The need at present to tackle economic/accounting frauds is greater than ever, all around the globe. Recently, the world has had a spate of white collared crimes such as bankruptcy, securities fraud, bribery, credit card frauds, bribes in loan taking. For solving such white collared crimes, one should have a fair knowledge of accounting concepts, analytical skills and investigative abilities. The career as a forensic accountant is one of the most secure jobs and currently in great demand. Explained here the potentials and working of this new emerging profession.
1. Introduction
Forensic accounting has been in practice since long (Kautiliya noted the occupational fraud scheme in his thesis, ‘Kautiliya Arthashastra’) but the need has never been as strong as in the present days. Recently, the world has experienced various white collared crimes such as bankruptcy, securities fraud, bribery, credit card fraud, bribes in loan taking, etc. It is equally true that for solving such white collared crimes, one should have a fair knowledge of accounting concepts, analytical skills and investigative abilities. The demand for such a different set of skills has given birth to a new branch of accounting, i.e., forensic accounting. The corporate scandals of Enron, world.com, and especially the tragedy of September 9, 2001, have made the role of forensic accounting very important.
2. Meaning of forensic accounting
Forensic accounting is broadly a mix of accounting, finance, law, computerisation, ethics and criminology with special focus on prevention and detection of frauds. Basically, forensic accounting covers three broad areas, viz., investigative accounting, litigation support and forensic audit.
2.1 Investigative accounting - It is the art of determining whether criminal matters such as employee theft, securities fraud, insurance fraud, identity fraud, etc., have occurred or not. Investigative accounting covers not only criminal matters but also civil matters, e.g., a forensic accountant has to search for hidden assets in divorce cases.
Economic accounting frauds require a different set of skills from those pre-sently available and the need for such a different set of skills has given birth to a new branch of accounting, i.e., forensic accounting. Forensic accounting is broadly a mix of accounting, finance, law, computerisation, ethics and criminology with special focus on prevention and detection of frauds.
2.2 Litigation support - Litigation support provides assistance of an accounting nature in a matter relating to
Documents necessary to support or refute a claim.
Review of relevant documentation to form an initial assessment of the case.
Formulation of questions to be asked regarding the financial evidence.
Identification of areas of loss.
Attendance at the examination for discovery to review the testimony.
Review of the opposing experts report
Reporting on both strengths and weaknesses of positions taken.
Assistance in settlement, discussions and negotiations.
Attendance at trial to hear the testimony of the opposing expert.
Provide assistance with cross-examination.
2.3 Forensic audit - It is an extended version of investigative accounting in search of and in prevention of financial frauds by finding the inadequacies and shortcomings of system, and by plugging the loopholes to prevent the wrong doers from taking advantage.
Thus, forensic accounting provides an accounting analysis that is suitable to the Court, which will form the basis for discussions, debate and ultimately dispute resolutions.
3. Functional areas of forensic accounting
Generally, a forensic accountant has to manage various types of assignments such as
Criminal investigations
Business investigations
Employee fraud investigations
Business losses/business trade disputes
Professional negligence
Personal insurance claims
Motor vehicle accidents
Business interruption/other types of insurance claims
Intellectual property rights
Matrimonial disputes
Restructuring of auditing procedures
In order to perform all these assignments, a forensic accountant has to pass through various stages (as presented in Chart I). It is very important to mention here that forensic accountants look not only at the numbers, but they look beyond and behind the numbers. That is why a forensic accountant must have some special qualities to perform these assignments as given below :
Curiosity, persistence, creativity, discretion, confidence and sound professional judgment.
Suspicious mind that the document he is looking at may not be what it purports to be.
Ability to pay attention to all alternatives, as well as, to the smallest details while analyzing the data.
- Proficiency in computer applications besides the basic accounting skills of a good audit.
- Familiarity with legal concepts and procedures.
- Ability to listen effectively as well as communicate clearly his findings and reports.
