Forensic Accounting: A New Paradigm For Niche Consulting.

Kolkata, India (PressExposure) December 29, 2008 -- The lack of respect and belief in India's law enforcement agencies and the rate at which white-collar crimes have increased has prompted the development of Forensic Accounting in India. The fraud detecting agencies seems to lack time and devotion needed for detecting and prevention of errors and fraud. According to a large global accounting firm, the market is sufficiently big enough to maintain an unit devoted entirely towards "forensic accounting". Many large as well as small accounting firms as well as the tiny firms have inculcated or rather developed separate forensic accounting departments.

We were of the belief that detection and prevention of frauds or white-collar crimes is part of conventional accounting function. It was thought that the frauds, both internal as well as external has be to detected by the auditors through their periodic audit. Now it is crystal clear that auditors can only check for the compliance of a company's books to generally accepted accounting principles, auditing standards and company policies. Hence the need was felt to detect the frauds in companies that are suspected to be engaged in fraudulent transactions. This field of accounting is known as "forensic accounting".

The litmus test of investigation,first introduced by the ever great Sherlock-Homes(considered by many as the father of Forensic Accounting)is perhaps the first ever application of forensic accounting . Though ,the contribution of the other few great historians to the field of forensic accounting cannot be overlooked. They used various tricks to investigate various crimes.

Forensic accounting is a specialized a area of accounting practice that describes engagements which result from actual or anticipated disputes or litigation. The word "forensic" means "suitable for use in court". The forensic accountants have to keep in mind this statement while they have to work or chalk out their programme. The forensic accounting work is tailor made according to the situation and need. The gathering of information and evidences is done according to the need and situation. We can say, it is customized according to the situation.

The forensic-accountants give expert evidence at the ultimate trial.

All the modern medium-sized as well as the large-sized accounting firms have specialized forensic accounting departments. Within these firms there may be specialized forensic accounting departments. Within these groups their may be further sub-specializations. Various sub-specializations include insurance claims , personal injury claims, fraud detection, construction or royalty audits. Nearly 40 percent of the top 100 US accounting firms are expanding their forensic and fraud services, according to Accounting Today. Now if we consider this data as significant then we can say that the total contribution of forensic accounting to the total revenue of the C.A. firms would be highly significant in the years to come. Under rising instances of frauds and litigation and flourishing businesses these services are considered to be very significant as they are rendered at a very competitive price. The forensic accountants utilize the various information relating the business, utilizes financial reporting systems, various accounting and auditing standards and procedures ,investigative techniques and litigation processes and procedure to perform their work. By acting as advisors to audit committees and assisting in investment analyst research, they are playing more "proactive" risk reduction roles .This is possible by designing and performing extended procedures as part of the statutory audit.

The objectives of forensic accounting include measurement of losses caused by an auditor due to his negligence ,to look into the matter whether their has been any embezzlement of cash ,the amount, necessity of criminal proceedings ,computation of asset values in a divorced proceeding. The primary approach technique of forensic accounting is explanatory analysis(cause and effect)of the phenomena-including the discovery of deception(if any),and its effects -introduced into an accounting system field. The primary methodology employed by the forensic accountants is the verification of the objective. They are trained to deal with real world business and do have the sufficient expertise to look beyond(behind) the numbers.

The scope of the forensic accountants are growing at a rapid pace. The increase in their work opportunities have been accelerated due to the fall of the Enron corporation and the collapse of the American Twin Towers. This has led to increase in the demand for American forensic accountants. So far India is concerned, formation of Serious Fraud Investigation Office(SIFO) is a landmark creation so far as forensic accountants are concerned. Failure of regulators to track security scams, increasing cyber crimes ,chain of cooperative banks bursting -all point to the ever increasing need for forensic accountants. Our understanding of the need for forensic accountants is immaterial here. In India due to the growing number of frauds the need for forensic accountants is ever increasing. The regulatory and administrative agencies will put pressure for greater demand of forensic practices. This has been initiated due to the changing nature of Indian and International accounting .Auditing and assurance standards also confirm this. A change in the curriculum can be initiated if the written exams and practical industrial training are boosted to show the "new knowledge base and skill-set" required By the professional accountants in the new era. It is therefore recommended that the "forensic accounting and auditing" be introduced as a paper in the various professional examinations conducted by the various accounting bodies in India.

