Forensic

Accounting: A
Tool for Fraud
Detection and
Prevention in
the Public
Sector.
Forensic
Accounting: A
Tool for Fraud
Detection and
Prevention in
the Public
Sector.
Forensic
Accounting: A
Tool for Fraud
Detection and
Prevention in
the Public
Sector.
Forensic Accounting: A Tool for Fraud Detection and Prevention

ABSTRACT

Authors:-Venketesh Bose1 and Mohammed Razali K.A2

The ever-increasing use of technology in every sphere of business is inadvertently leading to

more complex and sophisticated frauds than before. This is thereby, increasing the hindrance
to business heads and regulators to counter such menace. The Association of Fraud
Examiners mentioned in their Report to the Nations on Occupational Fraud & Abuse in 2012,
that the world loses 5% of its annual revenue to fraud i.e. about $3.5 trillion dollars. Financial
crimes and frauds are old concepts in India, but their solution is a relatively new concept. In
the wake of such frauds and threats to the business, forensic accounting helps the business to
prevent frauds from occurring and detects the existence of such frauds at the right time before
it is too late.

Forensic accounting is the application of financial accounting and investigative skills to a

standard acceptable by the courts to address issues in disputes in the context of civil and
criminal litigation. Forensic accounting is still in the beginning stage in India. In the current
economic scenario, forensic accounting is a very important tool for inquiry or uncovering of
financial crime and the direction of justice, providing decisive information about the facts
found related to financial crime. In recent years, insurance companies, banks and even police
started taking help of forensic accountants. The rise in white collar crimes and the problems
1
VII Semester, BBA LLB (Hons.), School of Legal Studies, CUSAT.
2
VII Semester, B.COM LLB (Hons.), School of Legal Studies, CUSAT.
faced by law enforcement agencies in uncovering fraud are main reasons for the growth of
this profession in India. Forensic accountants have been depicted as experienced accountants,
specialists and evaluators of legitimate and money related reports who are appointed to
investigate conceivable suspicions of false movement inside an organization or are procured
by an organization who may simply need to keep deceitful acts from happening.

Through this paper we intend to focus on the historical perspective of Forensic accounting in
India and also how the Government of India, has taken steps to implement forensic
accounting in India by bringing in changes in laws and making forensic accounting an
integral part of the legislative system of India.

INTRODUCTION

Fraud evokes a visceral reaction in us. It is an abuse of our expectation of fair treatment by
fellow human beings. Beyond that, it is a blow to our self-image as savvy managers capable
of deterring or detecting a fraudulent scheme. Whether we react because of values or because
of vanity, nobody likes to be duped. Many elements of modern society are focused on
maintaining an environment of fair dealing. Laws are passed; agencies are established to
enforce them; police are hired; ethics and morals are taught in schools and learned in
businesses; and criminals are punished by the forfeiture of their ill-gotten gains and personal
liberty—all with a view to deterring, detecting, and punishing fraud. The profession of
auditing grew out of society’s need to ensure fair and correct dealings in commerce and
government.3Since centuries fraud has been prevailing as a continuous enigma in every
human society and poses a huge threat to the well-functioning of every civilised society. It
has been emerging as an inevitable unwanted consequence of economic growth in corporate
business field. Fraud can be defined as a conduct involving use of dishonest and deceitful
means to obtain unjust advantage or gain. The failure of statutory audit to detect, prevent and
reduce corporate fraud and irregularities necessitated proper investigation as well as a strong
preventive environment. Thus the forensic accounting evolved, to help the business to
prevent frauds from occurring and detects the existence of such frauds at the right time.
Forensic accounting is a specific area of accounting which investigates fraud and analyse
financial information which can be utilized in civil and criminal litigation. It encompasses
financial expertise, fraud knowledge and a strong understanding of business reality and the
working of the legal system. Forensic accounting is viewed as one territory of these fields of
3
A GUIDE TO FORENSIC ACCOUNTING INVESTIGATION; THOMAS W. GOLDEN, STEVEN L. SKALAK, AND MONA
M. CLAYTON
accounting that is going to get more noteworthy consideration in future exploration, be it
sociological or humanistic methodology.

