Forensic Audit

1. ForensicAudit CA SUDHIR BHANSALI M.Com, FCA, ISA(ICAI) CA SUDHIR BHANSALI 09413801080 23.06.2012

2. “On this earth there is enough for everyone’s need, not enough for their greed”. - Mahatma Gandhi CA SUDHIR BHANSALI 09413801080 23.06.2012

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4. WHAT ?? • Ask Enron ,World Com, Satyam ,Layman Brothers and Citi Bank…and many more !! • Legally accurate Audit. • Audit that is sustainable in legal proceeding, or within some judicial or administrative review. • For us : ‘forensic’ deals with the relation and application of financial facts to legal problems. CA SUDHIR BHANSALI 09413801080 23.06.2012

5. WHAT ?? • Focus is: • The evidence of economic transactionsand reporting • the legal frameworkwhich allows such evidence to be suitable for establishing accountability • The Identification, Interpretation, and communication of the evidence and reporting events. CA SUDHIR BHANSALI 09413801080 23.06.2012

6. WHAT ?? • The Forensic Auditis unique. • Its Confirmation of wrong-doing. The term "forensic" refers to evidence that is suitable for presentation in a court of law. • To obtain evidence to support criminal chargesrelated to white-collar crimes such as bribery, fraud, theft, breach of trust, extortion and forgery. • The reports are usually very lengthy and fully-documented and well supportedchronology. CA SUDHIR BHANSALI 09413801080 23.06.2012

7. WHAT ?? (Negative or Positive) • Often Associated with “Negative" applications: bankruptcy, fraud, business disputes, or matrimonial divorce. • Also be applied in “Positive" assurance engagements : due diligence reviews, business valuations, Audit committee advisory services and enterprise risk management. CA SUDHIR BHANSALI 09413801080 23.06.2012

8. WHAT ?? • Forensic audit is applied to the Evidence of first order activities, not secondary systems of controls. • Analysis the crucial aspect of Recognizing the implications of evidence. • Additional techniques are employed to forecast or predict future conditionsbased on events. CA SUDHIR BHANSALI 09413801080 23.06.2012

9. What ?? (Forensic Auditors should know and able to do?) Many aspects of forensic Auditors fall outside the traditional practise of Audits • Ability to identify frauds with minimal initial information • Identification of financial issues • Interpretation of financial information • Presentation of findings • Knowledge of investigative techniques • Knowledge of rules of evidence CA SUDHIR BHANSALI 09413801080 23.06.2012

10. Why?? Human nature: – Hide failures; not admit them. – Conceal problems; not discuss them. – Defend wrong decisions; not admit them. – Cover up mistakes; not own up. Forensic Audit has been the buzzword, over the world since numerous years. But after the Harsad Mehta ,Khaten Parakh and Satyam fiasco and know colegate, 2G spectrum and hundred of other frauds and has gained proposition in Indian context also. CA SUDHIR BHANSALI 09413801080 23.06.2012

11. WHY? (History or Background) • Number of Forensic Auditors began to enhance in the early 1980’s • Association ofCertified Fraud Examiners USAestablished in 1988 • American College of Forensic Examinersfounded in 1992 • Forensic and Investigative Accounting programsin Canada - Rodman's School of Management - Ecoles des Hautes Etudes Commerciales CA SUDHIR BHANSALI 09413801080 23.06.2012

12. WHY? (Demand for Forensic Auditors) • 1/8 (One of the eight )“Most secure careertracks in America” (U.S. News & World Report, ) • One of the “Ten hottest jobs”for the next decade with annual salary potential of over $100000 to $300000 (Smart Money Magazine,) • 1/7 (One of the seven) hot new “sizzling” careerareas in accounting, according to the AICPA CA SUDHIR BHANSALI 09413801080 23.06.2012

13. Satyam Fraud Case CA SUDHIR BHANSALI 09413801080 23.06.2012

14. When?? (symptoms) • Adverse findingsduring Normal / Final Audit • Questions raised about the validity of a procurement procedure / award of contracts • Under-performance/ non-delivery of goods or services • Where information received from “whistleblower” • On requestof management CA SUDHIR BHANSALI 09413801080 23.06.2012

15. How ?? (can you prepare for the opportunities in this area?) • Self Study (e.g., ICAI Certificatecourse started in 2008-09) • On-the-job training • Formal education Obviously, a combination of at least twoof these approaches will lead to optimal preparation. CA SUDHIR BHANSALI 09413801080 23.06.2012

