Forensic accounting: Opportunities in forensic accounting

1. Forensic accounting: Opportunities in forensic accounting ChetanDalal WIRC of ICAI Goa June 13, 2014

2. 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.

3. 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

4. 1. Forensic Accounting Its Meaning and relevance to Chartered Accountants

5. Forensic Audit- Technical definition-Wikipedia, the free encyclopedia

6. 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

7. 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 CAs- Accounting Auditing Detective

8. What are the traits of a good forensic accountant?

9. 1. Distrust the Obviousor Use Professional Skeptcism2. 3D vision: Use multiple sources of information to get the truth- multi dimensional approach

10. 3D Vision

13. 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

14. 2. Simple Forensic tests useful in fraud detection and audits

15. May of the fraud attacks can come through manipulations in Documents: eg Forgeries and alterations excel reports assets cash

16. 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

17. A good forensic accountant constantly uses ‘inverse logic’ and tests of reasonableness to detect fraud • Inverse logic and what it means • Tests of reasonableness

18. 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

19. 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.

20. For example: Trojan horse fraud Just as soldiers were hidden and smuggled in thru a innocent looking wooden horse A fraudster hides malicious activities within a process, record or activity

21. Just as the invincible Achilles was defeated by attacking his only weak spot, his heel Achilles Heel Fraud AN intelligent fraudster spots even a microlevel tiny deficiency and attacks the weakest spot

22. 3. Some Case studies in Fraud Detection

23. Case: Simple vendor data Apparently nothing wrong

24. Present data in different dimension

25. Convert date into day of the week

26. Filter data in different ways Fraud: Someone called ‘Raju’ came on Sundays to create Codes for fictitious vendors

27. Disaster situations: Causes or even effects of fraud earthquake Computer breakdown fire Always examine such situations carefully

28. 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?

29. 4. Opportunities in Forensic Accounting and Fraud Detection

30. 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

31. 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

32. 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

33. How can one tap these opportunities? • Get ICAI FAFD certification – to get visibility. • Get international acreditation- CFE etc though not absolutely necessary. • 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.