ US$ 50bn in loans
disguised as sales
ā¢ Sold toxic assets with buy-back
arrangements (not honored).
4 Bernie Madoff
(2008)
ā¢ US$ 64.8bn ā¢ Largest ponzi scheme in history
5 Satyam (2009) ā¢ US$ 1.5bn ā¢ Inflated revenues, headcount,
margins and cash balance.
6. Recent Developments .. 2/2
(Post-Enron Era)
ā¢ Heightened Legal and Regulatory Scrutiny:
ā Tough new legislation (SOXā2002/CAā2013)
ā Oversight bodies (PCAOB/NFRA)
ā¢ New Standards of Accounting and Auditing:
ā GAAP to IAS (IndAS) +SAS99
ā COSO ERM (2004)
ā SIA/FAIS (2020-21)
ā¢ New Corporate Governance Listing Standards (SEC/SEBI)
ā NYSE/NASDAQ (2003) and LODR (2015)
ā¢ Greater Penalties for violations and non-compliance:
ā United States Organizational Sentencing Guidelines (2004)
6
7. Current status
ā¢ According to the 2020 ACFE survey, approximately $4.5 trillion is
lost to fraud globally every year, and 21% of cases cost the
organization in excess of $1 million.
ā¢ Increasing complexity of fraud prevention, detection, and
investigation.
ā¢ Developments in the digital domain (including cyberspace) have
become a double edged sword in the efforts to prevent and
detect the menace!
ā¢ Greater appreciation of the need for all stakeholders to
understand the dynamics of fraud and forensic accounting.
7
9. Emerging Challenges
ā¢ Increasing size, number and complexity of cases
ā¢ Complicated by technology, political-business nexus,
bank NPA, and now the pandemic.
ā¢ Fraud expectation GAP:
ā¢ No doubt it is an imperfect world ā but everything
must be done to deter, detect, investigate, and
penalize fraud.
9
ā¦ there are those whose perception of what can be realistically accomplished in
an audit frequently exceeds the services that any accountant or auditor can deliver
and, in terms of cost, exceeds what any business might be willing to payā¦
11. Define ā Accounting
ā¢ Dictionary definition:
ā the skill or activity of keeping records of the money a person or organization earns and
spends.
ā the system of recording and summarizing business and financial transactions and
analyzing, verifying, and reporting the results.
ā the process of recording financial transactions pertaining to a business.
ā the theory and system of setting up, maintaining, and auditing the books of a firm; art of
analyzing the financial position and operating results of a business.
ā¢ Book definition:
ā āAccounting may be defined as the collection, compilation and systematic recording of
business transactions in terms of money, the preparation of financial reports, the
analysis and interpretation of these reports and the use of these reports for the
information and guidance of managementā.. A. W. Johnson
11
12. Define ā Auditing
ā¢ Dictionary definition:
ā conduct an official financial inspection of (a company or its accounts)
ā¢ Book definition:
ā Auditing typically refers to financial statement audits or an objective
examination and evaluation of a companyās financial statements ā
usually performed by an independent external third party.
ā¢ FAIS definition:
ā¢ Audit primarily relates to provide assurance through the expression of
an independent opinion over the truth and fairness of financial
statements.
12
13. Accounting Vs. Auditing
ā¢ The relationship of auditing to accounting is close, yet their natures are very different; the
are business associates, not parent and child.
ā¢ Accounting includes the collection, classification, summarization, and communication of
financial data; it involves the measurement and communication of business events and
conditions as they affect and represent a given enterprise or other entity.
ā¢ The task of accounting is to reduce a mass of detailed information to manageable and
understandable proportions.
ā¢ Auditing does none of these things.
ā¢ Auditing must consider business events and conditions too, but it does not have the task of
measuring or communicating them. Its task is to review the measurement of and
communication of accounting for propriety.
ā¢ Auditing is analytical, not constructive; it is critical, investigative, concerned with the basis
for accounting measurements and assertions. Auditing emphasise proof, the support for
financial statements and data.
ā¢ Thus, auditing has its principal roots, not in accounting, which it reviews, but in logic on
which it leans heavily for ideas and methods.
- Muatz, R.K. and Hussein A. Sharaf, The Philosophy of Auditing (1961)
13
14. Define ā Forensics
ā¢ Dictionary definition:
ā pertaining to, connected with, or used in courts of law or public
discussion and debate.
ā relating to or dealing with the application of scientific knowledge to
legal problems.
ā¢ Technical definition:
ā being able to meet the exacting standards of a court of law.
ā relating to or denoting the application of scientific methods and
techniques to the investigation of crime or relating to courts of law.
