FORENSIC ACCOUNTING

A seminar report submitted to

Jawaharlal Nehru Technological University, Anantapur
In partial fulfilment of the requirements for
The award of the degree of
MASTER OF BUSINESS ADMINISTRATION

Submitted by
S. HUDA AFREEN
095K1E0015

Under the esteemed guidance

of
Ms.Uthama Devi
Asst. Professor, Dept. of M.B.A
BCETFW, Buggaletipalli, C.K.Dinne
Kadapa.

BHARATH COLLEGE OF ENGINEERING&

TECHNOLOGY FOR WOMEN
(Affiliated to JNT University, Anantapur and approved by AICTE, New Delhi)
Buggaletipalli, C.K.Dinne, Kadapa-516003.

2009-2011
 FORENSIC
ACCOUNTING
 2009-2011

INTRODUCTION:

Various terms are often used to describe the individual responsible for
performing commercial crime investigations pertaining to a financial nature.
These terms may include fraud examiner, fraud auditor, forensic auditor, fraud
accountant, financial crime investigator, etc.

The word “forensic” also refer to the Latin word “forum”, implying
presentation to a forum. The performing of an investigation in gathering and
presenting findings in a forum, which could include anything from a court of
law, disciplinary committee, etc., appears to be distinguished as part of the
definition.

Longman (1991, 403) refers to forensic as related to or used in the law and
tracking of criminals. Du Plessis (2001, 4-6) supplies the following definition
of forensic and investigative accounting:

“It is the application of financial skills and investigative mentality to

unresolved issues, conducted within the rules of evidence. As a discipline it
encompasses financial expertise, fraud knowledge and a strong knowledge and
understanding of business reality and the working of the legal system.”

Forensic therefore, pertains to the presentation of findings, subsequent to an a

investigation of a financial nature taking into account legal aspects, in a
commercial environment.

Forensic accounting is the specialty practice area of accountancy that 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.
Forensic accountants, also referred to as forensic auditors or investigative
auditors, often have to give expert evidence at the eventual trial. All of the
larger accounting firms, as well as

Many medium-sized and boutique firms have specialist forensic accounting

departments. Within these groups, there may be further sub-specializations:
some forensic accountants may, for example, just specialize in insurance
claims, personal injury claims, fraud, and construction.

 Focus is the evidence of economic transactions and reporting the legal

framework which allows such evidence to be suitable to the purpose(s) of
establishing accountability and/or valuation.

 In other words the identification, interpretation, and communication of the

evidence of economic transaction and reporting events.

 Often mistakenly assumed to be exclusively associated with "negative"

applications, such as bankruptcy, fraud, business disputes, or matrimonial
divorce.

 May also be applied in positive assurance engagements such as due

diligence reviews, business valuations, audit committee advisory services
and enterprise risk management.

 Forensic accounting is applied to the evidence of first order activities, not

secondary systems of controls.

 Analysis includes the crucial aspect of recognizing the implications of

evidence that has been obtained.

Forensic accounting is the practice of utilizing accounting, auditing, and

investigative skills to determine whether fraud has occurred.
The integration of accounting, auditing and investigative skills yields the
speciality known as Forensic Accounting.

"Forensic", according to the website dictionary means, "Belonging to, used in

or suitable to courts of judicature or to public discussion and debate."

"Forensic Accounting", provides an accounting analysis that is suitable to the

court which will form the basis for discussion, debate and ultimately dispute
resolution. Forensic Accounting encompasses both Litigation Support
and Accounting. As Forensic Accountants, we utilize accounting, auditing and
investigative skills when conducting an investigation. Equally critical is our
ability to respond immediately and to communicate financial information
clearly and concisely in a courtroom setting. Forensic Accountants are trained
to look beyond the numbers and deal with the business reality of the situation.

A forensic accounting major will provide students with the skills necessary to
determine techniques to prevent and detect fraud, apply analytical techniques
and computer digital techniques to detect fraud, provide expert interviewing
skills of possible fraud perpetrators and know the legal environment so one
will be able to gather evidence legally and be capable of testifying as an expert
witness in the prosecution of a fraud case. A forensic accountant must develop
a wide array of skills. One must be capable of analyzing potential fraud
indicators, sniffing out evidence to support a fraud hypothesis, understand
human behaviour that might lead to fraud and developing excellent oral and
written communication skills Guilford College provides a liberal arts
education that will develop all of these skills for a forensic accountant
graduate.

