OBJECTIVES OF WRITING THIS ARTICLE: Forensic accounting(F.A.) has come into limelight attributable to speedy improve in monetary frauds and white-collar crimes. But it’s largely untrodden space in India.The integration of accounting, auditing and investigative expertise creates the speciality know as F.A.The alternatives for the Forensic Accountants are rising quick;they’re being engaged in public apply and are being employed by insurance coverage firms, banks, police forces, authorities businesses and many others.This article seeks to look at the which means and nature, actions and companies rendered, core information and private expertise required for forensic accounting as a specialised subject in accountancy occupation. Indeed there’s a future in F.A. as a separate area of interest consulting.
The lack of respect and perception in India’s legislation enforcement businesses and the speed at which white-collar crimes have elevated has prompted the event of Forensic Accounting in India. The fraud detecting businesses appears to lack time and devotion wanted for detecting and prevention of errors and fraud. According to a massive world accounting agency, the market is sufficiently large enough to keep up an unit devoted solely in direction of “forensic accounting”. Many massive in addition to small accounting companies in addition to the tiny companies have inculcated or relatively developed separate forensic accounting departments.
We have been of the assumption that detection and prevention of frauds or white-collar crimes is a part of standard accounting perform. It was thought that the frauds, each inner in addition to exterior has be to detected by the auditors via their periodic audit. Now it’s crystal clear that auditors can solely test for the compliance of a firm’s books to usually accepted accounting ideas, auditing requirements and firm insurance policies. Hence the necessity was felt to detect the frauds in firms which might be suspected to be engaged in fraudulent transactions. This subject of accounting is called “forensic accounting”.
The litmus check of investigation, first launched by the ever nice Sherlock-Homes(thought of by many as the daddy of Forensic Accounting) is maybe the primary ever utility of forensic accounting. Though, the contribution of the opposite few nice historians to the sphere of forensic accounting can’t be missed. They used varied methods to research varied crimes.
F.A. is a specialised a space of accounting apply that describes engagements which end result from precise or anticipated disputes or litigation. The phrase “forensic” means “suitable for use in court”. The forensic accountants have to bear in mind this assertion whereas they should work or chalk out their programme. The F.A. work is tailor made in keeping with the scenario and wish. The gathering of data and evidences is finished in keeping with the necessity and scenario. We can say, it’s custom-made in keeping with the scenario. The forensic-accountants give skilled proof on the final trial. All the trendy medium-sized in addition to the big-sized accounting companies have specialised forensic accounting departments. Within these companies there could also be specialised forensic accounting departments. Within these teams their could also be additional sub-specializations. Various sub-specializations embrace insurance coverage claims, private harm claims, fraud detection, development or royalty audits. Nearly 40 % of the highest 100 US accounting companies are increasing their forensic and fraud companies, in keeping with Accounting Today. Now if we think about this information as important then we are able to say that the whole contribution of forensic accounting to the whole income of the C.A. companies can be extremely important within the years to return. Under rising cases of frauds and litigation and flourishing companies these companies are thought of to be very important as they’re rendered at a very aggressive worth.
The forensic accountants make the most of the varied data relating the enterprise, makes use of monetary reporting techniques, varied accounting and auditing requirements and procedures, investigative strategies and litigation processes and process to carry out their work. By appearing as advisors to audit committees and helping in funding analyst analysis, they’re enjoying extra “proactive” threat discount roles.This is feasible by designing and performing prolonged procedures as a part of the statutory audit. The goals of such an accounting embrace measurement of losses attributable to an auditor attributable to his negligence, to look into the matter whether or not their has been any embezzlement of money, the quantity, necessity of felony proceedings, computation of asset values in a divorced continuing.
