UNCOVERING THE TRUTH WITH FORENSIC ACCOUNTING

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1 UNCOVERING THE TRUTH WITH FORENSIC ACCOUNTING Contributed by : CA Nirav DharodVishesh Sangoi (a member of the association) he can be reached at dharodnirav99@gmail.com Competing in a rapidly changing world, companies must tackle with emerging challenges seemingly every day: cyber threats, emerging and potentially disruptive technologies, business performance risk and many more. Financial irregularity is a severe problem of concern globally. It is so endemic that fraud and corruption is gradually becoming a normal way of life. The stakes have never been higher than they are in today s business world, and the role of the forensic accountant has never been more important and impactful on wide-ranging business issue. This article examines a few aspects of the forensic accounting, the benefits of developing and inserting these skills into your organization and also the tools and techniques that can be used in the detection of fraud. Thinking Forensically Forensic accounting, also called investigative accounting or fraud audit, is a merger of forensic science and accounting. In the accounting profession, the term forensic deals with the relation and application of financial facts to resolve legal problems. A forensic accountant often utilizes his understanding of business information & financial reporting systems, accounting standards and procedures to investigate some form of economic crime. The term forensic accounting is generally taken. The stakes have never been higher than they are in today s business world, and the role of the forensic accountant has never been more important. This program focuses on defining forensic accounting, how it differs from traditional accounting, the benefits of developing and inserting these skills into your organization and also the tools and techniques that can be used in the detection of fraud. The stakes have never been higher than they are in today s business world, and the role of the forensic accountant has never been more important. This program focuses on defining forensic accounting, how it differs from traditional accounting, the benefits of developing and inserting these skills into your organization and also the tools and techniques that can be used in the detection of fraud.the stakes have never been higher than they are in today s business world, and the role of the forensic accountant has never been more important. This program focuses on defining forensic accounting, how it differs from traditional accounting, the benefits of developing and inserting these skills into your organization and also the tools and techniques that can be used in the detection of fraud.the stakes have never been higher than they are in today s business world, and the role of the forensic accountant has never been more important. This program focuses on defining forensic accounting, how it differs from traditional accounting, the benefits of developing and inserting these skills into your organization and also the tools and techniques that can be used in the detection of fraud. Refer to the comprehensive view of fraud investigation, including: i. The audit of accounting records to prove or disprove fraud; ii. The act of serving as an expert witness; iii. The act of conducting financial/accounting analysis in support of litigation; and iv. The act to eliminate epidemic ills in business. Characteristics of Forensic Accountants The Forensic Accountant needs to think like both a Thief and a Detective and should possess the following qualities: Creativity Where might I find evidence? Curiosity Recognize the warning signs. Perseverance Paper or accounting irregularities may exit, but unless the evidence is connected to individuals, no fraud can be established. 5

2 VOL. 21 NO. 4 / OCTOBER 2017 C.V.O. CA S NEWS & VIEWS Common Sense What is possible? Business Sense Understanding how a business functions. Confidence Standing up in court and present evidence in a clear and concise manner. Communication Skills Financial forensic engagements may fall into several categories. For example: Investigating corporate fraud; Litigation services; Money laundering; Tax fraud; Business valuation; and Computer forensics/e-discovery. The face of fraud is fluid it is constantly changing. Perpetrators have become more creative, devising more complex fraud schemes that are increasingly difficult to detect. This, in turn, requires companies to be more sophisticated in their approach to fraud prevention and detection. Tim Wolfe, Director (Special Investigation Unit at CNA in Chicago) Putting Fraud in Perspective In the legal sense, fraud is generally agreed to consist of the following components: a material misrepresentation of fact, made by one who knows of its falsity with the intention that another believe and act on the misrepresentation which is reasonably believed and relied upon by another, who suffers damage 6

