NATIONAL CONCLAVE 2012 On

Redefining Management Practices: A Perspective in Changing Business Scenario

Research Paper On

Forensic Accounting Another feather in the Hat of Accounting

By
DR. AVINASH PESHWE,
ASSOCIATE PROFESSOR, DEPT. OF COMMERCE, NETAJI SUBHASH CHANDRA BOSE COLLEGE, NANDED

Email-Id: peshweavinash@gmail.com, Mobile: 09822060012

and
Mr. MANOJ KUMAR GELDA Associate Profesor, Dept. of Commerce and Business Management,

Nishitha Degree & PG College, Nizamabad A.P

Email-Id: mr_gelda@yahoo.co.in, mrpgelda@gmail.com, Mobile: 9492009452

Abstract:

Forensic accounting has come into limelight due to rapid increase in financial frauds and white-collar crimes. But, it is a largely untrodden area in India. The integration of accounting, auditing and investigative skills creates the specialty known as forensic accounting. The opportunities for the forensic accountants are growing fast; They are being engaged in public practice and are being employed by insurance companies, banks, police forces, government agencies, etc. Maurice E. Peloubet coined the term Forensic Accounting in 1946. Kautilya was the first economist to articulate the need of forensic accountants. the growing arena of business and surging number of white-collar crimes that have led to the development of Forensic Accounting. Forensic Accounting borrows knowledge from Accounting, Finance, Law, Computerisation, Ethics, Criminology, etc. While Forensic Accounting developed as early as 1995 in USA, it put its first step in India just few years back. It is desired that in near future an accounting standard will be formulated on Forensic Accounting. This article aims at throwing light on Forensic Accounting. It encompasses the terminology, a brief note on its origin, role of Forensic Accountants, the techniques involved in their work and the present scenario of Forensic Accounting in India.

Nearly 40 percent of the top 100 American accounting firms are expanding their forensics and fraud services, according to Accounting Today. If this data is of some sense to Indian scenario then the day is not far away when forensic practice will contribute maximum to the total revenue of the Indian CA firm. Far from the humdrum stereotypic accountant your mind might have initially conjured, the forensic accounting professional is more of a private investigator with a financial sixth sense than the bookkeeper with a green eyeshade.

1. Introduction:

Until recently, detecting fraud or whitecollar crime was thought to be part of The conventional accounting function. Fraud was something the internal or external auditors were supposed to guard against through their periodic audits. Now, we as accountants know that auditors can only check for the compliance of a companys books to generally accepted accounting principles, auditing standards, and company policies. Thus, a new category of accounting was needed to detect the fraud in companies that suspected fraudulent transactions. This area of accounting is known as forensic accounting. Necessity is the mother of all inventions. Yes, it is the growing arena of business and surging number of white-collar crimes that have paved the way for the development of Forensic Accounting. According to AICPA, Forensic Accounting is the application of accounting principles, theories and discipline to facts or hypothesis at issues in a legal dispute and encompasses every branch of accounting knowledge. According to The Accountants Handbook on Fraud and Commercial Crime, Forensic Accounting is the application of financial skills and an investigative mentality to unresolved issues, conducted within the context of the rules of evidence. Forensic Accounting borrows knowledge from Accounting, Finance, Law, Computerisation, Ethics, Criminology, etc. Investigation plays a pivotal role in Forensic Accounting. It is the flavour of investigation that demarcates it from the conventional accounting practices. In wide sense, it can be identified as integrity of accounting, auditing and investigative skills to secure a particular result. Forensic accounting is the application of a specialized knowledge and specific skills to stumble upon the evidence of economic transactions. The job demands reporting, where the accountability of the fraud is established and the report is considered as evidence in the court of law or in the administrative proceeding. 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. He requires the ability to think. Far from being an ability that is specific to success in any particular field, developing the ability to think enhances a persons chances of success in life, thus increasing a persons worth in todays society. Sherlock Holmes was probably the most famous practitioner being the Forensic Chemist. But the Kautilya was the first economist who openly recognized the need of the forensic accountants. He mentioned forty ways of embezzlement centuries ago. The Opportunities for the Forensic Accountants are growing at the rapid speed. Collapse of Enron and WTC twin towers have blessed the American Forensic Accountants with the opportunities.

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 of co-operative banks bursting - all are pinpointing the need of forensic accounting, irrespective of whether we understand the need or not.

In the Indian context the Forensic Accountants are the most required in the wake of the growing frauds. The law enforcement officers are the experts of analyzing the fingerprints and the Narcotics but what about the digital evidence analysis. Very few know about it.

Its a thrill of hunt. Maurice E. Peloubet who coined the term Forensic Accountant in 1946 said that the preparation of financial statements has some but not all of the characteristics of forensic accounting. This statement is enough for the chartered accountants in India to foray in this field. It is new child on the block. Both CBI and CID cops do the forensic accounting work. Until recently there was no separate community in India. But now movement of India forensic community is gathering the pace.

