Forensic accounting involves detailed audits and fraud examinations to uncover financial misconduct within organizations, particularly during economic downturns. The practice originated with Frank Wilson's investigation of Al Capone, highlighting its critical role in legal contexts and fraud detection. In India, forensic accounting has become essential for banks and has seen substantial growth due to increasing fraud cases and regulatory requirements.

1. ACCOUNTING FOR MANAGERS
Presentation on
FORENSIC ACCOUNTING

2. Forensic Accounting

3. "The world has enough for
everyone's needs, but not for
everyone's greed."

4. Forensic accounting refers to doing audits and fraud
examinations by accounting professionals to uncover
potential fraud issues within an organization.

5. Fraud is a serious problem for all organizations, especially during difficult economic times
when employees, vendors and others are finding it more challenging to cope with inflation
and job insecurity.
The idea behind anything “forensic” is that it is done in a manner thorough, professional, and
well enough to be used in court. An audit can be done for many reasons but the point behind
forensic accounting is to see more than just numbers, understand what they mean, and
interpret that into reality.

6. Auditing is similar, but the main objective is to ensure that there are no material
misstatements in financial statements and that these financial statements are an
accurate representation of a company's financial position. Internal controls and
procedures may be tested as part of this process and fraud may be detected.
However, errors in the data samples tested could be the result of faulty procedures
or a similar situation where something was done incorrectly, but innocently.

7. Forensic by definition, means “suitable for a court of law.” Forensic Accounting is
a type of accounting that can be used in presentation before a legal forum.
It can be described as the act of identifying, settling, sorting, extracting,
recording, reporting and verifying financial data in question, as well as clearly
organizing and analyzing to make proper conclusions about the state of financial
matters that have fallen under criminal observation.

8. History of forensic accounting
The birth of Forensic Accounting is credited to Frank Wilson, who in 1930, while
working as a CPA for the Internal Revenue Service, was placed on a task force to
investigate the secret dealings of Al Capone, one of America’s most infamous
Chicago gangsters. Capone was well-known for a series of illegal activities, many
of them violent crimes, but it was his failure to report Federal Income Tax that
was his undoing, and all at the hands of Forensic Accountants.
In 1931, thanks to Wilson’s diligent analysis of Capone’s financial records, the
notorious Al Capone was indicted for Federal Income tax evasion, owing the
government a very huge amount, from illegal gambling profits. Capone was found
guilty and sentenced to 10 years in Federal Prison. The importance of Forensic
Accounting was cemented.

9. Forensic accounting is helpful in the prevention, detection, and investigation of
fraud/theft. Since the types of frauds and ways fraud can be committed are
numerous, there are several aspects that need to be considered.
Fraud can be difficult to notice because only the symptoms of it are seen, usually
after the fraud has been continuously occurring. The gathering of evidence,
interactions with witnesses and/or suspects, and documentation of fraud for
criminal or civil court cases differentiates forensic accounting from auditing.

10. Forensic accounting is the investigation of fraud or financial
manipulation by performing extremely detailed research and
analysis of financial information. Forensic accountants are
often hired to prepare for litigation related to insurance
claims, insolvency, divorces, embezzlement, fraud, skimming,
and any type of financial theft.

11. Forensic accounting includes fraud investigations, but also includes lots
of other accounting work designed to support legal action such as:
•Disputes with ex-employees who were sacked because of allegations of incompetence.
•Summarizing the effects of complicated financial transactions.
•Business valuations needed for messy family disputes.
•Finding 'deleted' incriminating evidence on computers.

12. Industrial Usage and Forensic Audit
•Forensic Accounting is one of the most sought after practices in todays business times. The big
four Auditing companies namely Deloitte, KPMG, EY and PWC practice daily auditing and
forensic audits for their clients.
•These audits are generally for internal clarification of accounts or external projects related to
acquiring and investment. Information is provided to the clients after conducting due diligence
and extensive audits to match the books of accounts.

13. Forensic Audits
•A Forensic Audit is an examination of a company’s financial records to derive evidence which can
be used in a court of law or legal proceeding. These audits are conducted to analysis any
discrepancies in the books of accounts.
•For example, Telemart, on the recommendation of its Chief Financial Officer (CFO), entered into
a contract with RJ Inc for the supply of carts. At the time, RJ Inc was not authorized to conduct
business, as its license was suspended due to certain irregularities in taxes paid. The CFO had
knowledge of this fact, but still recommended that Telemart enter into a contract with RJ Inc
because he was secretly receiving compensation from RJ for doing so.
•A forensic audit can reveal such cases of fraud.