Mindful of this pattern of accounting, and especially as it has been understood in all parts of
the world as taking out limits, a battle against debasement and worldwide misrepresentation
that consumes the interruption of the greater part of the creating nations, accounting must be
seen as experiencing another time, with its finished results helping with the examination and
handling of the culprits of extortion.

DEFINITIONS OF FORENSIC ACCOUNTING

The definition of forensic accounting is changing in response to the growing needs of

corporations.

 Forensic accounting is said to be 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. This suggests the forensic accountants ought to be
talented in forensic accounting, as well as in interior control frameworks, the law,
other institutional prerequisites, investigative capability, and interpersonal aptitudes. 4

 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.5

 The science that deals with the relation and application of finance, accounting, tax and
auditing knowledge to analyse, investigate, inquire, test and examine matters in civil
law, criminal law and jurisprudence in an attempt to obtain the truth from which to
render an expert opinion.6

4
Bologna and Lindquist (1985)
5
AICPA (1993)
6
Forensic accounting defined by Zia (2010)
  The integration of accounting, auditing and investigative skills results in the special
field known as forensic accounting.7

The HISTORYOF FORENSIC ACCOUNTING:- How the phrase Forensic Accounting

was born.

Fraud has become an industry, not just for the fraudster. Academics study it, investigators
investigate it, lawyers litigate on it, and conference-goers debate it. But the industry is built
on managing the consequences of fraud rather than on preventing fraud. The investigation of
fraud is only one of the services offered by the professional forensic investigator. Equally
important is the creation of a culture and environment which is aimed at the prevention of
fraud and a response policy which is designed to respond to fraud detection as effectively as
possible. According to a report released by Nedcor, crime cost South Africa R31 billion rends
in 1994/1995. A large part of this amount can be attributed to white-collar crime. Fraud and
its roots - greed and arrogance - are human nature. As business people, we must recognize
fraud as a permanent risk, a risk we must take action to manage. Fraud is theft. It hits an
enterprise in the pocket and has a direct effect on the bottom line. Despite the fact that
statistics indicate a dramatic escalation in the incidents of fraud over the past decade, certain
company executives still dismiss the suggestion that they may be victim of, or exposed to the
risk of fraud. The extent of fraud and white-collar crime resulted in the formation of various
specialized units in law-enforcement agencies. It also resulted in a major demand for
accountants in the fields of forensic accounting as such crimes can only be proved with
forensic reports and testimony by experts.8

The outcome of fraud investigations may be critical to the survival of the business. Even the
smallest engagement ay has serious consequences for individuals, innocent or guilty. It is
accordingly vital that the appropriate experience is brought to bear. A specialist forensic
7
Crumbley (2005)
8
Institute of Certified Public Accountants of Pakistan, Forensic Accounting Specialization, MODULE-6 SP-611.
accountant must always be consulted on potential engagements where fraud is at issue.
General type investigation procedures are not adequate to investigate fraud. Different
standards of evidence and of control and collection of material apply. There are no small
fraud investigation engagements. Seemingly small frauds are frequently the tip of the major
iceberg. All engagements must therefore be carried out to the same high professional
standards. Fraud investigation work is wide ranging. The same investigation may be covered
determining whether fraud has occurred and, if so, the nature of the loss and those
responsible; tracing of assets lost and legal action against those responsible to obtain
recovery; disciplinary proceedings; civil and criminal litigation. Few clients will have
previous experience of fraud investigations and investigations will often be undertaken in an
atmosphere of serious concern, and perhaps crisis. Effective assistance will be dependent on
the forensic investigator's ability to help the client manage the crisis, shape his expectations
and take action quickly and with discretion. It must be recognized that the outcome of
investigations may rest not only on the quality of the investigation but on the decisions made
by the client, and it is therefore vitally important that the client be accurately and correctly
advised at the outset. It is thus of utmost importance that when fraud of any kind is suspected,
an experienced forensic team manage and investigate the matter. This can only benefit the
client in the long run.

ROLE OF FORENSIC ACCOUNTANT

Criminal Investigations

Practicing forensic accountants could be called upon by the police to assist them in criminal
investigations which could either relate to individuals or corporate bodies. The forensic
accountant would use his/her investigative accounting skills to examine the documentary and
other available evidence to give his/her expert opinion on the matter. Their services could
also be required by Government departments, the Revenue Commissioners, the Fire Brigade,
etc for investigative purposes.

