What Is Forensic Audit?
Forensic Audit is an examination of evidence regarding an assertion to define its correspondence to established criteria carried out in a manner suitable to the court. For example, a forensic audit of sales records to determine the quantum of rent owing under a lease agreement, which is the subject of litigation.
What Is Forensic Accounting?
Forensic accounting is defined as "the application of investigative and analytical skills for the purpose of resolving financial issues in a manner that meets standards required by courts of law. Forensic accountants apply special skills in accounting, auditing, finance, quantitative methods, certain areas of the law, research and investigative skills to collect, analyze and evaluate evidential matter and to interpret and communicate findings.
The two major aspects within forensic accounting practices are:
1. Litigation support services. A forensic accounting expert measures the damages experienced by the parties implicated in legal disputes and can aid in settling conflicts, even before it reaches the courtroom. In the event that a conflict reaches the courtroom, the forensic accounting professional could give evidence as an expert witness.
2. Investigative/fact-finding services. A forensic accountant must determine whether illegal matters such as employee felony, securities embezzlement (including tampering and distortion of financial accounts), identity theft and insurance racket have taken place.
The scope of forensic accounting is to:
1. Look for evidence of unusual development in the accounting and financial systems.
2. Design accounting processes for verifying important premises and data. A forensic accounting orientation also calls for skills in identifying possible fraud.
3. Perform audit type processes on a routine schedule in order to reduce transaction processing risks.
4. Cover a broad range of businesses and locations that require customary or continuous surveillance of all transaction processing systems.
Forensic Accounting in India
With the impending use of Systems we are becoming completely dependent on that. With more and more use of systems frauds are happening at an alarming rate. Moreover, if you would look up RBI is thinking to set up a bad bank for bad loans since there has been increasing numbers of bad loans which warrant a forensic audit.
Scope in India:
1. RBI Red Flagged Accounts needs forensic, incoming period RBI may make it compulsory for advances above a certain threshold.
2. Serious Fraud Investigations Office set up under the Ministry of Corporate Affairs had many cases reported for fraud waiting to be investigated.
3. Economic Offences Wings also require help in Forensics.
4. Big Multi-National Companies have many incidences of internal fraud being reported which warrants an investigation.
5. Also in case of mergers Forensic Investigation is conducted as a part of due diligence.
6. The growing list of online criminal offences
7. Breakdown of regulators to trace and detect cyber-security frauds
8. The long chain of co-operative banks going bust
9. Cyber Forensics
Forensic Accountants: Scope of work
Although the focus is fundamentally on accounting concerns, the function of a forensic accountant may also cover a more generic investigation including the collection of evidence.
Almost every accounting firm in the country today has forensic accounting sections. Within these sections, there may be sub-differentiation; for instance, some forensic accounting experts may specialize in insurance applications, personal injury declarations, fraudulence, construction or royalty audits.
Forensic accountants may also offer their services in retrieving profits from crime and in relation to appropriation proceedings relevant to definite or assumed proceeds of crime or dubious transfer of funds.
Opportunities for Chartered accountants
The menace of fraud threatening the corporate and business world provides tremendous professional opportunities for chartered accountants and auditors. As a skilled accountant, they have the expertise to understand and tackle accounting manipulations. As system consultants they can provide valuable assistance in detecting shortcomings in accounting systems. As auditors they can identify lapses of internal control which leads to latent frauds and errors. As forensic accountants, they provide services in:
1. Investigating and analyzing financial evidence
2. Developing or assisting in development of specialized software for forensic accounting
3. Assisting in legal proceeding as expert witness.
4. Identifying substance over form
5. Preventing risk by making recommendations to avoid future lapses, fraud as a result of professional negligence
6. Preventing fraud by employees
7. Investing crimes, involving money laundering, kick-backs and misuse of public funds
8. Insurance claims – e.g. to assist in assessing loss for loss of profit profiles.
9. Arbitration, mediation and other such forms of alternative dispute resolution
10. Engagement by – Lawyers, Police Forces, Insurance Companies, Government/Regulatory Agencies, Banks, Courts and Business Community
11. Media as part of investigative journalism.
Forensic accountants utilize an understanding of economic theories, business information, financial reporting systems, accounting and auditing standards and procedures, data management & electronic discovery, data analysis techniques for fraud detection, 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.
Disclaimer: The above should be considered as broad guidance and not a considered opinion as fact. The author can be reached at cashakitsharma@gmail.com
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