The major strategy strategy of forensic accounting is explanatory evaluation(trigger and impact)of the phenomena-together with the invention of deception(if any), and its results -introduced into an accounting system subject. The major methodology employed by the forensic accountants is the verification of the target. They are educated to cope with actual world enterprise and do have the ample experience to look past(behind) the numbers. The scope of the forensic accountants are rising at a speedy tempo. The improve of their work alternatives have been accelerated because of the fall of the Enron company and the collapse of the American Twin Towers.
This has led to extend within the demand for American forensic accountants. So as far India is worried, formation of Serious Fraud Investigation Office(SIFO) is a landmark creation as far as forensic accountants are involved. Failure of regulators to trace safety scams, growing cyber crimes, chain of cooperative banks bursting -all level to the ever growing want for forensic accountants. Our understanding of the necessity for forensic accountants is immaterial right here. In India because of the rising variety of frauds the necessity for forensic accountants is ever growing. The regulatory and administrative businesses will put stress for higher demand of forensic practices. This has been initiated because of the altering nature of Indian and International accounting.Auditing and assurance requirements additionally affirm this. A change within the curriculum may be initiated if the written exams and sensible industrial coaching are boosted to indicate the “new knowledge base and skill-set” required by the skilled accountants within the new period. It is subsequently really useful that the “forensic accounting and auditing” be launched as a paper within the varied skilled examinations performed by the varied accounting our bodies in India. Unfortunately forensic accounting is essentially an unexplored space so far as India is worried. The chartered Accountants(CAs) cope with such instances in an irregular vogue. In the western counter-half(nations), the Lawyers, police, insurance coverage firms, authorities and regulatory our bodies, banks, courts and enterprise communities are more and more using the companies of the forensic accountants.The accountants and the auditors should have the talents and experience to enterprise into the rising subject of forensic accounting.
What Is Forensic Accounting? The rising wants of companies has modified the definition of forensic accounting. As per Bologna and Indquist, “the application of financial skills and an investigative mentality to unresolved issues, conducted within the context of rules of evidence.It is a new emerging field that encompasses financial expertise, fraud knowledge, and a sound knowledge and understanding of business reality and the working of the legal system.”It signifies that the forensic accounting must be expert not solely in monetary accounting but additionally inner management techniques, the authorized issues, different institutional necessities, investigative mix of thoughts and interpersonal expertise.
According to AICPA: “Forensic accounting is the application of accounting principles, theories, and discipline to facts or hypotheses at issues in a legal dispute and encompasses every branch of accounting knowledge: ‘ Similarly, forensic accounting is defined by Horty as:
“The science that offers with the relation and utility of finance, accounting, tax and auditing information to investigate, examine, inquire, check and look at issues in civil legislation, felony legislation and jurisprudence in an try and get hold of the reality from which to render an skilled opinion.”
In simple words, forensic accounting includes the use of accounting, auditing as well as investigative skills to assist in legal matters.It comprises of two major components: litigation services, that recognizes the role of an accountant as an expert consultant and investigative services, that uses a forensic accountant, s skills and may require possible court-room testimony.
Investigation of theft and defalcation of corporate and individual assets are part of legal matters.They use their education as well as experience to discuss the facts, patterns of the theft or misappropriation.Business accounting systems are reviewed by the forensic accountants.They suggest ways and means to solve and improve the internal control and internal accounting system.This is adopted to prevent theft and fraud. Because of their expert knowledge and educational background and experience their(forensic accountants) work is elevated to a new height.
Forensic accountants do not contest in cases.They act as fact finding devices, try trt to seek the real truth from the hidden facts.They conduct their work in an unbiased and objective manner.They need legal knowledge, expertise, training and experience to perform their work in an effective and real manner.Extensive knowledge in the field of commerce, legal, accounting as well an investigative blend of mind is needed to perform the work in a proper fashion.Expertise in litigation support and testimony in courts of law are also prerequisites of the forensic accountants.This is due to the fact that their work would many times be used in a court of law.The valuation of damages due to criminal and civil wrong-doings need to be done with perfection and for that reason knowledge of business valuation theory is the most essential.