Personal Injury Claims

Where losses arise as a result of personal injury, insurance companies sometimes seek expert
opinion from a forensic accountant before deciding whether the claim is valid and how much
to pay.

Fraud Investigations

Forensic accountants might be called upon to assist in business investigations which could
involve funds tracing, asset identification and recovery, forensic intelligence gathering and
due diligence review. In cases involving fraud perpetrated by an employee, the forensic
accountant will be required to give his/her expert opinion about the nature and extent of fraud
and the likely individual or group of individuals who have committed the crime. The forensic
expert undertakes a detailed review of the available documentary evidence and forms his/her
opinion based on the information gleaned during the course of that review.

Matrimonial Disputes

Solicitors often need the services of forensic accountants in divorce cases involving disputes
about matrimonial assets. Assignments of this sort might require the forensic accountants to
trace, locate and evaluate assets. Such assets, for instance, might technically be owned by a
business in which one of the parties to the divorce case has a share. The assets would need to
be accurately valued to ensure equity when splitting the divorcing couple’s assets and
liabilities.

Professional Negligence

The forensic accountant might be approached in a professional negligence matter to

investigate whether professional negligence has taken place and to quantify the loss which
has resulted from the negligence. A matter such as this could arise between any professional
and their client. The professional might be an accountant, a lawyer, an engineer etc. The
forensic expert uses his/her investigative skills to provide the services required for this
assignment.

Expert Witness Cases

Forensic accountants often attend court to testify in civil and criminal court hearings, as
expert witnesses. In such cases, they attend to present investigative evidence to the court so
as to assist the presiding judge in deciding the outcome of the case.

Meditation and Arbitration

Some forensic accountants because of their specialist training they would have received in
legal mediation and arbitration, have extended their forensic accounting practices to include
providing Alternative Dispute Resolution (ADR) services to clients. This service involves the
forensic accountant resolving both mediation and arbitration disputes which otherwise would
have been expensive and time consuming for individuals or businesses involved in
commercial disputes with a third party.

Litigation Consultancy

Forensic Accounting helps lawyers and their clients engaged in litigation and assisting with
evidence, strategy and case preparation.

WHO NEEDS FORENSIC ACCOUNTANTS

Forensic accountants are more than just number crunchers who happen to work on criminal
or civil disputes and also these accountants possess additional skills. They must conduct
investigations, know how to use a variety of computer programs and communicate well.
Some forensic accountants specialize in specific industries that are susceptible to fraud, such
as insurance or banking, and learn the business practices associated with those fields.

Forensic Accountants work in most major accounting firms and are needed for investigating
mergers and acquisitions, and in tax investigations, economic crime investigations, all kinds
of civil litigation support, specialized audits, and even in terrorist investigations. Forensic
Accountants work throughout the business world, in public accounting, corporations, and in
all branches of government.

ROLE OF FORENSIC ACCOUNTANTS UNDER INDIAN STATUTES

There is no mention of Forensic accountants in the Indian statutes so far but there are various
provisions related to Forensic accountants/auditors in the statutes6. It can be categorized
under the following heads:

Investigation and Inspection

Forensic auditors may help the Police, ACB and other investigating authorities in collecting
evidences and other investigation purposes. For example section 157 Cr.P.C 1973, Section 17
and 18 of Prevention of Corruption Act 1988, Section 6 of The Bankers Books Evidence Act,
1891, Section 78 of Information Technology Act 2000, Section 209A and 227 of the
Companies Act 1956 wherein the Court or Police may require the skills of Forensic
accountants while inspecting any books in so far as related to the accounts of an accused.

Expert Opinion

Forensic accountants may see and carefully examine the accounts and balance sheets and use
his skills to find out whether there is any fraud committed or any anomaly associated with it
by giving his expert opinion. This finds place in for example S.45 and S.118 of Indian
Evidence Act 1872, S.293 of Cr.P.C 1973.

Forensic Accounting under CARO (The Companies (Auditor’s Report) Order, 2003

Disposal of Fixed Assets: CARO, 2003

It requires the auditor to report to the effect that if a substantial part of fixed assets have been
disposed off during the year, whether it has affected the going concern status. In order to
carry out the duties, the auditor has to draw a corollary and reference to the section 293
Companies Act 1956, AS 24 (Discontinuing Operations) and to AAS 16 (Going Concern)
and thereafter make his observations on this matter.

