In this blog post, Oiswarjya Basu, of Calcutta University, Hazra Campus, pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyzes forensic accounting.

Forensic Accounting

“What the use of fingerprints was to the 19th century and DNA analysis was to the 20th, Forensic Accounting will be to the 21st century.”

-said Gordon Brown, former Chancellor of the Exchequer.

As the topic itself resonates, this Article shall deal with Forensic Accounting 101.

Here, it briefly traces the advent of the niche, gives a timeline-specific definition, discusses the profession and its objectives, along with the sphere within which the professionals are ought to operate, examines the different sectors the discipline has bled into and finally, establishes the reason why Forensic Accounting is rapidly becoming an absolute necessity in any given country.

 Forensic Accounting: Brief History

Forensic Accounting, as a concept, has been around for many years. However the phrase “Forensic Accounting” was not coined till 1946, when Maurice E. Peloubet, then a partner at Price Waterhouse, New York used the same in an essay titled “Forensic Accounting – Its Place in Today’s Economy”.

The origin of the discipline is often traced back as far as early 19th Century Scotland.[1] In fact, Sherlock Holmes was attributed to essentially be the first fictional character to be a Forensic Accountant. The practice then started proving its worth in times of wars such as the World War II, Algerian War, Vietnam War and so on.

Treasury Agents of the FBI jailed the infamous American mobster Al Capone on charges of Tax evasion after years of accumulating evidence against him through tools of Forensic Accounting.[2]

However, in India,

• Kautilya is known to have first openly discussed the importance of Forensic Accounting long before, through the preaching of checks and balances, audit etc. in his classic disquisition ‘Arthashastra’ (Science of Material Wealth) as means of curbing the famous forty ways of embezzlement, also propounded by him.[3]

• Similarly, Emperor Akbar’s trusted Scholar Birbal too had ingenious tricks up his sleeve to investigate into financial crimes in the state that closely mirrors today’s Forensic Accounting.[4]

In recent times, corporate scandals such as the ones that hit companies like Enron, Tyco and WorldCom, shook public trust and resulted in misappropriation in billions of dollars. Forensic Accounting had then broadened its horizon by being the key machinery into the investigation of these situations.[5]

The monumental collapse of World Trade Center’s twin towers on 9/11 had brought with it endless conspiracy theories and investigations into them have consequently increased the employability of western Forensic Accountants since.[6]

Ergo, it is quite established that with each passing day Forensic Accounting is more relevant than ever.

What is Forensic Accounting Today?

Merriam-Webster defines “Forensic” as “belonging to, used in, or suitable to courts of judicature or to public discussion and debate” and “Accounting” as “the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results”.

However, “Forensic Accounting”, as understood from but, not limited to the integration of the above-mentioned definitions, shall have a specialized meaning.

Bologna and Lindquist had defined Forensic Accounting as “the application of financial skills, and an investigative mentality to unresolved issues, conducted within the context of rules of evidence. As an emerging discipline, it encompasses financial expertise, fraud knowledge, and a sound knowledge and understanding of business reality and the working of the legal system.”

According to the American Institute of Certified Public Accountants (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.”

In simpler words, the integration of accounting, auditing and investigative skills creates the specialty known as Forensic Accounting.[7]

Need for Forensic Accounting

Given the day and age, there is no realm that is immune to dishonesty, fraudulence and oppression. Forensic Accounting challenges such acts and hence has penetrated various sectors that are infested with financial treachery. The need and demand for Forensic Accountants is increasing in the following areas[8]:

• Detection of Fraud by Employees Within an Organization

On speculations of misconduct of an employee, an organization may engage a Forensic Accountant to fish out the truth. They trace any fraud by going through the books and papers of the company as well as the activities of the employee. They also tactfully interview the accused and review evidence of assets created out of such fund embezzlement.

•  Criminal Investigation

Where fraud is already established and criminal proceedings are in line, a detailed report containing financial implications made by a Forensic Accountant is of unparalleled assistance to the Police and Law society.

•  Settlement For a Retiring Partner

If a retiring or otherwise outgoing partner of a firm complaint of an unjust settlement, he, with the help of a Forensic Accountant, can get assets and liabilities gauged properly and if need be, institute proceedings for resettlement.

• Cases Relating to Professional Negligence

Whenever due to the negligence of an employee, generally accepted standards of accounting and auditing are not complied with or an ethical code is breached, Forensic Accountants are called upon to quantify the extent of loss arising from such deficiency in service.

• Arbitration and Other forms of Dispute Settlement

Forensic Accountants are specially trained in alternative dispute resolution. They help the business community mend differences using tools of arbitration and mediation. Apart from that, they also help settle contract disputes, liability claims, intellectual property infringements, construction breaches etc.