- Last but not the least, a forensic accountant must have sixth sense, which can be used to present the accounting data in such a way which can be admissible in the Court of law.
Forensic accountants look not only at the numbers, but they look beyond and behind the numbers.
Steps to fulfil assignments under forensic accounting
Meeting with the client
Performing the conflict check
Performing an initial investigation so that detailed plan can be formulated
Developing an action plan
Performing the analysis
Preparing the report. For this purpose, a forensic accountant has to :—
Calculate economic damages
Summarize a large number of transactions
Perform PV calculations, regression analysis, and other tests
Utilize appropriate discount rates
Perform the tracing of assets
4. Career as a forensic accountant in practice
The US News and World Report, 2000 stated that the future for the forensic accountants is very bright and it is designated as “one of the eight most secure careers in USA”. Similarly, Smart Money Magazine May 16, 2002 ranked it as ‘one of the ten hottest jobs’ for the next decade with salary potential of over US $ 1,00,000 annually. Presently, it has been turning out as reality. An organization named National Association of Certified Fraud Examiners (NACFA), formed by Joseph J. Wells, Professor of Finance, University of Texas has 5000 forensic accountants, followed by National Association of Forensic Accountants (NAFA) which has 4000 forensic accountants, Price Water House Firm has 500 forensic accountants and Cooper and LYB Brand has 380 forensic accountants. The American College of Forensic Examiners (ACFE) has developed an additional training, testing and certification to give added qualifications to CPAs working in the field of litigation support and forensic accounting. Besides this, Florida Atlantic University USA, has introduced various graduate and post-graduate courses in forensic accounting.
Smart Money Magazine ranked forensic accoun-tant’s job as ‘one of the ten hottest jobs’ for the next decade.
In Canada, the Canadian Institute of Chartered Accountants (CICA), has established the alliance for excellence in investigative and forensic accounting to encourage and recognize excellence in the provision of financial investigation, forensic accounting and financial litigation support services provided by chartered accountants. The CICA has also introduced various diploma courses such as Diploma in Investigative and Forensic Accounting (DIFA), Diploma in Fraud Examiner (DFE), etc.
The awareness level about forensic accounting in India is also increasing. The IFAIA (The Institute of Forensic Accounting and Investigative Audit) is working on prevention, detection and investigation of white collared crimes. Besides this, Bio Informatics Institute of India (BII) is offering Post Graduate Diploma in forensic accounting and India Forensic Foundation (IFF) is providing education in the field of cyber frauds, bank frauds, occupational frauds, etc.
5. Conclusion
The forensic accountants work throughout the business world and all branches of the Government because they need their expert investigation and evidence relating to corporate frauds, mergers investigation and acquisitions modalities, tax investigations, settling of insurance claims, and more recently, tracing the flow of funds even to terrorist activities. The various corporate scandals have put suspicion in the minds of investors, and though the annual reports are assumed to be disclosing to the shareholders everything significant, in reality, they remain obscure and lost in the piles of information. Besides this, there are so many frauds which never hit the radar system and travel to grow geometrically over the period, if not detected on time for e.g. Harshad Mehta Scam, MS Shoe Scam, Global Trust Bank Scam, Stamp paper fraud amounting to Rs. 42,000 crores, etc. In the present days, when the BSE sensex is expected to reach the level of 10,000, and every investor is attracted towards the stock market, the biggest point is ignored in this bull run, is the technology fraud. In such circumstances, the role of ‘Black Tech Forensics’ has become very important.The awareness level about the forensic accounting in India is increasing because of the persistent efforts of India forensic movement but it has not yet garnered the requisite pace. Presently, only three institutes are working in this field which are proverbially just three drops in the ocean since India ranked 88th among the most corrupt nations of the world (Annual report published by Berlin based, News Agency in October 2005 based on the survey of 169 nations). Thus, there is an urgent need to popularize career as a forensic accountant because only the forensic accountants can save the fortunes by detecting and preventing the frauds in time.
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