2. Objectives :1. To know the use of Forensic Accounting. 2. To know that, how to control Financial frauds in companies

3. Hypothesis :Forensic Accounting method is the effective tool to control the financial frauds, corruption, misappropriation and use of e-Accounting and taxation in the corporate world.

4. Areas covered under Forensic Accounting:

Certain engagement related to civil disputes viz. disagreements related to company acquisitions like business valuation, calculating and quantifying losses and economic damages through breach contracts etc. Shareholders and partnership disputes involving detailed analysis of numerous years accounting records to quantify the issues in dispute. Cyber crime like credit card frauds, ATM card frauds, cyber extortion, cyber stalking, phishing i.e sending unsolicited e-mails & Collection of sensitive information by simple techniques. Forensic accounting also deals with areas of professional negligence claims, involving assessment and reporting on work of other professionals. This involves investigating whether breach of generally agreed accounting and/or auditing principles has occurred. Engagement involving criminal matters, involving assessment of accounting systems and accounts presentation , where forensic accountants are hired by the law of enforcement agencies. Business investigations involving fund tracing, asset identifications and recovery, forensic intelligence gathering and due diligence reviews. Employee fraud investigations involving procedures to determine existence, nature and extent of fraud and may involve identification of the clauses etc.

Business Economic losses viz. contract disputes trademark and patent infringements, losses arising from breach of non-compete clauses etc. Cases involving medical insurance claims, medical malpractices resulting in economic losses. Mediation arbitration in alternative dispute resolution mechanisms due to familiarity of forensic accountants with legal issues and procedures, helping individuals and businesses resolve disputes with minimum disruption and loss of time.

5. Terminologies used pertaining to forensic accounting:

1. Forensic Investigation: This refers to using specialized investigative skills to undertake inquiry in such a manner that outcome hall have an application in court of law. Forensic investigation may be grounded in areas like accounting, medicine or engineering. 2. Forensic Audit: This refers to investigation of a fraud or presumptive fraud with a view to gathering evidence that could be presented in courts of law. It is essentially a blend of propriety, investigative regularity, and financial audits. The objective is to ascertain whether true business value has been reflected in the financial statement and during the course of examination to find whether any fraud has taken place. 6. Detection techniques used in forensic accounting A. CPA (Critical Point Auditing) Scrutiny for CPA may involve use of a. Trend Analysis b. Checking unusual debits/credits in the accounts c. Discrepancies in receivable / payable / inventory balances evidenced from financial records corresponding subsidiary books. d. False credits to boost sales with corresponding debits to non-existent/dummy personal accounts.

B. PA (Propriety Audit) 1. PA is conducting by supreme audit government accounts prepared are in order, in terms of approvals and sanctions of expenditures incurred, whether the expenditure incurred was need-based and that the revenues have been realized in time and properly credited to government accounts. 2. The analogy of value for money audit is applied to forensic audits whereby ` financials frauds are unearthed saving wasteful and unwarranted expenditures.

7. Role of a Forensic Accountant

Auditor should be watchdog and not be the bloodhound. Its a good quote that every auditor should know. This quote makes the definition of Forensic accountants even more simple. The forensic Accountant is a bloodhound of Bookkeeping. These bloodhounds sniff out fraud and criminal transactions in bank, corporate entity or from any other organizations 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. Earlier, we were of the belief that detection and prevention of frauds or white-collar crimes is a part of conventional accounting function. But the recognition of Forensic Accounting has changed this notion of ours that Auditor is a watchdog and not a bloodhound. They only check for the compliance of a companys books to standards and company policies. GAAPs, auditing Hence, the need for a bloodhound

was apprehended. Like, a bloodhound, they are to sniff out fraud, criminal transactions out of the financial records out of the financial
records of corporate entities, banks or any other organisation. Thus, a forensic accountant is a financial detective with a suspicious mind who can pull out the latent truth and assist in dispute resolution.

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. Earlier, we were of the belief that detection and prevention of frauds or white-collar crimes is a part of conventional accounting function. But the recognition of Forensic Accounting has changed this notion of ours that Auditor is a watchdog and not a bloodhound. They only check for the compliance of a companys books to GAAPs, auditing standards and company policies. Hence, the need for a bloodhound was apprehended. Like, a bloodhound, they are to sniff out fraud, criminal transactions out of the financial records of corporate entities, banks or any other organisation. Thus, a forensic accountant is a financial detective with a suspicious mind who can pull out the latent truth and assist in dispute resolution. His duty is to analyse, interpret, and summarise complex financial and business related issues. They are to look beyond the numbers and concentrate on substance over form. This new and groundbreaking accounting has two main spheres: (i) Litigation support and investigation (ii) Dispute resolution.

The former represents factual representation of economic issues encompassing existing litigation. If the dispute reaches the courtroom, he may testify as an expert witness. Whereas in latter case, he quantifies the damages sustained by parties involved in legal disputes and can assist in resolving disputes, even before those reach the courtroom. A Forensic Accountant is supposed to have a three fold approach: (a) Base layer Accounting knowledge (b) Middle layer- Knowledge of auditing, internal controls, risk assessment and fraud detection (c) Top layer- Knowledge of thelegal environment and strong communication skills.