OTHER TERMINOLOGY:

Forensic Investigation:

The utilization of specialized investigative skills in carrying out an inquiry

conducted in such a manner that the outcome will have application to a court
of law. A Forensic Investigation may be grounded in accounting, medicine,
engineering or some other discipline.

Forensic audit:

An examination of evidence regarding an assertion to determine its

correspondence to established criteria carried out in a manner suitable to the
court. An example would be a Forensic Audit of sales records to determine
the quantum of rent owing under a lease agreement, which is the subject of
litigation.

Internal Audit:

An audit performed by an employee who examines operational evidence to

determine whether prescribed operating procedures have been followed.

External Audit:

An audit performed by an auditor engaged in public practice leading to the

expression of a professional opinion which lends credibility to the assertion
under examination.

It encompasses two main areas:

Litigation support

Investigation

Litigation Support:

Litigation Support", provides assistance of an accounting nature in a matter

involving existing or pending litigation. It deals primarily with issues related
to the quantification of economic damages. A typical litigation support
assignment would be calculating the economic loss resulting from a breach of
contract.
The forensic accountant quantifies damages sustained by parties involved in
legal disputes and assists in resolving disputes, even before they reach the
courtroom.

 Arbitration assistance
 Business valuation for divorce, stockholder disputes
 Computation of damages resulting from personal injuries, wrongful
death, breach of contract, casualty, and fidelity losses,
 Determination of lost profits due to business interruption,
 Testifying as an expert witness,
 Financial review of contractual obligations,
 Investigative services related to fraud and other illegal acts.

INVESTIGATION ACCOUNTING:

"Investigative Accounting", is often associated with investigations of criminal

matters. A typical investigative accounting assignment would be an
investigation of employee theft. Other examples include securities fraud,
insurance fraud, kickbacks and proceeds of crime investigations.

Is the act of determining whether criminal matters such as employee theft,

securities fraud (including falsification of financial statements), and insurance
fraud have occurred.

Also includes searching for irregularities associated with civil matters, such as
a search for hidden assets in divorce cases.

HISTORY OF FORENSIC ACCOUNTING:

Forensic Accounting is the use of accounting principles and investigation

techniques to ferret out fraud and theft. Forensic Accountants often testify in
court and are instrumental in building legal cases. They also provide services
in seven different legal areas; damages, antitrust, accounting, valuation,
general consulting and analysis. The history of Forensic Accounting is long,
but the field came into its own just in the last century.

EARLY HISTORY:

Forensic Accounting dates back to the ancient Egyptian scribes who accounted
for all of the Pharaoh's assets. These scribes were known as the "eyes and ears
of the Pharaoh." However, it wasn't until 1817 that Forensic Accounting had
its first day in court when an accountant was required to testify at a bankruptcy
hearing. In 1824, a Scottish accountant advertised his legal accounting
expertise, but the term Forensic Accounting had not yet been coined.

FORENSIC ACCOUNTING AND THE MOB:

In 1931, the IRS and FBI used accounting to convict mobster Al Capone. An
arrest wasn't made until law enforcement built a tax evasion case utilizing
accounting expertise. Frank J. Wilson was the agent charged with finding
proof of tax evasion. Wilson sifted through millions of financial documents
and found enough evidence for a conviction. Due to the Capone case, the IRS
actually produced an ad campaign boasting "Only an Accountant Could Catch
Al Capone."

FORENSIC ACCOUNTING AND THE LINDBERGH KIDNAPPING:

Frank J. Wilson continued to influence forensic accounting with his work on

the 1932 kidnapping of the Lindbergh baby. By tracking the serial number of
the gold certificates used to pay the kidnapper's ransom, he was able to trace
and identify the perpetrators. Wilson's methodology on the Lindbergh case
became a widespread practice in tracking and prosecuting financial crime.
Wilson then went on to work for the Secret Service and created an educational
program to fight counterfeit currency.
RECENT HISTORY:

Maurice E. Peloubet is credited with developing the term Forensic Accounting

in his 1946 essay "Forensic Accounting: Its Place In Today's Economy." By
this time, Forensic Accounting had proven its worth during World War II,
however formalized procedures were not in place until the 1980's when major
academic works were published. During the O.J. Simpson trial, forensic
accountants evaluated his assets impacting the damages awarded in the civil
suit. Forensic Accounting has been pivotal in the corporate scandals of
companies such as Enron, Tyco and WorldCom.