Unfortunately forensic accounting is largely an unexplored area as far as India is concerned. The chartered

Accountants(CAs) deal with such cases in an irregular fashion. In the western counter-part(countries), the Lawyers,police,insurance companies,government and regulatory bodies ,banks,courts and business communities are increasingly utilizing the services of the forensic accountants.The accountants and the auditors must have the skills and expertise to venture into the emerging field of forensic accounting.

What Is Forensic Accounting? The growing needs of corporations has changed the definition of forensic accounting. As per Bologna and Indquist ,"the application of financial skills and an investigative mentality to unresolved issues,conducted within the context of rules of evidence.It is a new emerging field that encompasses financial expertise, fraud knowledge,and a sound knowledge and understanding of business reality and the working of the legal sytem."It means that the forensic accounting should be skilled not only in financial accounting but also internal control systems,the legal matters ,other institutional requirements ,investigative blend of mind and interpersonal skills.

According to 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:' Similarly, forensic accounting is defined by Horty as:

"The science that deals with the relation and application of finance, accounting, tax and auditing knowledge to analyze, 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." In simple words, forensic accounting includes the use of accounting, auditing as well as investigative skills to assist in legal matters.It comprises of two major components:litigation services ,that recognizes the role of an accountant as an expert consultant and investigative services,that uses a forensic accountant,s skills and may require possible court-room testimony. Investigation of theft and defalcation of corporate and individual assets are part of legal matters.They use their education as well as experience to discuss the facts,patterns of the theft or misappropriation.Business accounting systems are reviewed by the forensic accountants.They suggest ways and means to solve and improve the internal control and internal accounting system.This is adopted to prevent theft and fraud. Because of their expert knowledge and educational background and experience their(forensic accountants) work is elevated to a new height. Forensic accountants do not contest in cases.They act as fact finding devices,try trt to seek the real truth from the hidden facts.They conduct their work in an unbiased and objective manner.They need legal knowledge,expertise,training and experience to perform their work in an effective and real manner.Extensive knowledge in the field of commerce,legal,accounting as well an investigative blend of mind is needed to perform the work in a proper fashion .Expertise in litigation support and testimony in courts of law are also prerequisites of the forensic accountants.This is due to the fact that their work would many times be used in a court of law.The valuation of damages due to criminal and civil wrong-doings need to be done with perfection and for that reason knowledge of business valuation theory is the most essential.

What exactly do the Forensic Accountants perform? Answer:They are trained to deal with real life business situations and are trained to look beyond the numbers. Analysis, interpretation and summarization of complex financial and business related issues are prominent characteristics of this accounting/auditing profession. Familiarity with legal concepts and procedures is a must.Insurance companies,public practice,banks,police forces and government agencies are major employers of forensic accountants. The various field of work encompassing the arena of a forensic accountant can be stated in points format as follows: 1)Financial evidence investigation and analysis. 2)Development of computerized software to help in the analysis and presentation of financial evidence. 3)Sharing their findings in the form of reports, slide shows or exhibits and documents collected. 4)To support trial evidence they prepare visual slides, assist in legal proceedings ,including testifying in courts as an expert witness . If we want to say or rather point out the role performed by the forensic accountants in a nutshell, we can say as follows: Measurement or to quantify the impact of lost earnings. Such as construction delays, stolen trade secrets, insurance disputes, damage/loss estimates, malpractice claims, employee theft, loss of profit, financial solvency reports, disturbance damages, loss of goodwill, compensation losses suffered in expropriation determination, assessment of the potential business compensation costs and providing consultation on business defalcation minimization.