What exactly do the Forensic Accountants perform? Answer: They are trained to deal with real life business situations and are trained to look beyond the numbers.
Analysis, interpretation and summarization of complex financial and business related issues are prominent characteristics of this accounting/auditing profession. Familiarity with legal concepts and procedures is a must.Insurance companies, public practice, banks, police forces and government agencies are major employers of forensic accountants.
The various field of work encompassing the arena of a forensic accountant can be stated in points format as follows:
1) Financial evidence investigation and analysis.
2) Development of computerized software to help in the analysis and presentation of financial evidence.
3) Sharing their findings in the form of reports, slide shows or exhibits and documents collected.
4) To support trial evidence they prepare visual slides, assist in legal proceedings, including testifying in courts as an expert witness.
If we want to say or rather point out the role performed by the forensic accountants in a nutshell, we can say as follows:
Measurement or to quantify the impact of lost earnings. Such as construction delays, stolen trade secrets, insurance disputes, damage/loss estimates, malpractice claims, employee theft, loss of profit, financial solvency reports, disturbance damages, loss of goodwill, compensation losses suffered in expropriation determination, assessment of the potential business compensation costs and providing consultation on business defalcation minimization. Lease default damages, breach of contract, business interruptions, breaches of shareholders and partnership agreements, reconstruction of accounting records,
Investigation of misappropriation, assistance in establishing ownership and division of assets, commercial damages, professional negligence cases, partnership disputes, expert evidence, fair value or fair market value and personal injury damages are included in commercial damages. Tax advocacy, compliance and review of financial statements, tax reporting and tax planning in such areas as income as estate matters are included in tax matters. Analysis, interpretation, summarization, presentation of complex financial and issues relating to the business for investigation is the role of a forensic accountant.
They carry out investigative accounting and provide litigation support.
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 activities:
Where the employees are caught to have committed fraud the forensic accountant tries to locate any assets created by them out of the funds defalcated, then try interrogate them and try 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 are considered in preparing and presentation as evidence.
3) Outgoing Partner’s settlement:
If the outgoing partner is not happy about his settlement he can employ a forensic accountant who will correctly assess his dues(assets) as well as his liabilities correctly.
4)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.
5) 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.
6) Facilitating settlement regarding motor vehicle accident: As the forensic accountant is well acquainted with intricacies of laws relating to motor vehicles, and other relevant laws in force, his services become indispensable in measuring economic loss when a vehicle meets with an accident.
7) 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.
8) 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.
9) 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.
Core Knowledge Of Forensic Accountants:
A forensic accountant is expected to be a specialist in accounting and financial systems. Yet, as companies continue to grow in size and complexity, uncovering fraud requires a forensic accountant to become proficient in an ever- increasing number of professional skills and competencies. Here are some of the broad areas of useful expertise for a forensic accountant:
” An in-depth information of economic statements and the power to critically analyse them. These expertise assist forensic accountants to uncover irregular patterns in accounting data and recognise their supply.
” A thorough understanding of fraud schemes, including but not limited to asset misappropriations, money laundering, bribery, and corruption.
” The means to understand the interior management techniques of companies, and to arrange a management system that assesses dangers, achieves administration goals, informs workers of their management tasks, and screens the standard of the programme in order that corrections and modifications may be made.
” Proficiency in computer and knowledge of network systems. These skills help forensic accountants to conduct investigations in the area of e-banking and computerised accounting systems.
” Knowledge of psychology with the intention to perceive the impulses behind felony behaviour and to arrange fraud prevention programmes that encourage and encourage workers.
” Interpersonal and communication skills, which aid in disseminating information about the company’s ethical policies and help forensic accountants to conduct interviews and obtain crucially needed information.
” Thorough information of firm.s governance insurance policies and the legal guidelines that regulate these insurance policies.
” Command of criminal and civil law, as well as, of the legal system and court procedures.