3 from that reliance. The effects of fraud on an organization are often devastating. Aside from any loss of revenues, fraud has demoralizing and sometimes debilitating consequences upto and including the destruction of the organization itself. The Fraud Triangle Each side of the fraud triangle involves a person s conscious perceptions and responses. These perceptions and responses are unique to the individual, but follow certain psychological principles. Types of Fraud i. Misappropriation of assets Theft, Concealment, Billing Schemes, Shell Company Schemes. ii. Fraudulent financial reporting Misstatement, Concealment. iii. Corruption Illegal payments, Hidden interest, Kickbacks, Gifts. Sample Fraud listing schemes i. Improper Revenue Recognition vi. Off-Site or Fictitious Inventory ii. Skimming of Cash vii. Improper Assets Valuations iii. Money Laundering viii. Adjustments to Estimates iv. Roundtrip Transactions ix. Off-Balance Sheet Entities and Liabilities v. Bill and Holds (The listing of fraud schemes is not intended to be a complete listing of all possible fraud schemes for all industries) 7

4 VOL. 21 NO. 4 / OCTOBER 2017 C.V.O. CA S NEWS & VIEWS Comparison of Forensic Accounting and Financial Auditing Let s understand how it differs from Auditing Sr. Particulars Forensic Accounting Auditing 1 Why, When and Where Serve as a backing to prove a fraud Continuous to certify the state of the services take place in the business in an apparent risk the art of a business and comply prone environment with an efficient market theory 2 Scope of the Job Present analytical accounting and Opine on the accounting financial information to support statements of business entities legal and administrative decisions considering all criteria used in its preparation 3 Details of tasks performed Detailed planning of tasks aimed Sampled and/or probabilistic at documenting deterministic and procedures to serve as a base of calculative analysis. concluding the financial statement. 4 Techniques Investigative, substantive or Substantive and Compliance. in depth checking Sample based. 5 Periodicity When necessary and particularly Covering the fiscal year to according to the periods stipulated substantiate the activities of the by the Judge or client. accounting period. 6 Reporting Investigative or Expert reports Financial statements, management letters or Auditors report Clues/Traces Basics to Uncovering Fraud Generally, fraud prevention and detection include the analysis for: Duplicate and Gaps, Statistics, Trend Analysis, Ratio Analysis, Ageing Analysis, Character Classification, Benford s Law etc. In addition, Forensic Accounting employs the following techniques to identify possible fraud risks, scenarios & schemes and the relationship among financial data that do not appear reasonable: I. Look beyond Documents Documents can be forged, altered or may be missing. A good forensic accountant should take additional steps: a. Interview current and former employees. b. Look for what isn t there. c. Look at the trail. II. Red Flags to be looked carefully signaling fraud a. Frequent changes in external auditors. b. Excessive number of checking/control accounts. c. Inability to Reconcile Accounts on a Regular Basis. 8

5 d. Large number of write-offs of accounts. e. Unusual Discrepancies between Actual and Budgeted Results having unexplained variances. f. Significant Changes in Employee Behavior Patterns. g. Refusal to take vacation or sick leave by employees. h. Refusal by company or division to use serial numbered documents (receipts). i. Continuous rollover of loans. j. Vendors without physical addresses. k. Vendor addresses matching employee addresses. l. The winning bidder is always the last to submit their bids. m. Increased complaints from vendors or employees. III. Computer Forensics Digital Analysis, an advanced application of data analysis, is a new tool for auditors and fraud investigators interested in preventing and detecting fraud. Computers may constitute a scene of a crime, It is not just the content of s, documents and other files which may be of interest to investigators but also the metadata associated with those files. A computer forensic examination may reveal when a document first appeared on a computer, when it was last edited, when it was last saved or printed and which user carried out these actions. More recently, commercial organizations have used computer forensics to their benefit in a variety of cases such as : a. Intellectual Property theft b. Industrial espionage c. Employment disputes d. Fraud investigations e. Forgeries f. Bankruptcy investigations g. Inappropriate and internet use in the work place h. Regulatory compliance Computer Forensics is becoming crucial in forensic accounting as data preservation is of utmost important. Failure to preserve the data and to ensure its integrity can be costly. The Road Ahead The simple and traditional accounting methods are not sufficient as well as robust enough to detect frauds. This has led to the development of the new field of accountancy known as the forensic accountancy. The discipline is beginning to see many avenues for additional proficiencies that go beyond accounting and finances. The expansion of assurance services beyond financial statements through utilisation of auditor core skills is also an opportunity to ensure the profession remains relevant in an increasingly complex marketplace. 9