14. Reasons for Conducting Forensic Audits
•Corruption
•Asset Misappropriation
•Financial Statement Fraud

15. Techniques Used in Forensic Audits
•Substantive techniques – For example, doing a reconciliation, review of documents, etc
•Analytical procedures – Used to compare trends over a certain time period or to get
comparative data from different segments
•Computer-assisted audit techniques – Computer software programs that can be used to identify
fraud. E.g. Relativity, Intella.
•Understanding internal controls and testing them so as to understand the loopholes which
allowed the fraud to be perpetrated.
•Interviewing the suspects.

16. Forensic Accounting: Scope of work
The function of a forensic accountant may also cover a more generic investigation including
collection of evidence.
Almost every accounting firm in the country today has forensic accounting sections. Within
these sections, there may be sub-differentiations; for instance, some forensic accounting experts
may specialize in insurance applications, personal injury declarations, fraudulence,
construction or royalty audits.
Forensic accountants may also offer their services in retrieving profits from crime and in relation
to appropriation proceedings relevant to definite or assumed proceeds of crime or dubious
transfer of funds..

17. Forensic Accounting in India
Given the nature and types of fraud in India, the Reserve Bank
of India (RBI) has compulsorily made forensic accounting audit
mandatory for all banks within the country. The establishment
of Serious Fraud Investigation Office (SFIO) in India has
become the turning point for forensic accountants in the
country. The indications of the growing demand for the field
are. Unique only to India, there is a specific species of forensic
accountants known as Certified Forensic Accounting
Professionals
- The growing list of online criminal offences
- Breakdown of regulators to trace and detect cyber-security
frauds
- The long chain of co-operative banks going bust

18. Types of Forensic Accounting
There are various types of forensic auditing that can take place, and they are typically organized
by the types of legal proceeding that they fall under. Some of the most common examples:
◦ Financial theft (customers, employees, or outsiders)
◦ Securities fraud
◦ Bankruptcy
◦ Defaulting on debt
◦ Economic damages (various types of lawsuits to recover damages)
◦ M&A related lawsuits
◦ Tax evasion or fraud
◦ Corporate valuation disputes
◦ Professional negligence claims
◦ Money laundering
◦ Privacy information
◦ Divorce proceedings

19. Forensic Accounting for Litigation Support
On occasion in the corporate world, disputes between businesses arise. In a few instances, it
becomes necessary to manage the dispute through legal channels. In such cases, the advice of
accountants versed in the legalities of commercial disputes can be essential.
Forensic accounting is utilized in litigation when quantification of damages is needed.
Parties involved in legal disputes use the quantifications to assist in resolving disputes via
settlements or court decisions. For example, this may arise due to compensation and benefit
disputes.
The forensic accountant may be utilized as an expert witness if the dispute escalates to a court
decision.

20. Forensic Accounting in the Insurance
Industry
Many insurance claims can be reviewed and settled by the insurance adjuster. However, when
the claim is complex, or has multiple facets of accounting that overlay multiple areas of
insurance coverage, the adjuster may look to an expert for assistance, such as a forensic
accountant.
Forensic accounting is routinely used by the insurance industry. In this capacity, a forensic
accountant may be asked to quantify the economic damages arising from a vehicle accident, a
case of medical malpractice, or some other claim.
Forensic accountants provide an independent and objective analysis of an economic loss. And
they don’t take things at face value. The forensic accountant will ask the questions who, what,
when, why and how? They look at the business from many different angles, combining both
accounting and investigative skills in their approach to identify the facts and quantify the loss.

21. Forensic Accounting for Criminal
Investigation
"Investigative Accounting", is often associated with investigations of criminal matters. A
typical investigative accounting assignment would be an investigation of financial
theft/fraud/misappropiation of assets.
Forensic accounting is also used to discover whether a crime occurred and assess the likelihood
of criminal intent. Such crimes may include employee theft, securities fraud, falsification of
financial statement information, identity theft, or insurance fraud.
Forensic accountants may also assist in searching for hidden assets in divorce cases or provide
their services for other civil matters such as breach of contracts, disagreements relating to
company acquisitions, breaches of warranty, or business valuation disputes.

22. Methods for Investigation
1) The Direct Method (Transaction Method)
Investigating of cancelled cheques, invoices, breach of contract, agreements, investigations into
public records
2) The Indirect Method
i) The Cash T Method (The Source and Application of Funds Method)
This usually utilized when an individual or company’s books and records do not clearly show
their income leading to a suspicion that they may have omitted some of their earnings for a
particular period of time.

23. Methods for Investigation (cont.)
ii) Net Worth Method
The total net worth of a person is calculated at the beginning and at the end of a stipulated time
period. The net worth is added with non deductible living expenses which increase the net
worth
iii) Bank Deposit Method
Bank deposits are checked against total expenses during a given year. They calculate the net
deposits utilizing a specific formula, and the difference between accounts, transfers, and
redeposited cheques are subtracted from the total deposits.