16. How?? Stage to start Forensic Audit • Planning and Execution stage Process 1.Preparation (of the investigator, not the data)2.Collection (the data)3.Examination 4.Analysis 5.Reporting 6.Comparison of Physical Forensic CA SUDHIR BHANSALI 09413801080 23.06.2012

17. Planning Stage • Meet with the Client • Obtain an understanding of issuesat hand • Perform preliminary assessmentof work to be done and prepare tentative schedule • Perform a Conflict Check • Ensure that the firm does not have conflicts of interest CA SUDHIR BHANSALI 09413801080 23.06.2012

18. Panning Cont… • Perform an Initial Investigation • Preliminary investigations examination of available information • Allows auditors to identify likely trouble areas and assess the work to be done • Plan the Audit • Should identify objectives to be achieved and plan audit methodology to be used CA SUDHIR BHANSALI 09413801080 23.06.2012

19. Execution Stage • Collect the Relevant Information • In depth interviews with client’s staff • Examination of hard-copy & electronic info • Electronic info is often best source for forensic auditors • Specialized computer forensic auditors are sometimes called in, depending on the audit • Off-site computers & servers, hard-copy info, etc. are also examined CA SUDHIR BHANSALI 09413801080 23.06.2012

20. Execution Cont… • Perform the Analysis • Highly dependent on specifics of the engagement • Often involves: calculating economic damagesand sensitivity analysis, tracingof assets • Prepare the report • Should contain the details of the engagement, the scope, any limitations and a detailed summary of the findings • Reports are generally confidentialand often used in court proceedings • Periodin which evidence gathered • Review Process & report to the client. • Identify those involvedand quantify amount of fraud. • Present findingsto the client and court CA SUDHIR BHANSALI 09413801080 23.06.2012

21. Objectives • How much was lost? (stolen) • Where are the assets? • How much can be recovered? • How much can be proven? CA SUDHIR BHANSALI 09413801080 23.06.2012

22. Branches Of Forensic Audit • Investigative accounting- It deals with Investigation of criminal matters relating to theft, securities fraud, insurance fraud etc. it also includes : > provisions of suggestions > possible courses of action • Litigation Support- >accounting assistance in litigation matters. >quantification of economic damage. CA SUDHIR BHANSALI 09413801080 23.06.2012

23. Forensic Audit V/s Statutory Audit CA SUDHIR BHANSALI 09413801080 23.06.2012

24. Forensic Audit V/s Statutory Audit CA SUDHIR BHANSALI 09413801080 23.06.2012

25. Forensic Audit V/s Statutory Audit CA SUDHIR BHANSALI 09413801080 23.06.2012

26. Facts • 45% of companies reported falling victim to fraud in the past two years in U.S. • Since 2003there has been: • 71% increase in the number of companies reporting cases of corruption & bribery • 133% increase in the number reporting money laundering; and • 140% increase in the number reporting financial misrepresentation CA SUDHIR BHANSALI 09413801080 23.06.2012

27. Facts • Fraud that led to a loss of assets cost companies—on average—over US$ 1.7 million: a 50% increase over 2003. • 40% of companies suffered significant loss of reputation, decreased staff motivation, and damaged business relations. • Over 33.33% (one third) of these frauds were discovered by accident, making "chance" the most common fraud detection tool CA SUDHIR BHANSALI 09413801080 23.06.2012

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29. Forensic Services • Business valuations • Personal injury and accident claims • Professional negligence • Insurance claims evaluations • Arbitration • Partnership and corporation disputes • Shareholder disputes (minority shareholders claiming (oppression) • Civil and criminal actions concerning fraud and financial irregularities – cross examination, formulate questions • Fraud and white-collar crime investigations • Divorce proceedings and matrimonial disputes CA SUDHIR BHANSALI 09413801080 23.06.2012

30. Work Opportunity :Agency Involved in India • Central Bureau of Investigation (CBI) • Serious Investigation Bureau • Insurance Sector (TRAI) • Securities Exchange Board of India (SEBI) • Big Corporations and Companies ( Proactive and Reactive Action) • Military and Police Department • State And Central Government. • Banks and Financial Institutes. CA SUDHIR BHANSALI 09413801080 23.06.2012

31. Type of Frauds CA SUDHIR BHANSALI 09413801080 23.06.2012

32. Type of Frauds CA SUDHIR BHANSALI 09413801080 23.06.2012

33. Motives of Fraudulent Financial Reporting > Under-pressure to achieve target • To Increase stock price • Tax motivated Reasons • Non- achievable Forecasts • To issue shares at Premium CA SUDHIR BHANSALI 09413801080 23.06.2012

