Forensic Accounting – a New Paradigm For Niche Consulting

OBJECTIVES OF WRITING THIS ARTICLE: Forensic accounting(F.A.) has come into limelight due to rapid increase in financial frauds and white-collar crimes. But it is largely untrodden area in India.The integration of accounting, auditing and investigative skills creates the speciality know as F.A.The opportunities for the Forensic Accountants are growing fast;they are being engaged in public practice and are being employed by insurance companies, edges, police forces, government agencies etc.This article seeks to examine the meaning and character, activities and sets rendered, chief knowledge and personal skills required for forensic accounting as a specialized field in accountancy profession. Indeed there is a future in F.A. as a separate niche consulting.

The without of respect and belief in India’s law enforcement agencies and the rate at which white-collar crimes have increased has prompted the development of Forensic Accounting in India. The fraud detecting agencies seems to without time and devotion needed for detecting and prevention of errors and fraud. According to a large global accounting firm, the market is sufficiently big enough to continue an unit devoted thoroughly towards “forensic accounting”. Many large in addition as small accounting firms in addition as the tiny firms have inculcated or rather developed separate forensic accounting departments.

We were of the belief that detection and prevention of frauds or white-collar crimes is part of traditional accounting function. It was thought that the frauds, both internal in addition as external has be to detected by the auditors by their regular audit. Now it is crystal clear that auditors can only check for the compliance of a company’s books to generally accepted accounting principles, auditing standards and company policies. Hence the need was felt to detect the frauds in companies that are suspected to be engaged in fraudulent transactions. This field of accounting is known as “forensic accounting”.

The litmus test of investigation, first introduced by the ever great Sherlock-Homes(considered by many as the father of Forensic Accounting) is perhaps the first ever application of forensic accounting. Though, the contribution of the other few great historians to the field of forensic accounting cannot be overlooked. They used various tricks to probe various crimes.

F.A. is a specialized a area of accounting practice that describes engagements which consequence from actual or expected disputes or litigation. The information “forensic” method “appropriate for use in court”. The forensic accountants have to keep in mind this statement while they have to work or chalk out their programme. The F.A. work is tailor made according to the situation and need. The gathering of information and evidences is done according to the need and situation. We can say, it is customized according to the situation. The forensic-accountants give expert evidence at the ultimate trial. All the modern medium-sized in addition as the large-sized accounting firms have specialized forensic accounting departments. Within these firms there may be specialized forensic accounting departments. Within these groups their may be further sub-specializations. Various sub-specializations include insurance claims, personal injury claims, fraud detection, construction or royalty audits. Nearly 40 percent of the top 100 US accounting firms are expanding their forensic and fraud sets, according to Accounting Today. Now if we consider this data as meaningful then we can say that the total contribution of forensic accounting to the total revenue of the C.A. firms would be highly meaningful in the years to come. Under rising instances of frauds and litigation and thriving businesses these sets are considered to be very meaningful as they are rendered at a very competitive price.

The forensic accountants utilize the various information relating the business, utilizes financial reporting systems, various accounting and auditing standards and procedures, investigative techniques and litigation processes and procedure to perform their work. By acting as advisors to audit committees and assisting in investment analyst research, they are playing more “proactive” risk reduction roles.This is possible by designing and performing extended procedures as part of the statutory audit. The objectives of such an accounting include measurement of losses caused by an auditor due to his negligence, to look into the matter whether their has been any embezzlement of cash, the amount, necessity of criminal proceedings, computation of asset values in a divorced proceeding.

The dominant approach technique of forensic accounting is explanatory examination(cause and effect)of the occurrences-including the discovery of deception(if any), and its effects -introduced into an accounting system field. The dominant methodology employed by the forensic accountants is the verification of the objective. They are trained to deal with real world business and do have the sufficient skill to look beyond(behind) the numbers. The scope of the forensic accountants are growing at a rapid speed. The increase in their work opportunities have been accelerated due to the fall of the Enron corporation and the collapse of the American Twin Towers.