Report on Frauds

If any fraud on or by the company has been noticed or reported during the year, Following
provisions CARO, 2003 are important in this aspect:

AAS 4(Revised) guides the Auditor to obtain a management representation letter as the
frauds reported and detected during the year because of the nature of the fraud and the
difficulties encountered by the Auditors in detecting material misstatements in the financial
statements resulting from fraud. Accordingly, it may be concluded that it is enough if the
Auditor expresses his opinion on the frauds noticed and reported by the management and not
expected to be a detective to approach his work with suspicion  Another major issue under
this clause is that it also requires reporting of frauds committed by the Company. The Auditor
is left with no clues and is expected to travel beyond the books to search for market
information about frauds committed by the Company, which is highly illogical.

Transactions with related parties

The focus of the primary reporting under this clause is to report whether transactions that
need to be entered into a Register in pursuance of Section 301 of the Companies Act 1956
have been so entered. This Clause may be considered as a further step towards the investor’s
protection. However, the major issue here is that the audit focus has to be shifted/further
intensified towards proprietary areas to find out the transactions that need tobe entered (a
thorough scrutiny of all entries in the books of accounts may be needed); and then to check
the Register for actual recording of the same Mere reliance on the 301 Register is not enough
and the Auditor has to scrutinise Form No.24AA (Disclosure of interest by the Directors) to
ascertain likely transactions that need to be entered in the 301 Register.

NEED OF FORENSIC ACCOUNTING

Forensic accounting identifies with the use of accounting ideas and systems to lawful issues.
Measurable accountants for the most part research and archive money related extortion and
cushy wrongdoings. The result of the measurable examination, including appraisals of
misfortunes, harms, and resources would be utilized as prosecution backing to lawyers and
law requirement staff. Forensic accounting offers imperative help for legitimate cases in
numerous regions of the law, for example, securities exchange controls, value altering plans,
item risk, shareholder debate, and breaks of agreement. Forensic accountants have likewise
been utilized as a part of separations, protection claims, individual damage claims, fake cases,
development, sovereignty reviews, and following psychological warfare by exploring
monetary records. Numerous forensic accountants work intimately with law requirement
faculty and legal counsellors amid examinations and frequently show up as master observers
amid trials. Forensic Accounting is an amalgam of forensic science and accounting. Despite
the fact that the instituting of the term Forensic Accounting is said to go back to 1946, the
practice is moderately new.9 The requirement for forensic accountant has been attributed to
the way that the review framework in an association had neglected to recognize certain
mistakes in the administrative framework.

Forensic accounting, forensic auditing or financial forensics is the forte practice range of
accounting that depicts engagements that outcome from genuine or expected debate or suit.
"Forensic" signifies "appropriate for use in a courtroom" and it is to that standard and
potential result that legal accountants for the most part need to work. Forensic accountants,

9
Hopewood A.G (2009)
additionally alluded to as forensic examiners or investigative evaluators, frequently need to
give master proof at the inevitable trial.10

All of the bigger accounting firms, and also numerous medium-sized and boutique firms, and
different Police and Government organizations have pro Forensic accounting divisions.
Inside these gatherings, there might be further sub-specializations: some Forensic accountants
may, for instance, simply represent considerable authority in protection claims, individual
harm claims, extortion and development. 11 While Forensic Accountants ("FAs") typically
don't give assessments, the work performed and reports issued will frequently give answers to
the how, where, what, why and who.

The FAs have and are keeping on advancing as far as using innovation to help with
engagement to distinguish oddities and irregularities. Remember that it is not the Forensic
Accountants that decide misrepresentation, but rather the court.12

Forensic accountants have been depicted as experienced evaluators, accountants and

specialists of legitimate and money related reports that are employed to investigate
conceivable suspicions of false movement inside an organization; or are procured by an
organization that may simply need to keep deceitful exercises from happening. They likewise
give administrations in zones, for example accounting, investigation, valuation, antitrust,
harms, and general counselling.