14
15. Define ā Forensics Accounting
ā¢ Book definition:
ā Forensic accounting is the application of investigative and analytical skills for
the purpose of resolving financial issues in a manner that meets standards
required by courts of law.
ā Forensic accountants apply special skills in accounting, auditing, finance,
quantitative methods, certain areas of the law, research and investigative
skills to collect, analyze and evaluate evidential matter and to interpret and
communicate findings.
ā¢ Forensic Accounting by Hopwood, Leiner, and Young
ā¢ Another book definition:
Forensic accounting can be described as a specialized field of
accountancy which investigates fraud and analyze financial information
to be used in legal proceedings.
15
16. Define ā Forensic Accounting
ā¢ Official definition (as per FAIS):
Forensic Accounting is discovery and evaluation of evidence by a professional
to interpret and communicate findings suitable for a Court of law.
The overriding objective of Forensic Accounting is to discover facts and
evidence, especially in the area of financial transactions and operational
arrangements, to help the Professional report findings, to reach a conclusion
(but not to express an opinion) and support a legal case in a Court of law.
ā¢ Simple definition:
Forensic Accounting is the scrutiny of accounting evidence with the objective of
presenting it in legal proceedings.
16
17. Define ā Fraud (Legal)
Definition of fraud as per Section 447 (1) Companies Act 2013
(i) āFraudā in relation to affairs of a company or anybody corporate, includes
ā¢ any act, omission, concealment of any fact or abuse of position
ā¢ committed by any person or any other person with the connivance in any
manner,
ā¢ with intent to deceive, to gain undue advantage from, or to injure
ā¢ the interests of, the company or its shareholders or its creditors or any other
person,
ā¢ whether or not there is any wrongful gain or wrongful loss.
(ii) āwrongful gainā means the gain by unlawful means of property to which the
person gaining is not legally entitled;
(iii) āwrongful lossā means the loss by unlawful means of property to which the
person losing is legally entitled.
17
18. Define ā Fraud
ā¢ Technical definition:
ā Fraud is a deliberate act (or failure to act) with the intention of obtaining an
unauthorized benefit, either for oneself or for the institution, by using
deception or false suggestions or suppression of truth or other unethical
means, which are believed and relied upon by others.
ā¢ FAIS definition:
Fraud is any intentional or deliberate act to deprive another of property or
money through deception or other unfair means.
ā¢ Simple definition:
Fraud is an intentional act through unfair means with a motive for some gain or
benefit.
18
19. Define ā Investigation
ā¢ Dictionary definition:
ā an official examination of the facts about a situation, crime, etc.
ā a detailed assessment of records and enquiry into the situation of the
business or for a particular reason
ā¢ FAIS definition:
ā A critical examination of evidences, documents, facts and witness statements
with respect to an alleged legal, ethical or contractual violation.
ā The examination would involve an evaluation of the facts for alleged violation
with an expectation that the matter might be brought to a Court of law or a
regulatory body.
ā¢ Simple definition:
Investigation involves the application of forensic accounting and similar
techniques to confirm the presence or absence of a fraud or irregularities.
19
20. Forensic Audit?
ā¢ An AUDIT is NOT the same as
ā Forensic Accounting, or
ā A Fraud Investigation
ā¢ Hence FORENSIC AUDIT is a MISNOMER (Misleading Term)!
ā¢ Audits generally culminate with the expression of an Independent
Opinion, which is not the case with Forensic Accounting and
Investigations,
ā¢ These culminate with the reporting of Evidence Discovered. And, at
most, Conclusions of any analysis work on evidence discovered.
