Study of Bank Reconciliations- an investigator*s

Forensic accounting: Opportunities in forensic accounting Chetan Dalal WIRC of ICAI Goa June 13, 2014

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.

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

1. Forensic Accounting Its Meaning and relevance to Chartered Accountants

Forensic Audit5

Technical definition-Wikipedia, the free encyclopedia

Forensic accounting is the specialty practice area of accountancy that describes engagements that result from actual or anticipated disputes or litigation. "Forensic" means "suitable for use in a court of law", and it is to that standard and potential outcome that forensic accountants generally have to work.

Forensic accountants, also referred to as forensic auditors or investigative auditors, often have to give expert evidence at the eventual trial.

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

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 CAs7

-Accounting -Auditing -Detective

What are the traits of a good forensic accountant?

1. Distrust the Obvious or Use Professional Skeptcism 2. 3D vision: Use multiple sources of information to get the truth- multi dimensional approach

3D Vision

ABC MULTIPLEX THEATRES LIMITED CASH RECEIPT : 24321

DATE: 26/7/01

Being: Cash collected for :

Rs.

Sale of tickets Sale of food and beverages Other

52, 762 -

Total Rs. Total tickets sold for morning show:

52, 762 Rs.58,625

469@ Rs.125

Group Discount to ABC Charitable Inst @

Rs. 5,863

10 %

Net Cash Collection Amount Rupees: Fifty two thousand seven hundred and sixty two only CASHIER:

SUPERVISOR:

Rs.52,762

ABC MULTIPLEX THEATRES LIMITED CASH COLLECTION REPORT:

DATE: 26/7/01

SHOW: Morning

Previous show's last ticket sold Current show's last ticket sold Total tickets sold @ Rs.125

10178 10647 469

Rs.58,625

Group Discount @

10 %

Rs. 5,863

Net Cash Collection Denomination of Cash notes and coins collected: Notes: 1000 500 100 50 20 10 5 2 1 Coins 5 2 1 50p 25p Total Rs

Rs.52,762

252 340 10 875 119

Rs. 25,200 Rs. 17,000 Rs 200 Rs. 8,750 Rs. 595

201 6

Rs. Rs.

1,005 12

Rs. 52,762

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

2. Simple Forensic tests useful in fraud detection and audits

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

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

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

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.

For example: Trojan horse fraud

Achilles Heel Fraud

3. Some Case studies in Fraud Detection

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Disaster situations: Causes or even effects of fraud

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?

4. Opportunities in Forensic Accounting and Fraud Detection

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

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

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

How can one tap these opportunities? 1. Get ICAI FAFD certification – to get visibility. 2. Get international acreditation- CFE etc though not absolutely necessary. 3. 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.