This has led to increase in the need for American forensic accountants. So as far India is concerned, formation of Serious Fraud Investigation Office(SIFO) is a landmark creation so far as forensic accountants are concerned. Failure of regulators to track security scams, increasing cyber crimes, chain of cooperative edges bursting -all point to the ever increasing need for forensic accountants. Our understanding of the need for forensic accountants is immaterial here. In India due to the growing number of frauds the need for forensic accountants is ever increasing. The regulatory and administrative agencies will put pressure for greater need of forensic practices. This has been initiated due to the changing character of Indian and International accounting.Auditing and assurance standards also confirm this. A change in the curriculum can be initiated if the written exams and functional industrial training are boosted to show the “new knowledge base and skill-set” required by the specialized accountants in the new era. It is consequently recommended that the “forensic accounting and auditing” be introduced as a paper in the various specialized examinations conducted by the various accounting bodies in India. Unfortunately forensic accounting is largely an unexplored area as far as India is concerned. The chartered Accountants(CAs) deal with such situations in an irregular fact. In the western counter-part(countries), the Lawyers, police, insurance companies, government and regulatory bodies, edges, courts and business communities are increasingly employing the sets of the forensic accountants.The accountants and the auditors must have the skills and skill to venture into the emerging field of forensic accounting.

What Is Forensic Accounting? The growing needs of corporations has changed the definition of forensic accounting. As per Bologna and Indquist, “the application of financial skills and an investigative mentality to unresolved issues, conducted within the context of rules of evidence.It is a new emerging field that encompasses financial skill, fraud knowledge, and a sound knowledge and understanding of business reality and the working of the legal system.”It method that the forensic accounting should be skilled not only in financial accounting but also internal control systems, the legal matters, other institutional requirements, investigative blend of mind and interpersonal skills.

According to AICPA: “Forensic accounting is the application of accounting principles, theories, and discipline to facts or hypotheses at issues in a legal argument and encompasses every branch of accounting knowledge: ‘ Similarly, forensic accounting is defined by Horty as:

“The science that deals with the relation and application of finance, accounting, tax and auditing knowledge to analyze, probe, inquire, test and examine matters in civil law, criminal law and jurisprudence in an attempt to acquire the truth from which to render an expert opinion.”

In simple words, forensic accounting includes the use of accounting, auditing in addition as investigative skills to assist in legal matters.It comprises of two major elements: litigation sets, that recognizes the role of an accountant as an expert consultant and investigative sets, that uses a forensic accountant, s skills and may require possible court-room testimony.

Investigation of theft and defalcation of corporate and individual assets are part of legal matters.They use their education in addition as experience to discuss the facts, patterns of the theft or misappropriation.Business accounting systems are reviewed by the forensic accountants.They suggest ways and method to solve and enhance the internal control and internal accounting system.This is adopted to prevent theft and fraud. Because of their expert knowledge and educational background and experience their(forensic accountants) work is elevated to a new height.

Forensic accountants do not contest in situations.They act as fact finding devices, try trt to seek the real truth from the hidden facts.They conduct their work in an objective and objective manner.They need legal knowledge, skill, training and experience to perform their work in an effective and real manner.Extensive knowledge in the field of commerce, legal, accounting in addition an investigative blend of mind is needed to perform the work in a proper fact.skill in litigation sustain and testimony in courts of law are also prerequisites of the forensic accountants.This is due to the fact that their work would many times be used in a court of law.The valuation of damages due to criminal and civil wrong-doings need to be done with perfection and for that reason knowledge of business valuation theory is the most basic.

What exactly do the Forensic Accountants perform? Answer: They are trained to deal with real life business situations and are trained to look beyond the numbers.

examination, interpretation and summarization of complicate financial and business related issues are noticeable characteristics of this accounting/auditing profession. Familiarity with legal concepts and procedures is a must.Insurance companies, public practice, edges, police forces and government agencies are major employers of forensic accountants.

The various field of work encompassing the arena of a forensic accountant can be stated in points format as follows:

1) Financial evidence investigation and examination.

2) Development of computerized software to help in the examination and presentation of financial evidence.

3) Sharing their findings in the form of reports, slide shows or displays and documents collected.

