FORENSIC ACCOUNTING

1. FORENSIC ACCOUNTING

2. WHAT IS FORENSIC ACCOUNTING ?

3. What is forensic accounting? • Forensic Accounting is the specialty practice area of accounting that describes engagements that result from actual or anticipated disputes or litigation. • Forensic accounting is the application of a specialized knowledge and specific skills to stumble upon the evidence of economic transactions. The job demands reporting, where the accountability of the fraud is established and the report is considered as evidence in the court of law or in the administrative proceeding. • Forensic accounting is accounting that is suitable for legal review, offering the highest level of assurance, and including the now generally accepted connotation of having been arrived at in a scientific fashion.

4. features of forensic accounting

5. features of forensic accounting • Forensic accounting is the practice of utilizing accounting, auditing, and investigative skills to assist in legal matters. • Kautilya was the first economist who openly recognized the need of the forensic accountants. He mentioned forty ways of embezzlement centuries ago • It encompasses 2 main areas – litigation support, investigation, and dispute resolution.

6. Features contd...... • Litigation support represents the factual presentation of economic issues related to existing or pending litigation.  In this capacity, the forensic accounting professional quantifies damages sustained by parties involved in legal disputes and can assist in resolving disputes, even before they reach the courtroom. • Investigation is the act of determining whether criminal matters such as employee theft, securities fraud (including falsification of financial statements), identity theft, and insurance fraud have occurred.  As part of the forensic accountant’s work, he or she may recommend actions that can be taken to minimize future risk of loss.

7. Features contd...... • Forensic accounting involves looking beyond the numbers and grasping the substance of situations.  It’s more than accounting…more than detective work…it’s a combination that will be in demand for as long as human nature exists. • Forensic accounting requires the most important quality a person can possess: the ability to think.  Far from being an ability that is specific to success in any particular field, developing the ability to think enhances a person’s chances of success in life, thus increasing a person’s worth in today’s society.

8. NEED FOR FORENSIC ACCOUNTING

9. NEED FOR FORENSIC ACCOUNTING • Recent major corporate scandals have prompted business owners to turn to Forensic Accountants for proactive fraud checkups. • CEOs must now certify that their financial statements are faithful representations of the financial position and results of operations of their companies and rely more heavily on internal controls to detect any misstatement that would otherwise be contained in these financials.   Thus, publicly held companies are likely to see the necessity for forensic accounting as a part of a strong internal control effort to comply with governmental and market demands for accurate reporting. • Forensic accountants who work for private companies help prevent and detect misuse of company resource.

10. Who needs Forensic Accountants? • Forensic Accountants work in most major accounting firms and are needed for investigating mergers and acquisitions, and in tax investigations, economic crime investigations, all kinds of civil litigation support, specialized audits, and even in terrorist investigations.  Forensic Accountants work throughout the business world, in public accounting, corporations, and in all branches of government (from the FBI and CIA to the offices of the local authorities). Forensic Accounting firms are everywhere

11. Categories

12. Categories • Engagements relating to civil disputes may fall into several categories.- Economic damages.-Tort or Breach of contract.- Earn outs or breaches of warranties.-Business valuation.

13. Categories • Economic damages:- In law, economic damages refers to the money paid or awarded to a claimant, purser or plantiff following a successful claim in a civil action. • Tort:- Tort law is the name given to a body of law that creates, and provides remedies for, civil wrongs that do not arise out of contractual duties. • Breach of contract:-Breach of contract is a legal concept in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance.

14. Categories • Earn outs:- Earn out is a phrase used by venture capitalists to describe a formula by which management of a target company earn a bigger share of the target's share capital by achieving results above pre-determined levels. • Breaches of Warranties:- A warranty is violated when the promise is broken; when goods are not as should be expected, at the time the sale occurs, whether or not the defect is apparent • Business valuation:- It is a process and a set of procedures used to determine the economic value of an owner’s interest in a business

15. INVESTIGATION

16. INVESTIGATION • The fraud the specialists are looking for is usually one of two general types:  financial statement fraud or theft of assets (these two types can co-exist in the situation in which management has taken assets and misstated financial statements to cover up the defalcation). • The occupational fraud committed by employees usually involves the theft of assets.  Embezzlement has been the most often committed fraud for the last 30 years.  Employees may be involved in kickback schemes, identity theft, or conversion of corporate assets for personal use.

17. INVESTIGATION • To uncover financial statement fraud, the forensic accountant often analyzes the financial statements by using ratio analysis and certain data-mining techniques such as Benford’s Law, a procedure used to determine the likelihood that data have been altered. • Other procedures performed include inspection of documents and records and the conduct of interviews with persons who would have knowledge about any fraud that’s occurred.