Forensic Accounting is examination accounting which includes breaking down, testing,

asking and looking at the common and criminal matters lastly giving an impartial and
genuine report. Pretty much as forensic examinations and lab reports are required in the court
to understand the homicide and dacoit puzzles, correspondingly forensic accounting assumes
a key part in following the financial fraud and clerical wrongdoings. Be that as it may,
forensic accounting covers an extensive variety of operations of which misrepresentation
examination is a little part where it is generally predominant.

There are two noteworthy angles inside legal accounting hone-

 Prosecution benefits that perceive the part of a Chartered Accountant as a specialist or

expert

10
Crumbley, D. Larry; Lester E. Heitger, G. Stevenson Smith (2005-08-05). Forensic and Investigative
Accounting. CCH Group. ISBN 0-8080-1365-3.
11
Parr, Russell L, Smith, Gordon V. (2010)
12
Bhasin Madan (2007)
  Investigative administrations that make utilization of the Chartered Accountant's
abilities, which could possibly prompt court declaration.

FORENSIC ACCOUNTING IN INDIA

The nature of frauds committed in India has changed over the years. Hence in the current
economic scenario, The Institute of Chartered Accountants of India recognizes the need to
have fraud detection and forensic accounting. Forensic accounting is still in the beginning
stage in our country but organisations should appoint forensic accountants irrespective of
whether they understand in detail the positive implications of forensic accounting or not.
Currently in our country, forensic accountants are in great demand. In fact, the supply of
forensic accountants is far short of their demand. Scandals like the Satyam scam, Fodder
scam, CWG scam and a lot more have aggravated the already high demand for forensic
accountants in India. India loses about $40 billion because of frauds but there are only about
400 forensic accountants in the country. The main reason behind the country not having
enough forensic accountants is the lack of awareness and understanding of the profession.
Forensic accounting is unique in that it combines accounting with investigation. Sherlock
Holmes was probably the most famous practitioner but Kautilya was the first economist who
openly recognized the need of the forensic accountants. He mentioned forty ways of
embezzlement centuries ago. The Opportunities for the Forensic Accountants are growing at
the rapid speed. Collapse of Enron and World Trade Centre twin towers have blessed the
American Forensic Accountants with the opportunities.

Forensic accounting is still nascent in India. However, the nature of fraud in India has
undergone a change. Reserve Bank of India has made forensic accounting audit compulsory
for banks in India. However banks are hesitant in approaching certified fraud examiners, and
are mostly dependent on their internal auditors.

In India the formation of Serious Fraud Investigation Office is the landmark creation for the
Forensic Accountants. Growing cybercrimes, 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. After the Satyam scam, forensic auditors are much in demand as many
companies want to understand what could be the initial warning signals of a Satyam kind of
fraud in other Indian companies. Even the government’s Serious Fraud Investigation Office
(SFIO) has sought the help of forensic accountants to get to the root of the financial fraud at
Satyam.

TECHNIQUES OF FORENSIC ACCOUNTING

Conventional Techniques
Chakrabarti (2014), Moid (2016), Peshori (2015), and Shaheen et al. (2014) mentioned five
techniques of forensic accounting for detection and prevention of frauds. These Conventional
Techniques can be described as follows:13

 Benford’s Law: Benford’s Law uses the mathematics to determine whether the
financial irregularity is the result of an unintentional mistake or a fraudulent activity.
It works by studying the patterns of the figures of the variable under study. According
to this law, the frequency distribution or the count percentage of the digits (first or
beyond that) of the variable under examination is compared to the pre-defined
standards using Z-test at certain level of confidence. Significant differences in both
render good reasoning for further investigation to detect any potential fraud. This law
can be applied to combination, decimal, or rounded numbers. It is a technique that can
be applied in situations where no other evidence pertains to prove or disapprove the
fraud or irregularity.

 Theory of Relative Size Factor (RSF): In order to discover any outliers in the data
which may have arisen from fraud, RSF is calculated as the ratio of largest figure to
the second largest figure in the data set. An unusually high RSF signals that the
highest number is not in line with the other numbers in the set and hence, calls for
further investigation to detect any potential fraud.

 Computer Assisted Auditing Tools (CAATs): These tools assist auditors in

performing his audit procedures (such as matching of transactions and balances,

13
Wadhwa Lalit and Dr. Pal Virender, Forensic Accounting And Fraud Examination In India, International
Journal of Applied Engineering Research, Vol.7 No.11 (2012), ISSN 0973-4562
 locating abnormal fluctuations, re-calculations, etc.) while dealing with huge volume
of client’s data, for example, Microsoft Office Software.