4) To sustain trial evidence they prepare visual slides, assist in legal proceedings, including testifying in courts as an expert observe.

If we want to say or rather point out the role performed by the forensic accountants in a nutshell, we can say as follows:

Measurement or to quantify the impact of lost earnings. Such as construction delays, stolen trade secrets, insurance disputes, damage/loss estimates, malpractice claims, employee theft, loss of profit, financial solvency reports, disturbance damages, loss of goodwill, compensation losses suffered in expropriation determination, assessment of the possible business compensation costs and providing consultation on business defalcation minimization. Lease default damages, breach of contract, business interruptions, breaches of shareholders and partnership agreements, reconstruction of accounting records,

Investigation of misappropriation, assistance in establishing ownership and division of assets, commercial damages, specialized negligence situations, partnership disputes, expert evidence, fair value or fair market value and personal injury damages are included in commercial damages. Tax advocacy, compliance and review of financial statements, tax reporting and tax planning in such areas as income as estate matters are included in tax matters. examination, interpretation, summarization, presentation of complicate financial and issues relating to the business for investigation is the role of a forensic accountant.

They carry out investigative accounting and provide litigation sustain.

The sets rendered by the forensic accountants are in great need in the following areas:

1) Fraud detection where employees commit Fraud:

Where the employee indulges in fraudulent activities:

Where the employees are caught to have committed fraud the forensic accountant tries to locate any assets produced by them out of the funds defalcated, then try interrogate them and try to find out the hidden truth.

2)Criminal Investigation: Matters relating to financial implications the sets of the forensic accountants are availed of. The report of the accountants are considered in preparing and presentation as evidence.

3) Outgoing Partner’s settlement:

If the outgoing partner is not happy about his settlement he can use a forensic accountant who will correctly estimate his dues(assets) in addition as his limitations correctly.

4)situations relating to specialized negligence:

specialized negligence situations are taken up by the forensic accountants.

Non-conformation to Generally Accepted Accounting Standards(GAAS) or non compliance to auditing practices or ethical codes of any profession they are needed to measure the loss due to such specialized negligence or shortage in sets.

5) Arbitration service: Forensic accountants render arbitration and mediation sets for the business community, since they undergo special training in the area of different argument resolution.

6) easing settlement regarding motor means accident: As the forensic accountant is well acquainted with intricacies of laws relating to motor vehicles, and other applicable laws in force, his sets become indispensable in measuring economic loss when a means meets with an accident.

7) Settlement of insurance claims: Insurance companies include forensic accountants to have an accurate assessment of claims to be settled. Similarly, policyholders seek the help of a forensic accountant when they need to challenge the claim settlement as worked out by the insurance companies. A forensic accountant handles the claims relating to consequential loss policy, character loss due to various risks, fidelity insurance and other types of insurance claims.

8) argument settlement: Business firms include forensic accountants to manager contract disputes, construction claims, product liability claims, infringement of patent and trade marks situations, liability arising from breach of contracts and so on.

9) Matrimonial argument situations: Forensic accountants entertain situations pertaining to matrimonial disputes wherein their role is merely confined to tracing, locating and evaluating any form of asset involved.

chief Knowledge Of Forensic Accountants:

A forensic accountant is expected to be a specialist in accounting and financial systems. however, as companies continue to grow in size and complexity, uncovering fraud requires a forensic accountant to become proficient in an ever- increasing number of specialized skills and competencies. Here are some of the general areas of useful skill for a forensic accountant:

” An in-thoroughness knowledge of financial statements and the ability to critically analyse them. These skills help forensic accountants to uncover abnormal patterns in accounting information and recognise their source.

” A thorough understanding of fraud schemes, including but not limited to asset misappropriations, money laundering, bribery, and corruption.

” The ability to comprehend the internal control systems of corporations, and to set up a control system that assesses risks, achieves management objectives, informs employees of their control responsibilities, and monitors the quality of the programme so that corrections and changes can be made.

” Proficiency in computer and knowledge of network systems. These skills help forensic accountants to conduct investigations in the area of e-banking and computerised accounting systems.