20
21. Broad Comparison
21
STATUTORY
AUDIT
ā¢ LEGAL MANDATE
ā¢ CHARTERED
ACCOUNTANT ONLY
ā¢ EXPRESSION OF AN
INDEPENDENT OPINION
ā¢ ON FINANCIAL
STATEMENTS
ā¢ AS PER AUDITING
STANDARDS
INTERNAL
AUDIT
FORENSICS INVESTIGATION
ā¢ MAY NOT BE A LEGAL
MANDATE
ā¢ NON-CAs
ā¢ PROVIDE ASURANCE
ā¢ BEYOND FINANCIALS
ā¢ NO MANDATORY
STANDARDS
ā¢ MAY INVOLVE AGENCIES
ā¢ FACT/EXPERT WITNESS
ā¢ PRIMARILY FRAUD
RELATED
ā¢ NO OPINION ON
GUILT/INNOCENCE
ā¢ NO MANDATORY
STANDARDS
(TILL NOW)
ā¢ TO SUPPORT A LEGAL
CASE
ā¢ NON-CAs
ā¢ NO STANDARD
EXPRESSION OF ANY
OPINION
ā¢ PRIMARILY FINANCIALS
ā¢ NO MANDATORY
STANDARDS
(TILL NOW)
23. Comparison ā Statutory Audit
23
STATUTORY
AUDIT
ā¢ LEGAL MANDATE
ā¢ CHARTERED
ACCOUNTANT ONLY
ā¢ EXPRESSION OF AN
INDEPENDENT OPINION
ā¢ ON FINANCIAL
STATEMENTS
ā¢ AS PER AUDITING
STANDARDS
OBJECTIVE : TRUE AND FAIR PICTURE
FOCUS : VERY GENERAL - A REVIEW OF THE BOOKS OF ACCOUNT
APPROACH : TEST OF TRANSACTION CONTROLS AND SUBSTANTIVE TESTS OF BALANCES
TARGET : IDENTIFY MATERIAL MIS-STATEMENTS IN FINANCIAL STATEMENTS
SKILLS : TESTING & CHECKING, INQUIRY & OBSERVATION
PRESUMPTION : PROFESSIONAL SKEPTICISM
OUTCOME : AUDIT REPORT QUALIFICATION ā SUBJECT TO/EXCEPT FOR
24. Comparison ā Internal Audit
24
INTERNAL
AUDIT
ā¢ MAY NOT BE A LEGAL
MANDATE
ā¢ NON-CAs
ā¢ PROVIDE ASURANCE
ā¢ BEYOND FINANCIALS
ā¢ NO MANDATORY
STANDARDS
OBJECTIVE : STRENGTHEN INTERNAL CONTROLS
FOCUS : GENERAL - A REVIEW OF SYSTEM & PROCESSES
APPROACH : BROAD BASED TESTING FOR COMPLIANCE
TARGET : IDENTIFY ROOT CAUSE OF CONTROL BREAKDOWN/VIOLATION
SKILLS : TESTING & CHECKING, INQUIRY & OBSERVATION + PROCESS EVALUATION
PRESUMPTION : HONEST MISTAKE (INNOCENT) UNLESS PROVEN OTHERWISE
OUTCOME : SUMMARY OF FINDINGS ā WITH FRAUD INDICATORS (RED FLAGS)
25. Comparison ā Forensics
25
FORENSICS
ā¢ TO SUPPORT A LEGAL
CASE
ā¢ NON-CAs
ā¢ NO STANDARD
EXPRESSION OF ANY
OPINION
ā¢ PRIMARILY FINANCIALS
ā¢ NO MANDATORY
STANDARDS
(TILL NOW)
OBJECTIVE : DISCOVER FACTS AND EVIDENCE
FOCUS : NARROW - VALIDATE TRANSACTIONS AND BALANCES
APPROACH : FOCUSED TESTING TO CONFIRM SUSPICION / ALLEGATION
TARGET : IDENTIFY / CONFIRM NATURE OF VIOLATION
SKILLS : SCRUTINY & ANALYSIS, FACT-FINDING, INTERVIEWS
PRESUMPTION : NEUTRALITY
OUTCOME : PRESENT EVIDENCE TO A COURT OF LAW ā THEY WILL DECIDE !
26. Comparison ā Investigation
26
INVESTIGATION
ā¢ MAY INVOLVE AGENCIES
ā¢ FACT/EXPERT WITNESS
ā¢ PRIMARILY FRAUD
RELATED
ā¢ NO OPINION ON
GUILT/INNOCENCE
ā¢ NO MANDATORY
STANDARDS
(TILL NOW)
OBJECTIVE : DISCOVER POTENTIAL FRAUD (AND CULPRIT)
FOCUS : VERY SPECIFIC - VERIFY FRAUDULENT āINTENTā
APPROACH : FORMULATE AND TEST HYPOTHESIS
TARGET : CONFIRM THE MODUS-OPERANDI
SKILLS : PROBING & ADMISSION SEEKING INTERVIEWS (INTERROGATING)
PRESUMPTION : PROBABILITY OF FRAUD / IRREGULARITY (PREDICATION)
OUTCOME : SUMMARY OF FINDINGS & CONCLUSIONS ā NO OPINION ON
GUILT/INNOCENCE
27. Points to Remember
ā¢ Be absolutely clear on the Domain of Function (A/F/I).
ā¢ Be absolutely clear on the Role assigned vs. Role
assumed.
ā¢ One cannot drift from one domain to the other in a
sub-conscious manner.
ā¢ Engage with Stakeholders to ensure they are aligned
to the role and the expected outcome from that role.