18. INVESTIGATION • The forensic accountant couples observation of the suspected employees with physical examination of assets, invigilation, inspection of documents, and interviews of those involved. • Experience on these types of engagements enables the forensic accountant to offer suggestions as to internal controls that owners could implement to reduce the likelihood of fraud.

19. FORENSIC ACCOUNTING IN INDIA

20. FORENSIC ACCOUNTING IN INDIA • In India the formation of Serious Fraud Investigation Office is the landmark creation for the Forensic Accountants. • Growing cyber crimes, failure of regulators to track the security scams, series of co-operative banks bursting - all are pinpointing the need of forensic accounting, irrespective of whether we understand the need or not. • Both CBI and CID cops do the forensic accounting work. Until recently there was no separate community in India. But now movement of Indiaforensic community is gathering the pace • Chartered Accountants are going to find themselves more involved in what is essentially a type of forensic practice .

21. Forensic Accountants

22. Forensic Accountants • Forensic Accountants may be involved in recovering proceeds of crime and in relation to confiscation proceedings concerning actual or assumed proceeds of crime or money laundering • Some Forensic Accountants are also Certified Fraud Examiners and/or Certified Public Accountants • Forensic Accountants utilize an understanding of business information and financial reporting systems, accounting and auditing standards and procedures, evidence gathering and investigative techniques, and litigation processes and procedures to perform their work.

23. traits of the forensic Accountants • The traits of the forensic Accountants could be compared to well bake Pizza. The base of forensic accounting is Accounting knowledge. Size and the extent of baking decide the quality of the Pizza. A middle layer is a dispersed knowledge of auditing, internal controls, risk assessment and fraud detection. It is like the spread of the cheese in Pizza. The toppings of this Pizza are a basic understanding of the legal environment. The legal environment is essential in order to support the litigations. The Cherry on the toppings of the pizza is a strong set of communication skills, both written and oral. It is just the beautification part. Perfect combination of the Pizza base, Cheese spread and good toppings makes the pizza delicious and the Forensic Auditor the perfect. It’s a combination that will be in demand for as long as human nature exists

24. Forensic accounting as career

25. Forensic accounting as career • Forensic Accounting is the fastest growing area of Accounting today! • Far from the humdrum stereotypic accountant your mind might have initially conjured, the forensic accounting professional is more of a private investigator with a financial sixth sense than the bookkeeper with a green eyeshade. • Since 9/11 Forensic Accountants have been playing a major role in tracing terrorists around the world.

26. Forensic Accounting • Forensic accounting also known as investigative accounting and is combination of accounting ,auditing and instigative skills . It provides accounting analysis that will be suitable to the court to form a basis of discussion to arrive at a solution of the dispute

27. Larger accounting firms as well as medium sized firms have professional forensic accounting departments. They specialize in insurance claims, fraud, construction or royalty audits

28. Difference between auditing and forensic accounting • An auditor does the review of accounts and jumps into investigation only when a doubt arises where as a forensic accountant starts the wok with investigation • An auditor’s duty ends with the submission of a report what went wrong where as a forensic accountant also as to see how it can be undone • An auditor’s role is of a verifier where as forensic accountant's role is of a investigator

29. Difference between auditing and forensic accounting • Detection of fraud is the secondary objective of auditing where as forensic accounting alleges detection into detail of spending, recording etc • Auditor detects the frauds and reports it where as forensic accountant detects the fraud , conducts investigation and decodes the financial angle of the crime for analysis suitable to the court which will lead to dispute resolution • Auditors never use the tools of statistical and computer aided techniques to arrive at any conclusions where as a forensic accountant does

30. A person dealing as forensic accountant shall posses not only the broad knowledge of accounting principles , practice and standards but also the knowledge of insurance, banking civil and criminal law and human psychology.

31. Branches of forensic accounting • Investigative accounting-it deals with investigation of criminal matters relating to employee theft, securities fraud, insurance fraud etc. it does not end with investigation but also includes provisions of suggestions regarding possible courses of action • Litigation Support- it involves providing accounting assistance in litigation matters. It primarily deals with quantification of economic damage

32. Steps invoked in forensic accounting • Recognition of the problem • Flow chart is prepared as how to go about • Collecting the evidence relevant to the problem • Evaluation of summarization of the evidence by various statistical and computer aided techniques • Preparation and submission of report

33. Application of forensic accounting • The application of forensic accounting can be better understood by the following case let: it is brought to the notice of the auditor by an employee that the manager misuses his right of reimbursement of bill on official tours by submitting fake bills and making money around Rs.50,000 a year

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