Lease default damages,breach of contract,business interruptions,breaches of shareholders and partnership agreements ,reconstruction of accounting records, Investigation of misappropriation,assistance in establishing ownership and division of assets,commercial damages,professional negligence cases ,partnership disputes,expert evidence,fair value or fair market value and personal injury damages are included in commercial damages. Tax advocacy, compliance and review of financial statements, tax reporting and tax planning in such areas as income as estate matters are included in tax matters. Analysis, interpretation, summarization, presentation of complex financial and issues relating to the business for investigation is the role of a forensic accountant. They carry out investigative accounting and provide litigation support. The services rendered by the forensic accountants are in great demand in the following areas:

1) Fraud detection where employees commit Fraud: Where the employee indulges in fraudulent activities: Where the employees are caught to have committed fraud the forensic accountant tries to locate any assets created by them out of the funds defalcated, then try interrogate them and try to find out the hidden truth. 2)Criminal Investigation: Matters relating to financial implications the services of the forensic accountants are availed of. The report of the accountants are considered in preparing and presentation as evidence. 3) Outgoing Partner's settlement: If the outgoing partner is not happy about his settlement he can employ a forensic accountant who will correctly assess his dues(assets) as well as his liabilities correctly.

4)Cases relating to professional negligence: Professional negligence cases are taken up by the forensic accountants. Non-conformation to Generally Accepted Accounting Standards(GAAS) or non compliance to auditing practices or ethical codes of any profession they are needed to measure the loss due to such professional negligence or shortage in services.

5) Arbitration service: Forensic accountants render arbitration and mediation services for the business community, since they undergo special training in the area of alternative dispute resolution. 6) Facilitating settlement regarding motor vehicle accident: As the forensic accountant is well acquainted with intricacies of laws relating to motor vehicles, and other relevant laws in force, his services become indispensable in measuring economic loss when a vehicle meets with an accident. 7) Settlement of insurance claims: Insurance companies engage forensic accountants to have an accurate assessment of claims to be settled. Similarly, policyholders seek the help of a forensic accountant when they need to challenge the claim settlement as worked out by the insurance companies. A forensic accountant handles the claims relating to consequential loss policy, property loss due to various risks, fidelity insurance and other types of insurance claims. 8)Dispute settlement: Business firms engage forensic accountants to handle contract disputes, construction claims, product liability claims, infringement of patent and trade marks cases, liability arising from breach of contracts and so on. 9)Matrimonial dispute cases: Forensic accountants entertain cases pertaining to matrimonial disputes wherein their role is merely confined to tracing, locating and evaluating any form of asset involved.

Core Knowledge Of Forensic Accountants:

A forensic accountant is expected to be a specialist in accounting and financial systems. Yet, as companies continue to grow in size and complexity, uncovering fraud requires a forensic accountant to become proficient in an ever- increasing number of professional skills and competencies. Here are some of the broad areas of useful expertise for a forensic accountant:

• An in-depth knowledge of financial statements and the ability to critically analyse them. These skills help forensic accountants to uncover abnormal patterns in accounting information and recognise their source. • A thorough understanding of fraud schemes, including but not limited to asset misappropriations, money laundering, bribery, and corruption. • The ability to comprehend the internal control systems of corporations, and to set up a control system that assesses risks, achieves management objectives, informs employees of their control responsibilities, and monitors the quality of the programme so that corrections and changes can be made. • Proficiency in computer and knowledge of network systems. These skills help forensic accountants to conduct investigations in the area of e-banking and computerised accounting systems. • Knowledge of psychology in order to understand the impulses behind criminal behaviour and to set up fraud prevention programmes that motivate and encourage employees. • Interpersonal and communication skills, which aid in disseminating information about the company's ethical policies and help forensic accountants to conduct interviews and obtain crucially needed information. • Thorough knowledge of company.s governance policies and the laws that regulate these policies. • Command of criminal and civil law, as well as, of the legal system and court procedures.


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Press Release Submitted On: December 28, 2008 at 7:59 am
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