Personal Skills Required:
So what does it take to become a forensic accountant? In addition to the specialised knowledge about the techniques of finding out the frauds, one needs patience and an analytical mindset. One has to look beyond the numbers and grasp the substance of the situation. There is a need for the same basic accounting skills that it takes to become a good auditor plus the ability to pay attention to the smallest detail, analyse data thoroughly, think creatively, possess common business sense, be proficient with a computer, and have excellent communication skills. A “sixth”sense that can be used to reconstruct details of past accounting transactions is also beneficial. A photographic memory helps when trying to visualise and reconstruct these past events. The forensic accountant also needs the ability to maintain his composure when detailing these events on the witness stand. Finally, a forensic accountant should be insensitive to personal attacks on his professional credibility. A fraud accountant (as forensic accountants are sometimes called) should also observe and listen carefully. By this, you can improve your ability to detect lies whether they involve fraud or not. This is so because”not all liars are fraudsters, however all fraudsters are liars”(Wells).
According to a forensic accounting expert, “the traits of a forensic accountant might be in comparison with a nicely-baked pizza. The base of forensic accounting is accounting information. Size and the extent of baking determine the standard of the pizza. A center layer is a dispersed information of auditing, inner controls, threat evaluation and fraud detection. It is just like the unfold of the cheese in pizza. The toppings of this pizza space fundamental understanding of the authorized atmosphere. The authorized atmosphere is crucial with the intention to help the litigations. The cherry on the toppings of the pizza is a robust set of communication expertise, each written and oral. It is simply the beautification half. Perfect mixture of the pizza base, cheese unfold and good toppings makes the pizza scrumptious and the of firm’s the legal guidelines that Forensic Auditor perfects. It is a mixture that will likely be in demand for so long as human nature exists.”
In addition to these personal characteristics, accountants must meet several additional requirements to become successful forensic accountants, say a Certification, acknowledging his competence. One can learn forensic accounting by obtaining a diploma given by Association of Certified Fraud Examiners (ACFE) in the US. Indian chapter of ACFE offers the course based on the white-collared crimes prevalent in US, based on their laws. However, there is no formal body that provides formal education of the frauds in India. Besides the formal certificate, one can deepen one’s knowledge and sharpen one’s skills in forensic accounting by undergoing training under an experienced forensic accountant, participating in various international conferences, reading relevant journals, books and other literature on forensic accounting.
To combat the frauds effectively one needs the active support of government at every stage. There are three-four such agencies in India, which are dedicated to the mission of combating frauds. Serious Fraud Office looks into violations of Income Tax, FEMA, RBI Act, etc.; CBI (Economic Office Wing) deals with big financial frauds; Central Vigilance Commission deals with corruption. These are the major government agencies that combat frauds of different types. Unfortunately, there is no specialised education provided by any of the Universities in the country. Recently, TCS has also come out with software to combat money laundering and Subex Systems have designed software to combat the telecom frauds. Thus, combating the frauds with software has started picking up in India, with few big companies like ACL and IDEA, joining the race.