27
30. FAIS Overview: Current Status
30
OVER-ARCHING
DOCUMENTS
Preface
Frame-
work
Basic
Principles
100
KEY
CONCEPTS
110
Nature of
Assignment
120
Fraud Risk
130
Laws &
Regulations
140
Applying
Hypotheses
200
ENGAGEMENT
MANAGEMENT
210
Engagement
Objectives
220 Engagement
Acceptance and
Appointment
230
Using the Work of
an Expert
240
Engaging with
Agencies
250
Communication
with Stakeholders
300
EXECUTING
ASSIGNMENTS
310 Planning the
Assignment
320 Evidence and
Documentation
330 Conducting
Work Procedures
340 Conducting
Interviews
350 Review and
Supervision
360 Testifying
before Competent
Authorities
400
SPECIALISED
AREAS
410
Applying Data
Analysis
420
Evidence Discovery
in Digital Domain
430
Loans and
Borrowings
440
Related and
Connected Parties
500
REPORTING
510
Reporting
Results
600
QUALITY
610
Quality
Control
(3) (4) (5) (6) (4) (1)
(1)
Completed
Ready
(16)
(7)
WIP (1)
TOTAL
(24)
31. FAIS Overview
31
ā The Standards outline the
principles (outcome) of each
subject matter
ā They provide for WHAT is
expected of the Professional,
but not the HOW
ā Details of HOW will come later
in the form of Guidance Notes:
ā Implementation Guide
ā Technical Guide
PRINCIPLE BASED
ā ALL ICAI MEMBERS *
ā ALL FAI ENGAGMENTS
ļ“ ANY LIMITATION ON THE APPLICABILITY OF THE STANDARD IS
MADE CLEAR IN THE STANDARD ITSELF
^ Recommendatory till March 2023. Guidance Notes are always
recommendatory in nature.
* NOTE:
ā Currently, anyone can conduct FAI assignments
ā Although ICAI cannot impose itās Standards on non-members;
however, over time, the Government may choose to make these
mandatory on everyone conducting certain assignments
(e.g., Listed Companies or Frauds over a certain amount)
MANDATORY^ NATURE
32. Over-Arching Documents
32
ļ PREFACE :
ā¢ Introduces the Standards
ā¢ Outlines the Process of Standard Setting
ļ FRAMEWORK:
ā¢ Sets the Structure of the FAIS
ā¢ Defines certain key terms
ā¢ Establishes a Fixed Format of 6 Sections
ļ BASIC PRINCIPLES:
ā¢ 5 Attribute Principles
ā¢ 5 Conduct Principles
33. Framework & Definitions
33
ļ Forensic Accounting is discovery and evaluation of evidence by
a professional to interpret and communicate findings suitable for a
Court of law.
ļ Investigation is the systematic and critical examination of facts,
records and documents for a specific purpose.
FIXED FORMAT FOR A STANDARD
KEY DEFINITIONS
1. Introduction & Scope: Brief background and scope of the Standard and its
applicability.
2. Objective: Purpose of issuing the Standard and why it is required and essential.
3. Requirements: The desired outcome and what is critical to achieve the objective of
the Standard.
4. Explanatory Comments: Explanation of certain parts of the Requirements which
require clarity and elaboration, including defining key words or terms.
5. Documentation of Work Procedures: Indicative list of the nature of documentation
which may be expected to demonstrate conformance to the Standards.
6. Effective Date: Date from which the Standard is to be applied and made mandatory.
34. Basic Principles
34
1. Independence
2. Integrity and Objectivity
3. Due Professional Care
4. Confidentiality
5. Skills and Competence
6. Contextualisation of Situation
7. Primacy of Truth
8. Respecting Rights and Obligations
9. Separating facts from opinions
10. Quality and Continuous Improvement.
ATTRIBUTES
PERFORMANCE
Credibility of the Professional
Credibility of the Engagement
35. New Concepts & Requirements
35
35
340: CONDUCTING
INTERVIEWS
410: DATA ANALYSIS
420: EVIDENCE
DISCOVERY IN
DIGITAL DOMAIN
510: REPORTING
RESULTS
120: FRAUD RISK
140: APPLYING
HYPOSTHESES
240: ENGAGING
WITH AGENCIES
330: WORK
PROCEDURES
36. Conclusions
ā¢ Forensic Accounting is a relatively new domain and very closely related
to Frauds and Irregularities.
ā¢ It is a means to conduct an investigation to confirm the presence or
absence of financial Frauds and Irregularities.
ā¢ It cannot be confused with other financial examinations like audit and it
requires special skills and techniques to conduct these assignments.
ā¢ Assignments in this domain are now expected to comply with the new
Financial Accounting and Investigation Standards (FAIS).
36