PROFESSIONAL HISTORY:

In 1992 the American College of Forensic Examiners was established with the
American Board of Forensic Accounts starting in 1997. The Journal of
Forensic Accounting, Auditing, Fraud and Taxation began publication in 2000.
In 2002 the Sarbanes-Oxley Act established the Public Companies Accounting
Oversight Board (PCAOB) which was charged with developing auditing
standards, conducting investigations and ensuring corporate compliance. As a
result of the Sarbanes-Oxley Act, there has been continuing emphasis on
forensic accounting.

NATURE OF FORENSIC ACCOUNTING:

Forensic accounting (or at least, accounting expert witnessing) can be traced as

far back as 1817 to a court decision. According to The Accountant’s
Handbook on Fraud & Commercial Crime, forensic accounting is defined as:
the application of financial skills and an investigative mentality to unresolved
issues, conducted within the context of the rules of evidence.

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.

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 make the pizza delicious and the Forensic Auditor the
perfect. It’s a combination that will be in demand for as long as human nature
exists.

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
person’s chances of success in life, thus increasing a person’s worth in today’s
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.

PREVENTING FINANCIAL FRAUD THROUGH

‘FORENSIC ACCOUNTING’:

There has been a surge in commercial litigations in recent times entailing

greater demand of the services of forensic accountants. This article deals with
different aspects of forensic accountancy and discusses as to where the
Forensic Accountants may be of help.

Thrill seeking and accountancy are not, whatever you may think, mutually
exclusive. Forensic accountancy can be a high profile and fascinating blend of
legal and numerical problem solving where you are key to beating the bad
guys. There’s nothing better than that thrill of getting the final bit of evidence
that pieces the jigsaw together – Mark Alden.

“Auditor should be watchdog and not be the bloodhound”. It’s 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 organization’s 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.

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.

The term Forensic Accounting encompasses a wide range of activities

including:

• The expert witness – preparation of formal reports for filing in Court and giving
evidence as an Expert
• Litigation Consultancy – working with lawyers and their clients engaged in
litigation and assisting with evidence, strategy and case preparation.
• Fraud Detection – assisting clients in detecting financial fraud by employees and
others and tracing misappropriated funds.
• Computer Forensics – assisting in electronic data recovery and enforcement of
IP rights etc...

THE TECHNIQUES IN FORENSIC ACCOUNTING:

The conventional accounting and auditing with the help of different

accounting tools like ratio technique, cash flow technique, a standard statistical
tool examination of evidences are all part of forensic accounting.

In cases involving significant amounts of data, the present day forensic

accountant has technology available to obtain or source data, sort and analyze
data and even quantify and stratify results through computer audit software
applications and various other techniques. This enables the forensic accountant
to pinpoint theft of assets for fidelity bond coverage, proof of losses for
insurance or recovery through litigation, and illegal payments by corporations.
Some of the techniques involved in forensic accounting are:

1. Benford’s law: It is a mathematical tool and is one of the various ways to

determine whether variable under study is a case of unintentional errors
(mistakes) or fraud. On detecting any such phenomenon, the variable under
study is subjected to a detailed scrutiny. The law states that fabricated figures
possess a different pattern from random (or valid) figures. The steps of
 Benford’s law are very simple. Once the variable or field of financial
importance is decided, the left most digit of variable under study extracted and
summarized for entire population. The summarization is done by classifying
the first digit field and calculating its observed count percentage. Then
Benford’s set is applied. A parametric test called the Z test is carried out to
measure the significance of variance between the two populations, i.e.
Benford’s percentage numbers for first digit and observed percentage of first
digit for a particular level of confidence. If the data confirms to the percentage
of Benford’s law, it means that the data is Benford’s set, i.e. there is 68%
chance of no error or fraud. The first digit may not always be the only relevant
field. Benford has given separate sets for 2nd, 3rd….and for last digit as well. It
also works for combination numbers, decimal numbers and rounded numbers.
There are many advantages of Benford’s law like it is not affected by scale
invariance, and is of help when there is no supporting document to prove the
authenticity of the transactions.

