Forensic accounting: Opportunities in forensic

accounting

Chetan Dalal

WIRC of ICAI

Goa June 13, 2014

Disclaimer Whatever is presented in this presentation is for ACADEMIC

and DEMONSTRATION purposes ONLY. Any names, entities, organisations or any person referred to is purely for a better understanding and in no way does it mean that there is any implication or allegation of any fraud in, by or through any of them.

Agenda 1. Forensic Accounting and it's meaning and relevance

2. Some simple forensic tests which can be conveniently used in audits

3. Case studies on fraud detection and use of forensic accounting techniques

4. Opportunities for CAs in this field in the foreseeable future

1. Forensic Accounting

Its Meaning and relevance to Chartered Accountants

5

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.

Forensic Audit-

Technical definition-Wikipedia, the free encyclopedia

What distinguishes a forensic audit from a normal audit?

Audit relies on documentary evidence, whereas a forensic audit actually examines the reliability of documentary evidence itself

7 Forensic Audit is all about examination and collection of evidence admissible in a court of law. It utilizes the following skills, usually in the domain of CAs-

-Accounting-Auditing-Detective

What are the traits of a good forensic accountant?

1. Distrust the Obviousor Use Professional Skeptcism

2. 3D vision: Use multiple sources of information to get the truth- multi dimensional approach

3D Vision

ABC MULTIPLEX THEATRES LIMITED CASH RECEIPT : 24321 DATE: 26/7/01

Being: Cash collected for : Rs. Sale of tickets 52, 762 Sale of food and beverages - Other - Total Rs. 52, 762 Total tickets sold for morning show: 469@ Rs.125 Rs.58,625 Group Discount to ABC Charitable Inst @ 10 % Rs. 5,863 Net Cash Collection

Rs.52,762

Amount Rupees: Fifty two thousand seven hundred and sixty two only CASHIER: SUPERVISOR:

ABC MULTIPLEX THEATRES LIMITED CASH COLLECTION REPORT: DATE: 26/7/01 SHOW: Morning

Previous show's last ticket sold 10178 Current show's last ticket sold 10647 Total tickets sold @ Rs.125 469 Rs.58,625 Group Discount @ 10 % Rs. 5,863 Net Cash Collection

Rs.52,762

Denomination of Cash notes and coins collected:

Notes: 1000 500 100 252 Rs. 25,200 50 340 Rs. 17,000 20 10 Rs 200 10 875 Rs. 8,750 5 119 Rs. 595 2 1 Coins 5 201 Rs. 1,005 2 6 Rs. 12 1 50p 25p Total Rs Rs. 52,762

Relevance to Chartered Accountants Corporate Governance. CAs will need these Forensic Accounting

skillsets to support management in corporate governance matters In particular: addressing whistleblower complaints of corruption, abuse

and fraud Conducting investigative audits Providing support to Regulatory Bodies- like RBI, SEBI, NHB etc Providing expertise to Enforcement Agencies such as EOW, Police,

etc Providing assistance to Insurance, Life Insurance, Banks, PSUs, and

other similar entities Special requirements for tax authorities- Income Tax, Sales Tax,

Service Tax, etc Trusts and NGOs and Charitable Institutions Training and support services Research

2. Simple Forensic tests useful in fraud detection and audits

May of the fraud attacks can come through manipulations in

excel reports

Documents: eg Forgeries and

alterations

CASH ASSETS

Some Simple forensic tests to detect fraud and wrongdoing Use of Inverse logic and tests of reasonableness Hunting for secret reserves Documentary modifications, alterations, cancellations Hunt for duplicate or fictitious documents Simple tests for signature verification

A good forensic accountant constantly uses ‘inverse logic’ and tests of reasonableness to detect fraud

Inverse logic and what it means Tests of reasonableness

What is ‘inverse logic’ and how does it help.

Inverse logic can be very useful in inventory quantification and valuation

It can be useful in finding out correctness as explained below- Production against installed capacity - Travel expense against presence evidenced through swipe

cards

A list of impossibilities and absurdities can be compiled by auditors from experience and research to facilitate application in every future audit or investigation

How to check a signature forgery

Compare a document containing an original signature to one containing the suspicious signature, if possible, and take note of your initial impression. Usually, something about a forged signature will look odd

Same length. Measure the length, size and shape of both signatures. Bankersonline.com says that a person's signature remains the same length always, even if the handwriting changes. A forged signature may be longer or shorter than the original.

For example: Trojan horse fraud

A fraudster hides malicious activities within a process, record or activity

Just as soldiers were hidden and smuggled in thru a innocent looking wooden horse

Achilles Heel Fraud

Just as the invincible Achilles was defeated by attacking his only weak spot, his heel

AN intelligent fraudster spots even a microlevel tiny deficiency and attacks the weakest spot

3. Some Case studies in Fraud Detection

23Case: Simple vendor dataApparently nothing wrong

24Present data in different dimension

25Convert date into day of the week

26FILTER DATA IN DIFFERENT WAYS

Fraud: Someone called ‘Raju’ came on

Sundays to createCodes for fictitious vendors

Disaster situations: Causes or even effects of fraud

EARTHQUAKEfire

COMPUTER BREAKDOWN

ALWAYS EXAMINE SUCH SITUATIONS CAREFULLY

Nabbing a cheque writing fraudster using the Birbal approachConsider the following fraudulent cheque.. And presume that there are four suspects who could have stolen the cheque. Is there any way that you could identify the fraud cheque writer?

4. Opportunities in Forensic Accounting and Fraud Detection

Kinds of Assignments

General Consulting in risk management, corporate Governance, internal control systems to the corporate world

Fraud Investigations- general financial crimes and manipulations Fraud investigations- non financial Fraud detection- sniffing out possible fraud where suspected or reported Fraud Prevention Background checks- HR, Vendors, Customers Insurance Claims related specialised investigations- loss of stocks, profits Life Insurance Claims Bank related investigations- stocks, debtors, overall borrower related fraud Training- corporates Research

Expectations differ in various entitiesFor example- Police (EOW, Crime Branch etc), Detective Agencies- CBI, CID etc, RBI, SEBI, NHB, FMC etc usually approach CAs after the crime has been reported.

They usually need information on modus operandi, the culprits, quantification and evidence. In particular they want know the cash and fund flow route and position when the fraud was committed

In such situations there has to be strong investigation discipline, confidentiality, and documentation since the matter is likely to come up in courts.

Issues under the new Companies Act 2013- re offences under fraud, etc. A whole new world is going to open up for fraud investigators and forensic accountants

Expectations -Corporate investigations Modus operandi, culprits, quantification,

Information about the controls which have failed and prevention

Feedback of other connected crimes, suspected leakages, and suspects

How can one tap these opportunities?

1. Get ICAI FAFD certification – to get visibility.

2. Get international acreditation- CFE etc though not absolutely necessary.

3. Other steps to get visibility like:- Contribute articles in journals and newspapers- Attend, participate and eventually speak in conferences- Do research on fraud and Inform clients once in a fortnight

about things to be careful of and preventives- Empanel yourself with EOW, Police, SEBI, Insurance

Companies, Banks, RBI etc.