Forensic accounting

MLA ACADEMY OF HIGHER LEARNING
A PROJECT ON FORENSIC
ACCOUNTING IN INDIA
SRIDEVI H.V
Year : 2019
Class: 1ST
YEAR MCOM

A PROJECT ON FORENSIC ACCOUNTING IN INDIA
MLA ACADEMY OF HIGHER LEARNING Page 2
ABSTRACT:
Forensic accounting gained importance due to increasing number of financial frauds and scams. This new area
in accounting encompasses accounting, auditing, and investigative skills, thus emerged to detect frauds. They
involve themselves in different areas like employee-related frauds, settlement and arbitrations, etc.. A forensic
accountant has a financial sixth sense. Despite the fact that forensic accounting can bridge the gap between
conventional accounting and auditing, this profession has not been able to gain the needed momentum due to
some hassles. This paper tries to shed light on the theoretical concept, nature, practice, need, role of forensic
accounting in preventing fraud, and the practical difficulties faced by forensic accountants. The paper was able
to assess the importance and rising scope of forensic accounting as a job. It also understood the practical
difficulties they faced like lack of organized databases in Indian scenario which makes it difficult to access all
needed information. Expectation level of the clients is very high and at times even unreasonable. This paper
fulfills an identified need to study the important rising field of forensic accounting in India.
Keywords: forensic accounting, accounting frauds, auditing, internal audit, accounting scams.
INTRODUCTION
The collapse of big business houses and numerous accounting scams plaguing the corporate world have
necessitated the imperative need for a new perception of accounting and auditing that goes beyond numbers.
Detecting fraud was considered to be a function of conventional accountants and auditors, till recently. Internal
and external auditors were supposed to guard against frauds through their periodic audits. But auditors can only
check the company’s books of accounts for compliance of generally accepted accounting principles, auditing
standards, and company policies. Moreover, public demands for change and subsequent regulatory reforms have
transformed the entire scope of corporate governance. Nowadays, the top management is under lot of scrutiny.
Such trends have the common goal of responsibly addressing investors’ concerns about the authenticity of the
financial reporting system. Thus, the need for a new strategy in accounting was felt to detect the fraud in
companies/suspected fraudulent transactions. This area of accounting came to be known as “forensic
accounting”. Forensic accounting is not an entirely new area in accounting. It has been there for years. Sherlock
Holmes is considered to be the first ever forensic accountant. Some of the major corporate scandals like Enron,
WorldCom cost the stakeholders trillions of dollars when the stock prices plummeted down badly affecting
investor confidence. These called for stricter financial governance. This led to the enactment of the Sarbanes-
Oxley Act of 2002, also known as the “Public Company Accounting Reform and Investor Protection Act” in
USA. This act is more commonly known as Sarbanes-Oxley, Sarbox, or SOX. The act covers issues such as
auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure.
Sarbanes-Oxley began to draw the public’s attention on what forensic accountants can do to uncover financial
irregularities and track illegal financial activities. Since 9/11, forensic accountants have been playing a major
role in tracking terrorists around the world. SOX-type laws have been subsequently enacted in Japan, Germany,
France, Italy, Australia, South Africa, and Turkey. In India, despite the fact that company accounts are prepared
strictly and religiously as per the Indian Companies Act, many instances of mistakes necessitated the need for

