This article has been written by CA Partha Pratim Sen pursuing a Diploma in US Corporate Law for Company Secretaries and Chartered Accountants from LawSikho, and has been edited by Shashwat Kaushik.
It has been published by Rachit Garg.
Table of Contents
What is forensic accounting
Forensic accounting, also known as investigative accounting, is a specialised branch of accounting that combines accounting, auditing, and investigative skills to uncover financial crimes. Forensic accountants typically analyse financial data, looking for evidence of crimes. They normally work for insurance companies, financial institutions, and law enforcement agencies. These professionals can also testify in court as expert witnesses.
Who are forensic accountants
Frank John Wilson pioneered the techniques used in the field of forensic accounting today. Forensic accountants can be professionals from different backgrounds, such as accountants, auditors, and financial analysts. They can work for government agencies, law firms, accounting firms, or as independent consultants.
In terms of professional certification, there are several recognised designations for forensic accountants, including:
- Certified Forensic Accountant (CrFA)
- Certified Fraud Examiner (CFE)
- Forensic Certified Public Accountant (FCPA)
- Certified in Financial Forensics (CFF)
- Chartered Accountant with forensic accounting specialisation
These certifications require extensive training and education, as well as passing rigorous exams to demonstrate expertise in forensic accounting, fraud investigation, and litigation support.
In addition to their specialised training, forensic accountants must have strong analytical skills, attention to detail, and the ability to communicate complex financial information clearly and concisely. They need to have a strong understanding of legal and regulatory requirements and be able to work closely with lawyers and law enforcement officials to build cases for prosecution.
Application of forensic accounting
Forensic accounting has a wide range of applications in various industries and legal and regulatory matters, which are illustrated as follows:
- Forensic accountants can assist in the implementation of AML policies and procedures for organisations to help prevent money laundering and other financial crimes.
- Forensic accountants can help businesses determine the value of their assets, liabilities, and equity, which is important in mergers and acquisitions, bankruptcy proceedings, and other business transactions.
- Cybercrime and the growing list of online criminal offences require forensic investigation.
- Forensic accountants can also be hired to analyse financial records in divorce cases, including property division, spouse support, and child support. They can also help determine the value of assets and identify hidden assets.
- Economic Offence Wing often requires a forensic investigation.
- Forensic accountants can assist insurance companies in investigating fraudulent claims, including false claims for property damage, theft, and other losses.
- Forensic accountants are often required to investigate cases of fraud, including embezzlement, asset misappropriation, financial statement fraud, and bribery. They use accounting and auditing techniques to detect financial irregularities and collect evidence for legal proceedings.
- Forensic accountants can provide litigation support in civil and criminal cases, including preparing financial reports, calculating damages, and serving as expert witnesses.
- A forensic investigation is conducted as part of due diligence.
- Multinational companies have many instances of internal fraud being reported, which warrants investigation.
- RBI often flags accounts that require forensic investigation.
The Serious Fraud Investigation Office (SFIO), set up by the Ministry of Corporate Affairs, has reported many cases of fraud that warrant investigation. Overall, forensic accounting plays a critical role in identifying and preventing financial fraud and irregularities, and its applications continue to grow as the need for financial transparency and accountability increases.
Forensic accounting and investigation standards
In the current scenario, there is a lack of a standardised process related to forensic accounting and investigation. To address the void, the Institute of Chartered Accountants of India has embarked on a mission to develop the first-ever standards, namely Forensic Accounting and Investigation Standards. This move comes at a time when instances of forensic accounting and investigation assignments related to corporate and banking frauds are on the rise.
The statements and assertions issued by the Digital Accounting and Assurance Board (DAAB), which is under the Institute of Chartered Accountants of India, form the basis for the development of these standards.
These standards are principal-based and, when applied to unique situations and under specific circumstances, provide adequate scope for professional judgment. The exclusive nature of forensic assignments requires the application of forensic accounting, investigation skills, and the use of certain AI tools and software, and obviously, these would be engagement-specific.
Objective of Forensic Accounting and Investigation Standards (FAIS)
The objectives of Forensic Accounting and Investigation Standards (FAIS) as promulgated by ICAI are:
- FAIS seeks to provide the minimum standards for undertaking these engagements.
- The standard provides an indicative benchmark relating to service quality, and this is engagement-specific.
- The guidance from government agencies and regulators is incorporated into these standards so that one can develop an understanding of what should be expected from forensic accounting and investigation services.
- The standards, being principle-based provide adequate scope for professional judgement.
- These standards have laid down a minimum set of requirements every ICAI member is obligated to follow while conducting forensic accounting and investigation assignments.