Exclusive Read: Role of ADR in Mergers & Acquisition

• Settlement Regarding Motor Vehicle Accidents

The expertise of Forensic Accountants is useful in quantifying losses arising out of motor vehicle accidents. They are well acquainted with laws as a part of their curriculum.

• Settlement of Insurance Claims

Claims relating to – consequential loss, property loss, due to various risks, fidelity insurance are handled by a Forensic Accountant. They are also sought when policyholders wish to challenge settlement claims by insurance companies and accurately assess them as well.

• Settlement of Disputes Arising Out of Matrimony

Forensic Accountants indulge in the valuation of assets in matrimonial disputes and their function is limited to locating, tracing and evaluation of the same.

Forensic Accountants – Skills, Qualifications and Activities

As aptly put, the Forensic Accountant is the bloodhound of book-keeping.[9] With the steep growth in frauds, scandals and white-collar crimes as well as the outcry for accountability and transparency to establish good governance, Forensic Accountants fit the bill to help the cause and sniff out such criminal transactions.

• Primarily, Forensic Accountants are retained to analyze, interpret, summarize and present intricate financial issues in a court of law, in a manner that is both lucid and well supported by documentary evidence.

By virtue of their broad scope of work, they find employment in Multinational Corporations, Banks, Insurance Houses, Police Forces, Government Agencies and even Freelance.

• One who aspires to be a Forensic Accounting expert must start working towards an Accountancy degree in the Bachelors or Masters level. To expand their knowledge base, they may also pursue specialized certifications on Forensic Accounting and pass the Fraud examiner’s Exam.

Having experience in the Law sector regarding fraud schemes, money laundering strategies, risk assessment will also help immensely, besides honing personal attributes such as excellent communicative skills, understanding of criminal psychology etc.

• Lastly, proficiency in operating computers and other devices makes a significant addition to entry-level Accountants.

Functions of Forensic Accountants, inter alia, Are:

• Detection of fraud in a corporate environment.
• Investigating and analyzing evidence arising out of financial foul-play.
• Developing software in order to analyze such evidence and presenting in the appropriate Court/ Tribunal.
• Preparation of reports, exhibits and collections of documents.
• Assisting in legal proceedings that include testifying in courts, serving as expert witness and formulating visual aids to support trial evidence.

Keeping in mind their job description, some of the traits that a Forensic Accountant must possess are analytical aptitude, persistence and perseverance, orientation to minute details, a knack for finding loopholes, confidence, compliance to ethical codes and inquisitiveness, among others.

The crucial need to adhere to this strict pre-requisite skill-set makes Forensic Accounting a super-specialized and boutique arena.

Conclusion

Forensic Accounting in India is still vastly untrodden, rather ironically, given the persisting corruption in the country and the alarming need for honesty, accountability and transparency in the economy.

The situation in the West is different. Forensic Accounting became a globally accepted discipline as soon as the Serious Fraud Investigation Office (SFIO) was founded in America and continues to be a substantial medium of employment.

Although India might be behind the States in gaining a suitable environment for Forensic Accounting to thrive in, there is no lack of scope for it. In fact, the market is expected to be booming in the near future.

Whereas presently work of Forensic Accountants is limited to dealing with financial implications of the cases they are entrusted with and not engaging in auditing, they soon will be playing more proactive risk reduction roles against financial frauds and white-collar crimes.[10]

What do you think about the Vitality of Forensic Accounting? Drop a Comment & Share the Article.

References –

1 Messmer, M. (2004); The Forensic Accountant- The Sherlock Holmes of the Accounting World:https://www.questia.com/magazine/1G1-113646095/the-forensic-accountant-the-sherlock-holmes-of-the
2Supra Note 1
3Dr. Bhasin, M. L. (2007); Forensic Accounting- A new paradigm for Niche Consulting: http://resource.cdn.icai.org/97231000-1010.pdf

4Supra Note 3
5Ulucan, F. and Pamukcu, A. (2012); Fraud Detection and Forensic Accounting: http://www.springer.com/cda/content/document/cda_downloaddocument/9783642208256-c1.pdf?SGWID=0-0-45-1326442-p174119761
6 Supra Note 3
7 Singh, P. (2012); Forensic Accounting- Concept in India; International Journal of Trade and Commerce; Volume 1, No. 1, pp. 100-105 ISSN-2277-5811.
8Supra Note 7
9Supra Note 3
10 Tandon, B. N. (1991); Practical Auditing; S. Chand and Co. Ltd., New Delhi, Reprint Edition.