2. Theory of relative size factor: It highlights all unusual fluctuations,

which may be routed from fraud or genuine errors. RSF is measured as the
ratio of the largest number to the second largest number of the given set. In
this method the records that fall outside the prescribed range are suspected of
errors or fraud. These records or fields need to relate to other variables or
factors in order to find the relationship, thus establishing the truth.

3. Computer Assisted Auditing tools (CAATs): CAATs are

computer programs that auditor use as part of the audit procedures to process
data of audit significance contained in a client’s information systems, without
depending on him. CAAT helps auditor to perform various auditing
procedures such as:

a) Testing details of transactions and balances

b) Identifying inconsistencies of significant fluctuations
c) Testing general as well as application control of computer systems
d) Sampling programs to extract data for audit testing, and
e) Redoing calculations performed by accounting systems
 Forensic accounting software (for accounting purpose) comes into two
different varieties:

 Data extraction software: It is designed to conduct spreadsheet analysis on all

the company’s computer database records such as billings, account receivable,
payments to vendors, payroll & purchasing.
 Financial analysis software: It uses monthly, quarterly or annual financial
statements and benchmarks the ratios between different accounts such as
billings by revenues or supply cost as a percentage of revenue.

Other computer software that forensic accountants might use

includes so- called ‘spy’ software.

4. Data mining techniques: It is a set of computer assisted techniques

designed to automatically, mine large volumes of data for new, hidden or
unexpected information or patterns. Data mining techniques can be
categorized in three ways:

o Discovery: It discovers the usual knowledge or patterns in data without

any prior knowledge of fraud.
o Predictive modelling: In this, patterns discovered from the database are
used to predict the outcome and to guess data for new value items.
o Deviation analysis: In this the norm is found first, and those items are
detected that deviate from the usual within a given threshold.

Link discovery has emerged recently for detecting a suspicious pattern. It

mostly uses deterministic graphical techniques, Bayesian probabilistic casual
networks. This method involves “pattern matching” algorithm to ‘extract’ any
rare or suspicious cases.

5. Ratio Analysis: Another useful fraud detection technique is the

calculation of data analysis ratios. Three commonly employed ratios are-

 The ratio of the highest value to the lowest value

 The ratio of the highest value to the second highest value and
 The ratio of the current year to the previous year.
FORENSIC ACCOUNTANTS:

A Forensic Accountant is someone with a combination of skills. Beyond being

a CA, a forensic accounting has auditing and investigating capabilities that are
ideal for detailing the complexity of litigation involving tax and finance. A
Forensic accountant can take a seemingly needle in-a-haystack pile of
financial information and distill it into the important elements that need to be
presented clearly and concisely as courtroom testimony.

Forensic accountants may be involved in recovering proceeds of crime and in

relation to confiscation proceedings concerning actual or assumed proceeds of
crime or money laundering. In the United Kingdom, relevant legislation is
contained in the Proceeds of Crime Act 2002. In India there is a separate breed
of forensic accountants called Certified Forensic Accounting Professionals.
Some forensic accountants are also Certified Forensic Accounting
Professionals, Certified Fraud Examiners, Certified Public
Accountants, Chartered Accountants or ACCAs.

Forensic accountants utilize an understanding of business

information and financial reporting systems, accounting and auditing standards
and procedures, evidence gathering and investigative techniques, and litigation
processes and procedures to perform their work. Forensic accountants are also
increasingly playing more proactive risk reduction roles by designing and
performing extended procedures as part of the statutory audit, acting as
advisers to audit committees, fraud deterrence engagements, and assisting in
investment analyst research.