” Knowledge of psychology in order to understand the impulses behind criminal behaviour and to set up fraud prevention programmes that motivate and encourage employees.

” Interpersonal and communication skills, which aid in disseminating information about the company’s ethical policies and help forensic accountants to conduct interviews and acquire crucially needed information.

” Thorough knowledge of company.s governance policies and the laws that control these policies.

” Command of criminal and civil law, in addition as, of the legal system and court procedures.

Personal Skills Required:

So what does it take to become a forensic accountant? In addition to the specialised knowledge about the techniques of finding out the frauds, one needs patience and an analytical mindset. One has to look beyond the numbers and grasp the substance of the situation. There is a need for the same basic accounting skills that it takes to become a good auditor plus the ability to pay attention to the smallest detail, analyse data thoroughly, think creatively, possess shared business sense, be proficient with a computer, and have excellent communication skills. A “sixth”sense that can be used to reconstruct details of past accounting transactions is also advantageous. A photographic memory helps when trying to visualise and reconstruct these past events. The forensic accountant also needs the ability to continue his composure when detailing these events on the observe stand. Finally, a forensic accountant should be insensitive to personal attacks on his specialized credibility. A fraud accountant (as forensic accountants are sometimes called) should also observe and listen carefully. By this, you can enhance your ability to detect lies whether they include fraud or not. This is so because”not all liars are fraudsters, but all fraudsters are liars”(Wells).

According to a forensic accounting expert, “the traits of a forensic accountant could be compared to a well-baked pizza. The base of forensic accounting is accounting knowledge. Size and the extent of baking decide the quality of the pizza. A middle inner is a distributed 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 area basic understanding of the legal ecosystem. The legal ecosystem is basic in order to sustain 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 of company’s the laws that Forensic Auditor perfects. It is a combination that will be in need for as long as human character exists.”

In addition to these personal characteristics, accountants must meet several additional requirements to become successful forensic accountants, say a Certification, acknowledging his competence. One can learn forensic accounting by obtaining a diploma given by Association of Certified Fraud Examiners (ACFE) in the US. Indian chapter of ACFE offers the course based on the white-collared crimes common in US, based on their laws. However, there is no formal body that provides formal education of the frauds in India. Besides the formal certificate, one can deepen one’s knowledge and sharpen one’s skills in forensic accounting by undergoing training under an experienced forensic accountant, participating in various international conferences, reading applicable journals, books and other literature on forensic accounting.

To combat the frauds effectively one needs the active sustain of government at every stage. There are three-four such agencies in India, which are dedicated to the mission of combating frauds. Serious Fraud Office looks into violations of Income Tax, FEMA, RBI Act, etc.; CBI (Economic Office Wing) deals with big financial frauds; Central Vigilance Commission deals with corruption. These are the major government agencies that combat frauds of different types. Unfortunately, there is no specialised education provided by any of the Universities in the country. Recently, TCS has also come out with software to combat money laundering and Subex Systems have designed software to combat the telecom frauds. consequently, combating the frauds with software has started picking up in India, with few big companies like ACL and IDEA, joining the race.

The Need For Niche Consulting:

The CPA Vision Statement states: “The CPAs are trusted professionals who permit people and organisations to shape their future. Combining insight with integrity, CPAs deliver value by: (a) communicating the total picture with clarity and objectivity, (b) translating corn plex information into basic knowledge, (c) anticipating and creating opportunities, and (d) developing pathways that transform vision into reality1 It reflects the trend towards providing a broader range of assurance sets. However, recent corporate accounting scandals and the resultant outcry for transparency and honesty in reporting have given rise to two disparate however logical outcomes. First, forensic accounting skills have become crucial in untangling the complicated accounting manoeuvres that have obfuscated financial statements. Second, public need for change and later regulatory action has transformed corporate governance. Increasingly, company officers and directors are under ethical and legal scrutiny. Both trends have the shared goal of responsibly addressing investors’ concerns about the financial reporting system. Indeed, there is a future in forensic accounting as a separate”niche” consulting area in India. The need to specialise, otherwise known as Niche Consulting, is imperative to practising accountants because the fast-paced developments in business thereby need specialised knowledge and skills. While a majority of CAs have excellent analytical skills, they need to concede that ‘forensic’ sets require ‘specialised’ training in addition as real-life ‘functional’ corporate experience. There is a need for specialised information, not just audit and tax service. What clients seem to want are people with rare sets of skills and experiences. With the maturing of the audit business, and the rapid development of technology that makes existing sets low cost and cheap, it appears that it is the right time now to acquire those rare skills. To help practitioners move into ‘niche’ consulting, some specialized organisations in the US have concluded that: “Future success for the profession depends, in part, on how the public perceives the ability of CPAs. New efforts in consulting, specialisation and understanding global business practices and strategies are considered crucial. We go out into the niche market, examining our strengths first. We go where the action is, only then we know we can adequately service our clients and make money doing it.” One area where ‘niche’ consulting is becoming the global trend is in “Forensic Accounting and Auditing’ But the major question facing the Indian accountancy profession is: Are we ready to drop to where the challenging action is?

Forensic Accounting In India:

It is in an beginning state in India.It is nevertheless an untrodden area in India.But due to ever increasing situations of bank & cyber-frauds its growing importance cannot be denied.

One immediate landmark creation is “Forensic Research Foundation”.They provide sustain for investigation of fraud.They publish one bi-monthly journal named as “White Crimes”.It relates to forensic and economic crimes. Another international organization named as KPNG has set up investigation detection centre in India.. Networks Limited, a Delhi based organization, working in the similar field, they are also trying to original ways and method to detect financial irregularities and crimes in India.Serious Investigation Fraud Offices(SIFO), has been established in India for the same reason, i.e. detection and prevention of economic irregularities and crimes. The need for such bodies and the importance of Forensic Accountants have been highlighted by L.N.Roy Committee.Lenin Parekh Committee has also expressed the view that one “fraud detection committee”need to be established. The main aim of such boards should be to prevent the interest of the stakeholders.

Conclusion:

Forensic accounting in India has come to limelight only recently due to rapid increase in white-collar crimes and the belief that our law enforcement agencies do not have sufficient skill or the time needed to uncover frauds. A large global accounting firm believes the market is sufficiently large to sustain an independent unit devoted strictly to ‘forensic’ accounting. All of the larger accounting firms, in addition as, many medium-sized and boutique firms have recently produced forensic accounting departments.

Forensic accounting, in fact, integrates accounting, auditing, and investigative skills to conduct an examination into a company’s financial statements. general-based knowledge (within the themes listed above) is crucial to the success of entry-level forensic accountants. Because forensic accounting is comparatively a new area of study, a series of working definitions and sharing of corporate experiences should be undertaken and promoted to ensure a shared understanding. Indeed, there is great future in forensic accounting as a separate”niche” consulting.

While the forensic accounting and auditing practice had commenced in the US as early as ‘1995, the seed of this specialisation has however to take off in India. Forensic accountants are only dealing with financial implications of the situations entrusted to them and not engaging in auditing exercise. On account of global competition, the accounting profession must convince the marketplace that it has the “best-equipped” professionals to perform such sets.

Forensic accountants are also increasingly playing more ‘proactive’ risk reduction roles by designing and performing extended procedures as part of the statutory audit, acting as advisors to audit committees, and assisting in investment analyst research.

While majority of CAs have excellent analytical skills, they need to concede that ‘forensic’ sets require ‘specialised’ training in addition as real-life ‘functional’ corporate experience.

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References: –

1)Journal Of Forensic Accounting: Editor-In Chief: Crumbley D. Larry, Publisher: Inc.Edwards. R.T.

2)Journal Of The Chartered Accountant 2007, Pages: 1000-1010.Dr. Madan Bhasin, The Author is Head, Accounting Department, Mazoon College, Muscat, Sultanate Of Oman.

3)Referential Notes Of Prof. Dutta Kr. Uttam, Reader Deaprtment Of Commerce, Reader, University Of Burdwan.

4)Website access: http://www.wikipedia.com, accessed on 4th, February, 2008.

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