 Data Mining Techniques: Data mining techniques enable to extract large volumes of
data for further analysis. These techniques are categorized into:

(a) Discovery, to determine the patterns in data through trends and variations

(b) Predictive Modeling, to forecast the outcome on the basis of patterns identified

(c) Deviation Analysis, to detect the items that deviate from the established norm

(d) Link Analysis, to detect any unusual pattern by employing various graphical
techniques.

 Ratio Analysis: Ratio analysis is conducted in order to pinpoint the symptoms of

fraud. Examples include the ratio of maximum value to the minimum value, the ratio
of maximum value to the second maximum value, or the ratio of current year figure to
the previous year figure. These ratios help in predicting the relationships, with any
abnormal ratio calls for examination towards detecting potential fraud. The commonly
used ratios include asset quality index, gross margin index, sales in receivables ratio,
etc. The forensic accounting techniques should follow customized and situation-
oriented approach while examining a financial fraud or irregularity, as against the
statutory auditing techniques, which follow prototype procedures.

Contemporary Techniques
The global professional services giant KPMG employed and suggested the use of following
techniques of forensic accounting in the light of increasing sophistication and technology in
the commitment of corporate frauds and economic crimes:

 Spot the Unusual: While conducting fraud and misconduct investigations, one should
look for the accounting transactions entered into on holidays. Such transactions could
be a nice suspect for highly common frauds like misappropriation of funds and
bribery. In furtherance of this, KPMG aids its clients in plugging the inconsistencies
 in order to avoid such incidents and also assist in preparing the restated financial
statements.

 Fraud Risk Management: This technique renders a proactive outlook towards

corporate fraud. It enables to sense the potential fraud at the earliest and avoid it.
KPMG offers following strategies for the same:
(a) Fraud awareness workshops and training programs
(b) Fraud risk assessment and vulnerability tool
(c) Forensic health check
(d) Organization perception survey,
(e) Predictive data modeling
(f) Anti counterfeiting risk assessments
(g) Competition risk management, etc.

 Forensic Technology Lab: Forensic technology lab conducts in-house or field

investigations to collect the productive information in a systematic manner and
indicate any dubious entry. It enables to collect, recover, and preserve the evidence in
the digital format to assist in fraud examinations and legal prosecution. It also helps to
detect any manipulations with the evidence.

 Corporate Intelligence: Corporate intelligence incorporates ‘Due Diligence’ check

conducted on the third party (either individual or organization) while entering into a
business transaction with them, such as, investment, merger or acquisition, strategic
alliance, foreign partnerships, etc. ‘Due Diligence’ or ‘Know Your Customer’ (KYC)
exercise keeps a check on ownership structure, market reputation, previous records of
frauds or non-compliance, senior management, pending lawsuits, credit-worthiness of
the third party.

 Verification (Know Your Employee): To counter the occupational frauds, a rigorous

‘Due Diligence’ check on the employees is necessitated. It includes verification of
employees’ background and credentials such as, address, education, past
employment(s), pending lawsuits, mental and physical check, criminal record, etc.
  Documentation Management: The e-Discovery tool of KPMG enables the
preservation and presentation of vast electronic evidences in the legal proceedings.

Forensic Accounting Techniques employed by Banks

The banking sector too is scuffling with plethora of frauds and financial crimes. Poor
implementation of fraud risk management techniques, and continued use of manual
techniques to detect and prevent frauds (like fake documentation, embezzlement of cash and
assets) are the major concerns before the banking industry. Despite the existence of anti-fraud
control systems, the irregularities are uncovered through complaints from the customers or
internal whistleblowers. The average financial damage resulting from a banking fraud can
range from 10 lakhs to 2 crores (India Banking Fraud survey, 2015). Deloitte’s India Banking
Fraud survey, 2015 assessed the status of forensic accounting techniques at banks and
discovered the use of following techniques to detect and prevent frauds:
(a) customer screening against negative list
(b) Off-site monitoring and surprise visits
(c) employee/customer/third party due diligence check
(d) Whistleblower hotline
(e) Forensic technology tools like UV scanners
(f) Intelligence gathering.

