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Forensic Accounting [Submitted by Mr. Ankur Tuteja, November 21, 2007 TABLE OF CONTENTS 1.
Introduction and Background 1. Introduction and Background: The term, Forensic Accounting was coined by Maurice Paulobet in 1946. Worldwide, Sherlock Holmes is considered to be the first forensic accountant. However, in India, Kautilya was the first person to mention the famous forty ways of embezzlement in his book Arthashastra during the ancient times. He was the first economist, who openly recognized the need of the forensic accountants. Similarly, Birbal was the Scholar in the time of King Akbar. He used various tricks to investigate various crimes. Some of his stories give the fraud examiner a brief idea about the Litmus test of investigation. Now in 21st century, Forensic accounting has come into limelight due to rapid increase in financial frauds and white-collar crimes. Fraud was something the internal or external auditors were supposed to guard against through their periodic audits. Now, the accountants know that auditors can only check for the compliance of a company's 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'. 2. What is Forensic Accounting? Forensic Accounting is a simply analysis of evidences. Forensic accounting is the specialty practice area of accounting that describes engagements, which result from real or anticipated litigation. The word forensic accounting can be divided into two parts -
According to American Institute of Certified Public Accountants (AICPA): " Forensic accounting is the application of accounting principles, theories and disciplines to facts or hypothesis at issues in a legal dispute and encompasses every branch of accounting knowledge." To make it simple, the integration of
There are two major components of Forensic accounting:
Forensic Accountant "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. The traits of the forensic Accountants could be compared to well bake Pizza:
A perfect combination of the pizza base, cheese spread and good toppings makes the pizza delicious and Forensic accountant perfect. 3. What does a Forensic Accountant do? A Forensic Accountant is often retained to analyze, interpret, summarize and present complex financial and business related issues in a manner, which is both understandable and properly supported. He is trained to look beyond numbers and deal with the business realities of the situation. A Forensic Accountant is often involved in the following:
As mentioned earlier a Forensic Accountant can be of assistance is two ways: Investigative Accounting
Litigation Support
Attendance at trial to hear the testimony of the opposing expert and to provide assistance with cross-examination. 4. What types of assignments does a Forensic Accountant perform? Forensic Accountants become involved in a wide range of investigations, spanning many different industries. The practical and in-depth analysis that a Forensic Accountant will bring to a case helps uncover trends that bring to light the relevant issues. Forensic accountants are trained to look beyond numbers and deal with the business like situation. 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. Detailed below are various areas in which a Forensic Accountant will often become involved.
Other areas include:
In the nutshell, the following services can be provided by a forensic accountant: quantifying the impact of lost earnings, such as construction delays, stolen trade secrets, insurance disputes, damage/loss estimates, malpractice claims, employee theft, loss of profits, financial solvency reports, disturbance damages, loss of goodwill, compensable losses suffered in expropriation determination, assessment of the potential business compensation costs, and consultation on business defalcation minimization. 5. What is a typical approach to Forensic Accounting assignment? Each forensic accounting assignment is unique. Accordingly, the actual approach adopted and the procedures performed will be specific to it. However, in general, many Forensic Accounting assignments will include the steps detailed below.
6. Who retains a Forensic accountant? The following groups often retain forensic Accountants:
7. What characteristics/skills should Forensic Accountant posses? 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. The major skills can be divided in to two: I. Core skills (specialized skills and knowledge). I. Core skills:
II. Non-core skills: includes, but are not limited to
In addition to personal characteristics accountants needs other requirement i.e. a professional qualification or a certificate, 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. 8. What is the presence of Forensic Accounting in India? As mentioned above Indian chapter of Association of Certified Fraud Examiners (ACFE) offers courses in India but they are based on laws prevalent in US. Other than this Indiaforensic is the only formal body that provides formal education about forensic accounting in India. Indiaforensic is however not affiliated to any of the Universities. Indiaforensic offers three types of programs:
In India Serious Fraud Investigation Office (SFIO) is the landmark in creation of Forensic Accountants. SFIO is the dedicated division of the Department of Company affairs, which looks into the frauds that involves the violations of multiple laws such as Income Tax, FEMA and RBI Act etc. SFIO recognize CFE as the designation for the purpose of employment and empanelment. Other than SFIO there are few more agencies that are dedicated to combating frauds in India such as Central Bureau of Investigation (CBI), Central Vigilance Commission (CVC). CBI has specialized wing to deal with financial frauds called as Economic offences wing. CVC handles the crucial part of the occupational frauds ie. Corruption. It also helps in resolving the bank fraud cases. 9. Why Chartered Accountants should enter in to Forensic Accounting? 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
A large global accounting firm believes the market is sufficiently large to support 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. 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 "niche" consulting. While the forensic accounting and auditing practice had commenced in the US as early as 1995, the seed of this specialization 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 "best-equipped" professionals to perform such services. 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.
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