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
Forensic Audit5
Technical definition-Wikipedia, the free encyclopedia
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.
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
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 CAs7
-Accounting
-Auditing
-Detective
What are the traits of a
good forensic
accountant?
1. Distrust the Obvious
or 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
Sale of food and beverages
Other
52, 762
-
Total Rs.
Total tickets sold for morning show:
52, 762
Rs.58,625
469@ Rs.125
Group Discount to ABC Charitable Inst @
Rs. 5,863
10 %
Net Cash Collection
Amount Rupees: Fifty two thousand seven hundred and sixty two only
CASHIER:
SUPERVISOR:
Rs.52,762
ABC MULTIPLEX THEATRES LIMITED
CASH COLLECTION REPORT:
DATE: 26/7/01
SHOW: Morning
Previous show's last ticket sold
Current show's last ticket sold
Total tickets sold @ Rs.125
10178
10647
469
Rs.58,625
Group Discount @
10 %
Rs. 5,863
Net Cash Collection
Denomination of Cash notes and coins
collected:
Notes:
1000
500
100
50
20
10
5
2
1
Coins
5
2
1
50p
25p
Total Rs
Rs.52,762
252
340
10
875
119
Rs. 25,200
Rs. 17,000
Rs 200
Rs. 8,750
Rs.
595
201
6
Rs.
Rs.
1,005
12
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
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
Achilles Heel Fraud
3. Some Case studies in
Fraud Detection
23
24
25
26
Disaster situations: Causes or
even effects of fraud
Nabbing a cheque writing fraudster
using the Birbal approach
Consider 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 entities
For 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.