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35. Fraud Detection • An appropriate combination of audit techniques under the given set of circumstances. • Usually not discovered in the course of auditing by using standard audit procedures. • Awareness of the risk factors that increase the possibility of fraud • Documentary evidence may not be reliable. • Modify audit program or perform additional procedures to confirm or dispel his suspicion of fraud or error. CA SUDHIR BHANSALI 09413801080 23.06.2012

36. Techniques • Critical Point Auditing >Unusual debit/creditin closing >Trend Analysisof Significant Financial Transactions >Discrepancies in Receivable /Payable >False credit to boost Sales >Cross debit and Credit and Inter A/C Transfer >Weakness in internal Control System CA SUDHIR BHANSALI 09413801080 23.06.2012

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38. Indicators of Fraud • Large unexpected losses • Non-compliance with corporate policy or internal controls. • Employees apparently living beyond their means. • Inventory shortages remain unexplained and poorly investigated. • Copies rather than original invoices are being paid • Missing and/or altered documentation. CA SUDHIR BHANSALI 09413801080 23.06.2012

39. Indicators of Fraud.. • Unusually large number of accounts. • Shortages and overages in cash drawers • Adjustments to receivables • High level of journal entries. • Access to computers at unusual hours • NumerousNon Specified Fund on bank statements . CA SUDHIR BHANSALI 09413801080 23.06.2012

40. Tracing Cash Flows • Process of analyzing cash transactions of an over a specific period of time. • analyze the source of the funds and where the money went and when it was withdrawn from the particular account. CA SUDHIR BHANSALI 09413801080 23.06.2012

41. Tracing Cash Flows • Proceeds of crime and money laundering investigations. • Determine appropriate use of grant/loan monies. • Money laundering – (i.e. Real estate transactions: to identify the source of the funds for a purchase or the use of the proceeds from a sale) CA SUDHIR BHANSALI 09413801080 23.06.2012

42. SA 240- Auditors responsibility Relating to fraud in an Audit • Primary responsibility of management. • Inherent limitations of audit. • Test nature of audit function. • Fraud arises out of collusion (internal). • difficult to detect. • Risk of failure of internal controls. • Weakness of internal controls. • Unusual transactions. • Problems in obtaining sufficient audit evidence. CA SUDHIR BHANSALI 09413801080 23.06.2012

43. SA 240 cont… • Assess types of fraud or error likely to occur • Likelihood of material effect on accounts • Additional Procedures • External evidence, auditing in depth, tracing • Reporting Responsibilities : Immediately to top management/board/audit committee. - significant disclosure in accounts • - significant and not disclosed accounts, • Disclosure in audit report CA SUDHIR BHANSALI 09413801080 23.06.2012

44. Audit Evidence (SA-500)(w.e.f. 1st April 2009 • Sufficient Appropriate Audit Evidence • Degree of risk of misstatement • Materiality of the item • Experience gained during previous audits • Results of procedures • Types of info. Available and trend of ratio Analysis CA SUDHIR BHANSALI 09413801080 23.06.2012

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46. A Forensic Audit Engagement • Similar to a typical audit engagement. • Each forensic audit is unique. • Guideline for auditors to start with but rarely followed. • Auditors must assess specific risksand perform audit accordingly. CA SUDHIR BHANSALI 09413801080 23.06.2012

47. Sample Documentation • Fraud Examination Checklist. • Fraud Examination proposal. • Fraud Policy Review Opinion. • Forensic Audit Report CA SUDHIR BHANSALI 09413801080 23.06.2012

48. Forensic Auditing – Applications and Consequences Satyam Computers Ltd. • Founder Chief Executive Raju charged with fraud, false corporate reporting and making false statements to regulators. • First CEO charged under Criminal offence for false reporting. • Satyam Computers case is the first of Its Type in India. CA SUDHIR BHANSALI 09413801080 23.06.2012

49. Forensic Auditing – Applications and Consequences Satyam continued • Consequences? • Accounting scheme resulted in Rs. 14000 Crores overstatementand earnings thereon– The Company was near bankruptcy. • Since 2002-03, the Companies executives have overstated turnover. • Chief persons were blamed for massive accounting fraud. • CEO Raju, CFO and Auditors are under trail and finally ICAI removed members name from register of members. CA SUDHIR BHANSALI 09413801080 23.06.2012

50. Future Outlook It should only preventive rather than reactive auditing that forensic auditing will become visibly effective and make auditing credible, once more. >Awareness of human behavior, >organization’s behavior, >knowledge of the system, technology in use. CA SUDHIR BHANSALI 09413801080 23.06.2012