solving the problem of locating and reporting frauds. The Satyam Scam of 2009 which rocked the Indian
corporate world also highlighted the need for employing the services of forensic accountants for detecting
corporate frauds. Conventional auditing is like a watchdog of the financial system and the bloodhound is the
forensic accountant. Public companies thus realized the need for adopting forensic accounting as part of a
diligent internal control system to satisfy the market and regulatory needs for true and fair disclosures. If
statistics is to be believed, there is a big gap between the demand and supply of forensic accountants, giving
them a coveted position. As per the study of India Forensic Center of Studies regarding Certified Forensic
Accounting professionals, it was observed that the average annual salary of a forensic accountant is above Rs.8
lakhs, maximum being Rs.1.5 crores. There are multiple applications of forensic accounting in India like the
accounting fraud investigations done by the investors, regulators like Securities and Exchange Board of India
(SEBI), revenue authorities like Income Tax and Sales Tax. In addition, there are many companies employing
forensic accountants for the investigation of employee-related frauds and corruption
This paper tries to shed light on the theoretical concept, nature, practice, need, role of forensic accounting in
preventing fraud and the practical difficulties faced by forensic accountants.
Evolution of Forensic Accounting in India
In India, Kautilya was the first person to mention the famous forty ways of misappropriation in his famous book
Kautilya Arthashastra.In India Chartered Accountants are called upon to take up such investigative assignments.
Wide use of Forensic Accounting developed in India after Enron case, Rajat Gupta case and Satyam
Case. Very few Chartered Accountant firms have fraud examination as a separate practice.
Chartered accountancy firms like SharadJoshi, S.K. Jain (Xerox Fraud case) are providing this type of
services. However, this this area is by and large dominated by the big four consultancy firms such as Deloitte,
KPMG, Price water House Coopers and Ernst and Young. In India the formation of erious Fraud
Investigation Office is the landmark creation for the Forensic Accountants. Companies Act 2013
paved the way for a special approach to prevent economic fraud and preserving national wealth in
the lines of American law and British Bribery Act. For proper risk management, reputational risk was to be
managed. The occasion of fraud and irregularities and lapses in compliance culture necessitated proper
investigation thereof as well as a strong preventive environment. Thus forensic accounting was called for
to detect planning of the fraud, execution of the fraud, consequences of the fraud and book the culprits without
much time lag.
Review of literature
Maurice E. Peloubet first time used the term Forensic Accountant in 1946 in his essay "Forensic Accounting: Its
Place in Today's Economy." Archaeological studies disclose that, during 3300-3500 BC, accountants of Egypt,
were involved in the prevention and detection of fraud. During18th century close relationship developed
between accountancy and legal profession. Many amendments to financial statement disclosure can be
attributed to frauds in the corporate. In1930s an American 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 forensic accountant.
According to the Journal of Forensic Accounting, “Forensic accounting is sufficiently thorough and complete so
that an accountant, in his/ her considered independent professional judgment, can deliver a finding as to
accounts, inventories, or the presentation thereof that is of such quality that it would be sustainable in some
adversarial legal proceeding, or within some judicial or administrative review.”
Forensic Accountant:
The authenticity of the results found by Forensic Accountant depends on the knowledge, skills, and experience
of the forensic accountant. A forensic accountant must be capable of integrating knowledge and skills in
the examination, analysis, interpretation, reporting, and testimonial support of evidence. In court, the
forensic accountant can be an expert witness, a consultant, or play other roles such as special master, court-
appointed expert, referee, arbitrator, or mediator.
Meaning of Forensic Audit:
Investopedia defines - A forensic audit is an examination and evaluation of a firm's or individual's financial
information for use as evidence in court. A forensic audit can be conducted in order to prosecute a party for
fraud, embezzlement or other financial claims
Statement of the problem
The study on forensic accounting is important because of increasing instances of misappropriation of corporate
funds and the failure of statutory audit to prevent them, along with an increase in corporate crimes and frauds
have put pressure to find a better way of exposing fraud in business world. A nationwide study conducted by
Kessler International showed that 39% of organizations in India have considered the need for a forensic
accountant. The following are some of the factors that have given rise to forensic accounting:
(1) The existing conventional accounting or auditing practices are incapable of going beyond numbers and
analyzing other hidden aspects of corporate fraud;
(2) There is no proper method to overcome issues of lobbying and collusion;
(3) There is no alternative mechanism to review auditor reports to ensure full authenticity and fairness;
(4) The inability of internal auditors to initiate action or to detect frauds in advance.
Objectives of the Study
1. To know the various uses of forensic accounting in India.

2. To know the role of Forensic Accounting (techniques) in fraud examination.
Research methodology
The study is descriptive in nature. This Research paper based on secondary data, and data collected from
journals, Newspaper and Websites.
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
– cross examination, formulate
questions
-collar crime investigations
TYPES OF FRAUDS:
Following are the types of frauds:
1) Bank frauds 2) Corporate frauds 3) Insurance frauds 4) Cyber fraud 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.
USES OF FORENSIC ACCOUNTING:
The services rendered by the forensic accountants are in great demand in the following areas:
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 services.
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 resolution.
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 insurance claims.
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.
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:
legal proceedings, including testifying in court as an expert witness and preparing visual aids to support trial
evidence.
with the protection and recovery of assets.
-ordination of other experts, including: Private investigators; Forensic document examiners; Consulting
engineers.
Litigation Support
tion of questions to be asked regarding the
financial evidence.
issues and to formulate additional questions to be asked.
ing expert's damages report and reporting on both the strengths and weaknesses of the
positions taken.
opposing expert and to provide assistance with cross-examination.
APPLICATION OF PRINCIPLES OF FORENSIC 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
possible fraud.
• The related area of forensic auditing can help in reducing the transaction processing risk by helping to perform
audit type procedures on a routine schedule.
• 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 accounting.
Different tool and techniques used for Forensic Audit are:
1. Benchmarking – comparison of financial result of one period with another or theperformance of
one cost centre, or business unit, with another and overall business performancewith its pre decided standards.
2. Ratio analysis – to identify any abnormal trends and changes.
3. System analysis – to examine the systems in place and identifying any weaknesses whichcould be
opportunities for the fraudsters.
4. Specialist software- like audit tools for data matching analysis.
5. Exception reporting –Generating automatic unchangeable reports that to find out deviationfrom the
norms.
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 assignment.
(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.
Forensic Accounting as a Profession
Currently, Certified Forensic Accounting Professional is the only designation which helps the professionals to
perform the assignments related to investigative accounting and litigation support. In order to become a
Certified Forensic Accounting Professional, one needs to undergo the Uniform Examination and become a
Certified Forensic Accountant. There are specialized certifications in the field of Information Technology,
Banking, Insurance, and Money Laundering.
Limitations
 Time constraint- Shortage of time was a very big constraint.
 Resource constraint- Availability of data was constraint due to which only secondary data is considered.
 No direct source of information available- the information is collected from indirect sources due to
which data might not be accurate.

