Forensic Analysis on FS

1. FORENSIC ANALYSIS ON
FINANCIAL STATEMENTS
SESSION: 1- INTRODUCTION TO FORENSIC
ANALYSIS OF FINANCIAL STATEMENTS

2. WHAT IS FORENSIC
ACCOUNTING?
Forensic accounting is a specialized area of accounting
which includes investigating incidents of fraud, bribery,
money laundering and embezzlement by analyzing
financial records and transactions.
Securities fraud, assets misappropriation, identify theft,
compensation disputes, trademark and patent
infringements are just some areas of focus for forensic
accountants.

3. HISTORY OF FORENSIC
ACCOUNTING
➢ Frank Wilson gave the birth of Forensic Accounting in the
1930s. When he was working as a CPA for the US Internal
Revenue Service, he was assigned to investigate the
transactions of the mobster Al Capone.
➢ Wilson’s diligent analysis of the financials of Al Capone
indicted him for Federal Income tax evasion. Capone owed
the government $215,080 from illegal gambling profits and
was guilty of tax evasion for which he was sentenced to 10
years in custody. This case established the significance of
Forensic Accounting.

4. CATEGORIES OF FORENSIC
ACCOUNTING
• Securities fraud
• Business valuation
• Post-acquisition disputes such as earnouts or
breaches of warranties
• Money laundering
• Tax fraud
• Bankruptcy and insolvency
• Economic damage assessment

5. THE PRACTICE AREA OF FORENSIC
ACCOUNTANTS
• Law enforcement agencies
• Regulatory bodies
• Accounting firms
• Financial institutions
• Special task forces

6. RELEVANT QUALIFICATIONS TO HAVE
KNOWLEDGE ON FORENSIC
ACCOUNTING
• Chartered Accountancy
• PhD in Forensic Accounting
• Certified Fraud Examiners
• Certified Public Accountants
• University Degree in Accounting/Finance etc.

7. POPULAR ACCOUNTING FIRMS
1. Pricewaterhousecoopers (PWC)
2. Deloitte
3. Ernst & Young (EY)
4. KPMG
5. Grant Thornton
6. BDO USA
7. RSM US
8. Crown LLP

8. WHY INVESTORS NEED TO CHECK THE
FINANCIAL STATEMENTS’ QUALITY?
• Accounting data validation for financial
analysis
• To check the corporate governance quality
• To reduce the risk of loss from rouge trading
• To assess the sustainability of any company
• To identify the true financial picture of any
company

9. IMPACTS OF IGNORANCE IN READING
FINANCIAL STATEMENTS
1. High risk of loss on investment
2. Risk of blocked-funds
3. Lower return to risk
4. Tax evasion
5. Increase in Non-Performing Assets
6. Capital flight through transfer pricing
7. Money laundering increases etc.

10. TYPES OF EARNINGS MANAGEMENT
1. Income Smoothing
2. Big Bath
3. Income Shifting (by Transfer Pricing)

11. FROM WHERE DO WE COLLECT THE DATA FOR
FORENSIC ANALYSIS OF FINANCIAL
STATEMENTS?
1. Annual Reports
2. Newspaper Evidence
3. Regulatory Bodies
4. Law Enforcement Agencies
5. Industry Reviews
6. National Statistics
7. Expert Opinion

12. COMMON WAYS OF WINDOW-DRESSING OF
FINANCIAL STATEMENTS
1. Expense capitalization
2. Deferring payment to suppliers to enhance
cash/bank balance
3. Changing inventories valuation to increase or
decrease profits
4. Imbalances between Production, Sales and
Inventories
5. Recognizing false sales revenue
6. Inflated Assets Revaluation
7. Reporting False One-Off Gains

13. COMMON WAYS OF WINDOW-DRESSING OF
FINANCIAL STATEMENTS
8. Improper Provisioning and Write-Offs
9. Fictitious Write-Ins of Lost Sales
10. Manipulating depreciation expenses
11. Manipulating Capital Work-in Progress
12. Manipulating In-transitory Items
13. Improper Accounting for Group Consolidation
14. Phantom Cash Balances etc.

14. TOP ACCOUNTING SCANDALS IN
HISTORY
1) Enron Scandal (2001) – Hiding bad-debt
2) WorldCom Scandal (2002) – Expense capitalization
3) AIG Scandal (2005) – Rouge trading of shares
4) Lehman Brothers Scandal (2008) - Hiding $50 B loan
5) Satyam Scandal (2009) - Inflated revenue by $1.5 B
6) Waste Management Scandal (1998) - $1.7 B phantom profit
7) Tyco Scandal (2002) - inflated earnings by $500 M

15. RELATIONSHIPS BETWEEN F/S
Cash & Cash
Equivalents and
Retained Earnings
(Balance Sheet)
Closing Balance
of Cash & Cash
Equivalents (Cash
Flow Statement)
Retained Earnings
(Income
Statements)

16. WHY TO CHECK THE RELATIONSHIPS
BETWEEN F/S?
✓ To find any discrepancy between the financial
statements
✓ To evaluate any estimation errors
✓ To assess the financial reporting quality

17. COMMON TECHNIQUES OF FINDING
ACCOUNTING FRAUDS
✓ Checking Governance Quality
✓ Investigating Information Systems
✓ Investigating Tax Files
✓ Analysing Transaction Data
✓ Analysing Non-Monetary Assets
✓ Reconciliation of Financial Statements Components

18. COMMON TECHNIQUES OF FINDING
ACCOUNTING FRAUDS
✓ Checking Inventory Valuation
✓ Benchmarking Ratios and Company Metrics
✓ Checking IFRS Compliance
✓ Herfindahl-Hirschman Index (HHI)
✓ Applying Recognised Models i.e. Beanish M Score
✓ Statistical Techniques

19. COMMON TECHNIQUES OF FINDING
ACCOUNTING FRAUDS
✓ Raw Materials Price Data
✓ Debt Service Coverage Analysis
✓ Understanding Anti-Dilution of EPS
✓ Time Apportionment of Mid-Year Acquisition
✓ Opex and Capex Analysis
✓ And many more!

20. Q&A
Please wait for Session-2