Use of Advanced Forensic Data Analytics is a strategic move by banks in order to identify
and deter any forthcoming fraud, perpetrated by customer, employee, or third party.
Deloitte’s India Banking Fraud Survey, 2015 recommended various methodologies that the
banks can employ in fraud detection and prevention, viz., risk-based, constantly evolving,
predictive, and integrated. Data Visualization technique can be employed for visual
representation of multidimensional data and processes using PERT/CPM networks. This
enables in
(a) Pinpointing any hidden or suspicious relationships
(b) Tracing the movement of money during AML investigations
(c) Understanding complex relationships through link analysis and geo-spatial
representations.
Furthermore, Robotics Process Automation (RPA) techniques, commonly referred to as ‘If
Then’ techniques, are employed to set up the rules (manually framed on the basis of past
experiences of frauds) for detecting and analyzing any abnormal or unusual transaction and
thereafter, taking an immediate course of action. These techniques are specifically useful for
ecommerce and banking sectors. Due to revolutionary increase in the volume and complexity
of data, the manual process of constructing the rules has been replaced by the machine
learning technology. Such technology will automatically learn, project and react on its own in
order to differentiate between dubious and legitimate transactions, without being coded for it.

APPLICATION OF PRINCIPLES OF FORENSIC ACCOUNTING TO AN

ORGANISATION

• One premise of forensic accounting is to look for indications of abnormal occurrences in the
accounting and financial reporting systems.

• Having a forensic accounting orientation to designing the accounting processes will provide
an opportunity to design in steps for verification of key assumptions and data while also
providing the opportunity for identifying possible fraud.

• The related area of forensic auditing can help in reducing the transaction processing risk by
helping to perform audit type procedures on a routine schedule.

• Timely performance of audit type procedures can help management and internal audit
function is more effective by helping to identify and resolve potential internal control
breakdowns quickly and thoroughly. It can reduce external audit costs by regularly
completing testing procedures that are part of the annual certified audit.

• In instances where information processing systems cover a broad array of businesses and/or
locations establishing routine or continuous monitoring of all transaction processing systems,
it can be considered as a type of forensic accounting.

Some of the areas that the principles and activities of forensic accounting can apply in an
organization include:-

• Reviewing operational transactions for compliance with standard operating procedures and
approvals.

• Completing analysis of financial disbursement transactions in the accounting system to

determine if they are normal or outside company policy and, thus, possibly fraudulent.
• Reviewing general ledger and financial reporting system transactions for possible improper
classification or manipulation of data or accounts and its impact on the resulting financial
reports.

• Examining warranty claims or returns for patterns of fraud or abuse. • Helping estimate the
economic damages and the resulting insurance claims that stem from calamities such as fires
or other natural disasters.

• Evaluating or confirming business valuation in mergers and acquisitions.

CONCLUSION

The detection and prevention of corporate irregularity or non-compliance was the inherent
function and responsibility of accounting and auditing disciplines until the onslaught of
stream of corporate frauds, misconduct, and white-collar crimes, particularly the Satyam
scam in 2009. The Ernst and Young’s 14th Global Fraud survey 2016 ranked India at 17th
place (of total 57 countries surveyed) with 58 percent of respondents claiming the existence
of bribery and corrupt practices in their businesses.
It is quite disappointing that forensic accounting is, to a greater extent, an untapped area in
the Indian economy flooded with corporate scandals. Much of the forensic accounting
practices employed are reactive (rather than proactive) in nature. Until recently, the focus is
still on preventing and detecting conventional and well-known frauds and not the emerging
sophisticated ones. There is a need to identify and control the uncontrollable. The lack of
awareness regarding the sophisticated forensic accounting techniques and the scarcity of
qualified and well-trained professionals in the field contributes to its rudimentary stage of
evolution in the aftermath of increasing financial crimes. In an environment of increased
exposure to fraud risk, there are immense possibilities for forensic accounting to assume a
separate ‘niche’ and provides opportunities for forensic experts to offer litigation support,
investigative accounting, and consulting services. Despite of various positive developments
in the discipline, there is much scope for further advancements in the forensic accounting
techniques and legislation in the light of increasing complexity of corporate frauds.