Findings based on Merits of Forensic Accounting
In India, internal audit is mandatory for all the companies having turnover above Rs.2 crores according to the
Companies Act 2013. In most of the cases, internal audit becomes a mandatory function and it becomes difficult
to measure the performance of the internal auditors in terms of value addition. On the other hand, the forensic
accountants are generally given the mandate to reduce or prevent the frauds and according to the reports of the
companies like Riskpro Management Consulting Private Ltd., for every rupee invested in the forensic
accounting function, the forensic auditors have saved at least 7 rupees for the company. This means a return on
investment of 700%. All the above makes forensic accounting a more coveted and valued service than
conventional accounting or auditing.
Findings based on Practical Difficulties faced by forensic accounting
Forensic accounting is an emerging new area of accounting and as such, forensic accountants confront the
following difficulties while practicing the profession:
(1) It is a premium service and not all the businesses can afford forensic accountants;
(2) Lack of organized databases in Indian scenario makes it difficult to access all needed information;
(3) Expectation level of the clients is very high and at times even unreasonable;
(4) Understanding level of the accountants about the true aspect of fraud detection is very dismal;
(5) Application of the technology in maintaining the books of accounts and their compatibility with the
data analysis software is another hindrance in proper forensic accounting implementation;
(6) Additionally, the fraud perpetrators are far ahead of fraud fighters.
Recommendations
The study makes the following recommendations which are consistent with the literature review. The study
recommends that it is important to revise the company’s organization structure for better alignment with the
workings of forensic accounting services. This was to allow for clear functionality of different departments
without conflicting with each other. The company also needed to formulate clear policies to guide the practice
of accounting. It was necessary that the internal controls and management be educated and informed of the most
common type of fraud and the department responsible so that unreasonable loss of money and fraudulent
practices could be addressed. Such information could be communicated during meetings in annual general
meetings as it could reduce the number of litigations against the auditors since such litigation services are costly
and generally damage the reputation of the company.
It was also important for the company to use better accounting and auditing standards as per the International
Accounting Standards Board and International Standards of Auditing. It was necessary that appropriate action
be applied when fraud was detected. Proper forensic procedures were to be followed during investigations in

matters of prosecution by professional forensics accountant and disciplinary action was to be made in cases of
fraud.
Trainings on independence, transparency, accountability, competence was to be fostered to enhance the smooth
operation of forensic accounting services.
Conclusion
Forensic accounting in India 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. It is being used as an investigative tool,
rather than a preventive tool. If forensic auditing is made mandatory in various sectors many of the scams can
be restricted. There is also a need to make a new Law for the prosecution of fraudsters, irrespective of their
domicile and such Law should always be framed keeping in mind the uses of information technology in
fraudulent practices. To prevent scams in financial sector, RBI has also asked banks to include forensic auditing
practices. While majority of CAs have excellent analytical skills, they need to acknowledge that 'forensic'
services require 'specialized' training as well as real-life ‘practical’ corporate experience.
REFERENCES:
1. Preeti Singh, 2012, “Forensic Accounting Concept in India”, International Journal of Trade and Commerce-
IIARTC, Vol. I, NO. I, pp. 100-105.
2.cawebworld.com/articles/forensic-accounting-upcoming-career-professionals 3.
studycafe.in/2013/11/forensic-audit-reporting-prespective
4. financialexpress.com/news/forensic-auditors-to-the-fore-on-increasing-whitecollar- crimes

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