Stakeholders or participants in FAIS
List of external stakeholders who have been contributory factors in developing these standards:
- Computer Emergency Response Team (CERT),
- Comptroller and Auditor General of India,
- Central Board of Direct Taxes,
- Central Board of Indirect Taxes and Customs,
- Central Bureau of Investigation,
- Data Security Council of India,
- Economic Offence Wing,
- Enforcement Directorate,
- Insolvency and Bankruptcy Board of India,
- Institute of Company Secretaries of India,
- Institute of Cost Accountants of India,
- Insurance Regulatory and Development Authority,
- Indian Bank’s Association,
- Ministry of Corporate Affairs,
- National Company Law Tribunal,
- National Bank for Agriculture and Rural Development,
- National Stock Exchange of India Ltd.,
- National Cyber Coordination Centre,
- National Crime Records Bureau,
- Reserve Bank of India,
- Securities and Exchange Board of India,
- Serious Fraud Investigation Office,
- Standing Conference of Public Enterprise, and
- Telecom Regulatory Authority of India
Global development in the area of forensic accounting and its importance
For several years, forensic accountants have played a pivotal role in assisting in lawsuit matters. Both forensic accounting and corporate intelligence skills are essential for any effective financial investigation to take place, whether related to a scam, swindle, misconduct, or any other unlawful activity. Until recently, forensic accountants used to be a part of the broad field of corporate advisory, mainly looking into niches like risk compliance and management consulting, but now forensic accountants are becoming more specialised by attaining skills and proficiency in different areas such as computer forensics, insolvency, valuation, asset tracing, identification, and recovery. In addition, many reputable institutions are now offering education and training in forensic accounting, whereby professionals and students are trained to decode and interpret evidence related to financial fraud.
With professional accountants like Chartered Accountants and Certified Public Accountants gradually gaining training and skill in forensic accounting, the scope of this field has gradually expanded over the past 10 to 15 years, requiring its practitioners to develop an expanded skill set in the fields of accounting, insolvency law, appraisal and communications, business intelligence, and fact-finding. With these specialisations, modern forensic accountants are becoming an essential, prominent, and sometimes indispensable part of the legal support team.
Overview of fraud and its pattern from 2022 onwards
Frauds tend to be of two types occupational fraud and computer-based occupational fraud. Frauds that are committed by stakeholder groups forming an integral part of the organisation, such as employees, managers, officers, or owners, to the detriment of the business are known as occupational fraud, and when these frauds are technology assisted or driven, they are called computer-based occupational fraud.
There has been a rising trend related to occupational fraud since the COVID-19 period because of the sudden shift to remote offices. With many employees working from less secured environments, the surge in electronic communication, disruption in regular work procedures, and unsupervised working environments combined have provided fertile breeding grounds for occupational fraud schemes and unscrupulous activities like creating fake signatures, requesting fraudulent payments, fabricating invoices, and manipulating accounting records. In addition to these internal threats, there are external threats as well, like cyber attacks of various sorts, the most common being phishing attempts, getting tricked into downloading malware, or unknowingly granting access to sensitive company information. The Corona virus has created a hurdle and has made it difficult for internal auditors to prevent, detect, and investigate fraud, mainly because of travel limitations, ongoing delays in communications, and a lack of access to evidence. In addition, there are three typical challenges associated with hiring remote workforces: interview challenges, a lack of adequate control, and a lack of oversight. The combination of these factors provides dreadful scope for fraud to occur and prosper.
The rise of occupational fraud has been evidenced in various publications, one of which is the recent Association of Certified Fraud Examiners (ACFE) 2022 Report. This report talks about the costs, methods, victims, and perpetrators of occupational fraud, all compiled from 2,110 real fraud cases investigated in 133 countries, resulting in a total loss of US$3.6 billion. These frauds are committed by individuals against their employers and have affected organizations in every region and industry across the globe.
These organisations have lost approximately 5% of their revenue each year to fraud, principally originating from asset misappropriation, corruption, and financial statement fraud.
Some most prevalent fraudulent schemes
- Asset misappropriation- This entails theft or misuse of company assets and is the most common, occurring in almost 86% of the cases.
- Financial statement fraud- This scheme involves the intentional overstating or understating of financial statements, as the case might be, to deceive the users of financial statements, various stakeholders, and the market at large. This type of fraud is less common..
- Corruption schemes- This involves dishonesty by people in positions of power, which includes bribery, kickbacks, and conflicts of interest. These schemes occurred in 50% of the cases reviewed.
In addition to these pandemic-related security issues, the surge in block chain technology and use of crypto currencies is becoming a dominant contributory factor, which is propelling the rise of fraud cases. In this dynamic and ever evolving digital landscape, crypto currencies are becoming the new vehicle for money laundering. According to the 2022 Report of the Association of Certified Fraud Examiners (ACFE), approximately 8% of all fraud cases now involve the use of crypto currencies.
Given that these occupational frauds are predictably on the rise and given the need to investigate these financial wrongs and unearth the myriad ways these financial crimes are conducted, we have to resort to forensic accounting or investigative accounting to fight back against these rampant crimes.
Importance of forensic accounting or investigative accounting as a tool to fight back rampant crimes
This massive amount of data arises from transactions emanating from several interrelated industries, such as telecommunications, marketing, entertainment, banking, financial services, and government cyber security, to name a few. Data analytics tools are used to analyse these data sets to uncover trends, patterns, and correlations, help make data-driven decisions, and reveal evidence of fraud. Although one of the biggest values of this “big data” is its ability to shed light on previously unseen insights, it becomes effectively useless if the investigators cannot easily understand it. This is where data analysis and other software come in handy. Visual database software can link, analyse, summarise, and illustrate the information collected by connecting seemingly incongruent mazes of data points and integrating them, which, once done, helps in determining the title of assets or identifying relationships between different entities and individuals.
Although evidence collected using big data solutions is of immense benefit, when this is analysed by forensic accounting investigators, the power of data analytics is further enhanced as it can lead to persuasive conclusions. It is the flawless blending of these two apparently different investigative approaches that can result in clear-cut success in most fraud investigations.
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