24. Data Mining Technique
One of the analytical tools forensic accountants use is data-mining software,
which can take extremely large sets of data and extract patterns. A lot of
commercially available data-mining software incorporates Benford’s Law into
the programming, which makes it very easy to spot irregularities in those
patterns.
Benford's Law can recognize the probabilities of highly likely or highly unlikely
frequencies of numbers in a data set. The probabilities are based on
mathematical logarithms of the occurrence of digits in randomly generated
numbers in large data sets

25. Benford's Law maintains
that the numeral 1 will be
the leading digit in a
genuine data set of
numbers 30.1% of the time;
the numeral 2 will be the
leading digit 17.6% of the
time; and each subsequent
numeral, 3 through 9, will
be the leading digit with
decreasing frequency.

26. Benford’s Law (in Excel)

27. How to spot the fraud using Benford’s law ?

28. Total cost formula
The total cost formula is used to derive the combined variable and fixed costs of a batch of
goods or services. The formula is the average fixed cost per unit plus the average variable cost
per unit, multiplied by the number of units.
The calculation is:
(Average fixed cost + Average variable cost) x Number of units = Total cost

29. How to Gauge Cost
The duration of the embezzlement and quality of source documents greatly affect the time
necessary to investigate the event. Because of these unknowns, most forensic auditors will not
quote a set fee at the start. However, most will quote the average billing rate. Utilizing an average
billing rate, a client can approximate the costs by calculating the hours.
HOURS
The first step in estimating the hours is to determine the duration of the fraud. For example,
assume an embezzlement affects only one set of books and only one year. On average, the hours
from the start of the investigation to the final issuance will usually be around 50 – 70 hours. If
there is more than one year involved, then the additional years will run about 30 – 40 hours per
each additional year. So, for an embezzlement that spanned two years on one set of books, the
estimated hours will be approximately 80 – 110 hours. Using this information as the base amount,
a client can multiply out against the number of years the fraud was believed to have occurred.

30. Testimony Cost
Additional costs come into play if there is the need for testimony. Many firms will charge a
premium rate for testimony. This is due to the level of expertise needed to sit in a court setting.
Most testimonies will run for 8 – 12 hours. This includes prep time, deposition, and the actual
testimony. Again, a larger fraud may require additional preparation time.
The hours will be based on:
◦ Duration of the fraud
◦ Number of financial books affected
◦ Testimony time
This calculation allows a client to get a feel for the cost of the investigation. While this method
isn’t always full proof, it does provide some insight as the total cost necessary for an
investigation.

31. Difference between forensic auditing and
auditing
Forensic Auditing Auditing
• An examination of financial records to find any
illegal financial activity.
• Forensic accounting applies accounting, auditing
and investigation skills to examine analyze and
report on financial info. in a manner suitable to
the court.
• Forensic auditing services are usually necessary
when there is a dispute or lawsuit already in
place.
• End product of forensic Auditing is the summary
of evidence gathered with special emphasis on
testimonial evidence
• The examination of an entity’s financial
statement and accompanying disclosure by an
independent auditor
• Auditing is done to examine and evaluate the
financial statements of any given organization.
• Audit’s objective is to provide assurance to the
intended user that the information contained in
those financial statements is a fair and accurate
representation of the organization.
• End product is the opinion of the auditor on
financial statements and internal control

32. Advantages of Forensic Accounting
•Minimized losses
•Improved Efficiency
•Reduced Exploitation Risk
•Avoidance of legal problems
•Improved Brand Reputation and Authority

33. Disadvantages of Forensic Accounting
•It takes a lot of time.
•It can be expensive.
•It can be distracting.
•It can effect employee morale.

34. Conclusion
The digital era has made it easier than ever before for criminals to tamper with business accounts
and generally defraud others. Of the 500,000+ new businesses that are established every year,
the overwhelming majority rely on computers and the internet. Each time security experts
intensify their efforts to minimize external risks, hackers push back with equal force.
Research has also shown that internal ‘white collar’ crime is also a growing problem, contributing
to more than $1 trillion in combined losses every year. The contemporary fraudster has a
tendency to be highly capable in covering their tracks and leaving little to no evidence behind.
Conventional accountants and business managers alike simply do not have the knowledge, the
specialist skills or the available time to carry out comprehensive financial audits and
investigations.
There is an acute shortage of forensic accounting skill sets in India. A huge demand for forensic
accountants has come up in todays time to prevent scams and frauds and the scope of forensic
accounting is increasing day by day.

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