The

traits of the forensic Accountants could be compared to well bake Pizza. The base of forensic

accounting is Accounting knowledge. Size and the extent of baking decide the quality of the Pizza.

A middle layer is a dispersed knowledge of auditing, internal controls, risk assessment and fraud detection. It is like the spread of the cheese in Pizza. The toppings of this Pizza are a basic understanding of the legal environment. The legal environment is essential in order to support the litigations. The Cherry on the toppings of the pizza is a strong set of communication skills, both written and oral. It is just the beautification part. Perfect combination of the Pizza base, Cheese spread and good toppings makes the pizza delicious and the Forensic Auditor the perfect. Its a combination that will be in demand for as long as human nature exists. A well- equipped forensic accountant can provide the following services: 1. Investigate the financial evidence. 2. Analysis and presentation of the financial evidence in a computerised form. 3. Communicate their findings in the form of reports, exhibits and collection of documents. 4. Assist in legal proceedings, including testifying in court as an expert witness and preparing visual aids to support trial evidence. These services of forensic accountants can be utilised in various fields. The sphere of their activities is quite large. They take up various types of assignments. While they can be of help in business related fraud investigation, they can also handle matrimonial dispute cases. A list of such cases taken up by a Forensic Accountant is given below. Criminal Investigations: A Forensic Accountant is normally called for in case of a criminal investigation, if it entails financial and other related frauds. The Investigative Agencies (EOW, CID, SFIO, etc), regulatory bodies (SEBI, TRAI, etc) and other stake-holders seek for these services from them as and when required.

Stakeholders and ownership disputes: These assignments often involve a detailed analysis of financial records over a period for quantifying the issues in a dispute. For example, amount payable to a deceased partner or legal heirs of a deceased partner.

Insurance and other related claims: Insurance policies differ significantly as to their terms and conditions. Accordingly, these assignments involve an in-depth review of the policy to investigate coverage issues and the appropriate method of quantifying the economic losses resulting from an event. These assignments demand great knowledge of the forensic accountant in the local laws and regulations in place. For example, motor accidents, loss on account of fire, natural calamities, business discontinuance, etc. Business related Fraud investigation: Business investigations involve asset identification and recovery, tracing funds, forensic intelligence gathering and due diligence reviews. These investigations are carried out with the objective of determining the existence, nature, and extent of fraud and may concern the identification of perpetrator. These investigations often involve interviews of personnel who had access to the funds and a detailed review of the documentary evidence.

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. Matrimonial dispute cases: Forensic accountants entertain cases pertaining to matrimonial disputes wherein their role is merely confined to tracing, locating and evaluating any form of asset involved. Thus, we see how forensic accountants help the organizations or individuals and society at large. They are an indispensable part of todays legal team.

Forensic Accounting in India Indias economy has been rising for the past few years. But this rise is accompanied by some evils as well. India has also been experiencing white-collar crimes and scams for the past few

years. Thus, the need of forensic accountants was realised. Forensic accountants played a major role in letting the cat out of the bag in the 2008 Satyam scam. Of late, the CWG and 2G scams are in the limelight in India. They are having a major role in these scams as well. While Forensic Accounting developed as early as 1995 in USA, it put it first step in India just few years back. Forensic Research Foundation has been established in India for the investigation of fraud. Another international investigation organisation has also put its feet on the Indian land. Serious Fraud Investigation Office (SFIO) is another noteworthy organization set up in India for serving the same purpose. We are looking forward to Forensic Accounting gaining a great momentum in India. We have a great expectation from ICAI in this respect. We expect that in near future an accounting standard will be formulated on Forensic Accounting. This will strengthen the walk of Forensic Accounting from infancy to maturity. This new weapon of Forensic Accounting will be an immense help to law enforcement agencies and regulatory bodies in curbing white-collar crimes and scams. The growing number of regulator and the administrative agencies will demand the services in the nature of forensic practice. Chartered Accountants are going to find themselves more involved in what is essentially a type of forensic practice. The changing nature of the Accounting and Auditing & assurance standards also confirms this.

Nearly 40 percent of the top 100 American accounting firms are expanding their forensics and fraud services, according to Accounting Today. If this data is of some sense to Indian scenario then the day is not far away when forensic practice will contribute maximum to the total revenue of the Indian CA firm. Far from the humdrum stereotypic accountant your mind might have initially conjured, the forensic accounting professional is more of a private investigator with a financial sixth sense than the bookkeeper with a green eyeshade.

References
1. Dr. G S Mehta and Tarun Mathur (2007):Preventing Financial Fraud through Forensic

Accounting. The Chartered Accountant. 2. Wikipedia, the free encyclopedia 3. Journal of Forensic Accounting: Editor-In Chief: Crumbley D. Larry, Publisher: Inc. Edwards. R.T. 4. Journal of The Chartered Accountant 2007,Pages: 1000-1010.Dr. Madan Bhasin 5. www.forensicaccounting.com 6. www.indiaforensic.com 7. www.ezinearticles.com