"While Forensic Accountants ("FAs") usually do not provide opinions, the

work performed and reports issued will often provide answers to the how,
where, what, why and who. The FAs have and are continuing to evolve in
terms of utilizing technology to assist in engagements to identify anomalies
and inconsistencies. It is important to remember that it is not the Forensic
Accountants that determine fraud, but instead the court." (David Malamed,
Forensic Accountant, Toronto Ontario)
“Auditor should be watchdog and not be the bloodhound”. It’s 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 organization’s 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.

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.

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. It’s a combination that will be in demand for as long as human nature
exists.

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
person’s chances of success in life, thus increasing a person’s worth in today’s
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.

It’s 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.

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.

NEED FOR FORENSIC ACCOUNTANT:

The forensic accountants are used by attorneys in a broad range of activities

from expert witness testimony to special counsel’s investigation of fraud, to
bolster corporate governance. Forensic accountants become involved in a wide
range of investigations, spanning a myriad range of industries. These include:
o Criminal Investigations
o Shareholders and Partnership disputes
o Business Interruption/Other types of insurance claims
o Business/Employee fraud investigations
o Business economic losses

What makes a Forensic Accountant?

 Background in accounting
 Background in Information Systems
 Preference to certifications:
 CPA
 CIA
 CFE

Obtaining the credential involves passing a four-part, 10.5-hour exam that

covers law, financial transactions, investigation, criminology and ethics.

WHAT CHARACTERISTICS SHOULD A FORENSIC

ACCOUNTANT POSSESS?

A capable Forensic Accountant should have the following characteristics:

• curiosity;
• persistence;
• creativity;
• discretion;
• organization;
• confidence;
• Sound professional judgement.

A Forensic Accountant must be open to consider all alternatives, scrutinize the

fine details and at the same time see the big picture. In addition, a Forensic
Accountant must be able to listen effectively and communicate clearly and
concisely.
FRAUD:

Fraud is an intentional misrepresentation of a material point or issue on which

a victim relies.This reliance usually results in one or more victims suffering
damages.

TYPES OF FRAUD:

• OCCUPATIONAL
– Financial statement schemes
– Asset misappropriation (e.g., cash theft, fraudulent disbursements,
inventory theft)
– Bribery and corruption
– Intellectual property

• OTHER FRAUDS
– Financial institution
– Check and credit card fraud
– Insurance fraud
– Health care fraud
– Bankruptcy fraud
– Tax fraud
– Securities fraud
– Money laundering
– Consumer fraud
– Computer and Internet fraud
– Governmental fraud

Examples of Fraud:
Financial Statement Schemes:

A publicly-traded company engaged in sham transactions for more than seven

years by using several shell companies. The money transferred to the shell
companies as payments for assets were returned as payments on accounts
receivable. The company’s assets were inflated by as much as $80 million

ASSET MISAPPROPRIATION:

A CEO conspired with a former employee to sell a building to a company

owned by the CEO’s employer. The building was sold for $1.2 million more
than it had been purchased by the former employee. All transactions occurred
on the same day.

STARS OF INDIAN FRAUDS:

Harshad Mehta: Loss caused to the State Bank of India was more than
Rs.5.5 Billions.

Ketan Parekh: Loss caused by KetanParekh to Bank of India was Rs. 1.3
Billion

Sanjay Seth: Home Trade scam Amounted to Rs. 6 Billions

THE FRAUD TRIANGLE:

Perceived pressure, perceived opportunities, and rationalization

Forensic accounting relies on the Fraud Triangle to find weak points in

business processes and identify possible suspects in cases of fraud. It consists
of three core concepts that together create a situation ripe for fraud; incentive,
opportunity and rationalization. People must have the incentive and
opportunity to commit financial fraud as well as the ability to justify it. Recent
analysis has suggested adding a fourth concept to make a diamond: capability.
Just because someone has the opportunity or incentive to steal, it doesn't mean
that they have the capability to do so. For example, if someone doesn't
understand how to do journal or ledger entries, they wouldn't know how to
manipulate the numbers no matter what the incentive or opportunity.

STATISTICS RELATED TO FRAUDS IN INDIA:

Bank Frauds: Reserve Bank of India – Rs.600.16 Crores

Occupational Frauds: India forensic

Research Foundation – Rs.40Billion

Corruption in India: Transparency

International - India ranks 88th amongst the 158 countries surveyed in the year
2005.