The Need For Niche Consulting:
The CPA Vision Statement states: “The CPAs are trusted professionals who allow individuals and organisations to form their future. Combining perception with integrity, CPAs ship worth by: (a) speaking the whole image with readability and objectivity, (b) translating corn plex data into crucial information, (c) anticipating and creating alternatives, and (d) creating pathways that rework imaginative and prescient into reality1 It displays the development in direction of offering a broader vary of assurance companies. However, latest company accounting scandals and the resultant outcry for transparency and honesty in reporting have given rise to 2 disparate but logical outcomes. First, forensic accounting expertise have turn into essential in untangling the sophisticated accounting manoeuvres which have obfuscated monetary statements. Second, public demand for change and subsequent regulatory motion has remodeled company governance. Increasingly, firm officers and administrators are beneath moral and authorized scrutiny. Both traits have the widespread purpose of responsibly addressing buyers’ issues in regards to the monetary reporting system. Indeed, there’s a future in forensic accounting as a separate”niche” consulting space in India. The have to specialise, in any other case generally known as Niche Consulting, is crucial to practising accountants as a result of the quick-paced developments in enterprise thereby demand specialised information and expertise. While a majority of CAs have glorious analytical expertise, they should acknowledge that ‘forensic’ companies require ‘specialised’ coaching in addition to actual-life ‘sensible’ company expertise. There is a want for specialised data, not simply audit and tax service. What shoppers appear to need are individuals with distinctive units of expertise and experiences. With the maturing of the audit enterprise, and the speedy improvement of expertise that makes current companies low price and low-cost, it seems that it’s the proper time now to accumulate these distinctive expertise. To assist practitioners transfer into ‘area of interest’ consulting, some skilled organisations within the US have concluded that: “Future success for the profession depends, in part, on how the public perceives the ability of CPAs. New efforts in consulting, specialisation and understanding global business practices and strategies are considered crucial. We go out into the niche market, examining our strengths first. We go where the action is, only then we know we can adequately service our clients and make money doing it.” One space the place ‘area of interest’ consulting is turning into the worldwide development is in “Forensic Accounting and Auditing’ But the major question facing the Indian accountancy profession is: Are we ready to plunge to where the challenging action is?
Forensic Accounting In India:
It is in an infancy state in India.It is still an untrodden area in India.But due to ever increasing cases of bank & cyber-frauds its growing importance cannot be denied.
One immediate landmark creation is “Forensic Research Foundation”.They provide support for investigation of fraud.They publish one bi-monthly journal named as “White Crimes”.It relates to forensic and economic crimes. Another international organization named as KPNG has set up investigation detection centre in India.. Networks Limited, a Delhi based organization, working in the similar field, they are also trying to innovate ways and means to detect financial irregularities and crimes in India.Serious Investigation Fraud Offices(SIFO), has been established in India for the same reason, i.e. detection and prevention of economic irregularities and crimes. The need for such bodies and the importance of Forensic Accountants have been highlighted by L.N.Roy Committee.Lenin Parekh Committee has also expressed the view that one “fraud detection committee”need to be established. The main aim of such boards should be to prevent the interest of the stakeholders.
Forensic accounting in India has come to limelight only recently due to rapid increase in white-collar crimes and the belief that our law enforcement agencies do not have sufficient expertise or the time needed to uncover frauds. A large global accounting firm believes the market is sufficiently large to support an independent unit devoted strictly to ‘forensic’ accounting. All of the larger accounting firms, as well as, many medium-sized and boutique firms have recently created forensic accounting departments.
Forensic accounting, in fact, integrates accounting, auditing, and investigative skills to conduct an examination into a company’s financial statements. Broad-based knowledge (within the themes listed above) is crucial to the success of entry-level forensic accountants. Because forensic accounting 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”area of interest” consulting.
While the forensic accounting and auditing practice had commenced in the US as early as ‘1995, the seed of this specialisation has yet to take off in India. Forensic accountants are only dealing with financial implications of the cases entrusted to them and not engaging in auditing exercise. On account of global competition, the accounting profession must convince the marketplace that it has the “greatest-outfitted” professionals to perform such services.
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 advisors to audit committees, and assisting in investment analyst research.
While majority of CAs have excellent analytical skills, they need to acknowledge that ‘forensic’ services require ‘specialised’ training as well as real-life ‘practical’ corporate experience.
1)Journal Of Forensic Accounting: Editor-In Chief: Crumbley D. Larry, Publisher: Inc.Edwards. R.T.
2)Journal Of The Chartered Accountant 2007, Pages: 1000-1010.Dr. Madan Bhasin, The Author is Head, Accounting Department, Mazoon College, Muscat, Sultanate Of Oman.
3)Referential Notes Of Prof. Dutta Kr. Uttam, Reader Deaprtment Of Commerce, Reader, University Of Burdwan.
4)Website access: http://www.wikipedia.com, accessed on 4th, February, 2008.