Cyber Frauds in India – NCRCC – Rs.14 crores lost in cyber frauds in 2002-
03.

INDUSTRY WISE COMPOSITION OF FORENSIC

ACCOUNTANTS IN INDIA:

 Self employed 19%

 Government employees 5%
 Software companies 12%
 Lancers network 2%
 Hill and associates 2%
 EXL 2%
 Banks 6%
 HP 2%
 Big4 16%
 Others 34%

PERCIVED PRESSURE:
Employees, managers, and owners can feel pressure to commit fraud as a
result of

 Living beyond means

 High personal debts
 Unexpected financial needs
 Expensive vices
 Family-imposed pressures

PERCIVED OPPORTUNITIES:

Opportunities to commit fraud exist when levels of trust in an organization are

reached or when controls are weak.

 Inappropriate segregation of duties

 Ineffective supervision
 Transaction authorization not required
 Lack of physical controls
 Lack of adequate audit trail

RATIONALIZATION:

Individuals usually don’t commit fraud unless they can justify their actions in
relation to their own code of ethics.

 Feeling underpaid or overworked

 Desire to seek revenge
 Belief that taking the assets is a loan
 Belief they are helping others (family, employees)

HOW DO FORENSIC ACCOUNTANTS SEARCH FOR

FRAUD?
 • PROACTIVE FRAUD DETECTION:

Inductive approaches--

Use of Data-mining software

Digital analysis of company data

Deductive approaches--Determine what kinds of frauds can occur.

Search for symptoms of these frauds.

• REACTIVE FRAUD DETECTION:

Fraud accountants are often engaged after someone in the entity suspects that
fraud has been committed. Usually the area in which fraud has been committed
is known. Often, the entire area is examined.

EVIDENCE CATEGORIES:
1. Testimonial Evidence –
2. Documentary Evidence - Documentary evidence is
any evidence introduced at a trial in the form of documents. Although this
term is most widely understood to mean writings on paper (such as an invoice,
a contract or a will), the term actually include any media by which information
can be preserved. Photographs, tape recordings, films, and printed emails are
all forms of documentary evidence.
3. Physical Evidence - Physical evidence is any evidence introduced in
a trial in the form of a material object, intended to prove a fact in issue based
on its demonstrable physical characteristics. Physical evidence can
conceivably include all or part of any object

Examples include the written contract, the defective part or defective

product, the murder weapon, the gloves used by an alleged murderer.

Trace evidence, such as fingerprints and firearm residue, is also a type of real
evidence. Real evidence is usually reported upon by an expert witness with
appropriate qualifications to give an opinion. This normally means a forensic
scientism or one qualified in forensic engineering.

In a murder trial for example (or a civil trial for assault), the physical evidence
might include biological evidence such as DNA left by the attacker on the
victim's body, the body itself, the weapon used, pieces of carpet spattered
with blood, or casts of footprints or tire prints found at the scene of the crime.

4. PERSONAL OBSERVATION:

INDIAN SCENARIO:

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, Sathyam scandal - 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.
 It’s 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.

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.

BPO INDUSTRY:

With such a massive growth in the industry, incidents of fraud were bound
to occur and the industry has been hit by some serious fraud charges in recent
years, because of which it has been under the scanner for some time now.

BPO employees have been accused of selling personal and confidential

financial information of UK citizens to those willing to pay a price. There have
been instances of employees selling bank account and credit card details of
customers and even sharing of personal details like phone numbers etc.
 Yet the industry doesn't even have a definition as to what constitutes a
fraud. As per the India forensic Consultancy Service (ICS) survey, "most call
centre employees would treat frauds just like any other complaint."

"Fraud means that social security numbers should not be noted but I have
seen many employees noting it; even our boss notes them down sometimes, so
to whom we are supposed to report the fraud,” a BPO employee was quoted as
saying in the survey.

CONCLUSION:

The importance of the forensic accountant’s role in the detection of fraud is

continuously growing. Armed with combination of skills, these financial
detectives are today important assets to modern legal teams. In the backdrop of
increasing levels of frauds, the demand for forensic accountants is bound to
substantially increase in the future.