Chapter No.

– 4
Forensic Accounting & Auditing – Scope & Process

4.1 Introduction
A lot is written about forensic accounting in the literature in Western countries. However,
there was no specific definition of the word forensic accounting before 2003. Kasum,
A.S. University of llorin, llorin, Nigeria made the first reference to the research paper
written by CA Mayur Joshi in year 2009 in his widely recognized research. Kasum gives
the credit to Indian forensic accountant Mr Mayur Joshi in his research papers for
defining the forensic accounting in India.
Forensic accounting is a complicated term. There are number of misconceptions about
the term forensic accounting. Literal meaning of this term is analysis of the evidence of
the financial statements before the court of laws. When the forensic accounting was
coined in 1940 by American professionals it consisted of
• Accounting
• Auditing
• Investigative skill sets
This definition was challenged by Mayur Joshi in the year 2003 and he made an
argument that Auditing is an extended skill of accounting and the definition in 1940’s
missed out the role of technology. In 1940s the technology was in nascent stage, hence
there was no question of adding it as the skill set. Mayur changed the definition and re-
defined the term which now consist of
• Accounting
• Investigative mind set
• Technology Understanding
Forensic Accounting has taken many great leaps of growth in recent history. The
Accounting industry has gradually called for more and more Forensic Accountants. It is
predicted that growth of the industry, based on the number of jobs reached 6.7% for the
years between 2013 and 2018. The revenue the industry brings in is also steadily
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increasing as time goes on. Like any other job, Forensic Accounting has evolved with
time. The industry has been affected by changes in technology, society and the economy.
As one aspect of world changes so has the job of a Forensic Accountant. Continuing
education is only one way in which Forensic Accountants learn how to adjust to new
challenges. The profession has been around since the early 1990’s and has greatly altered
the way fraud is discovered and handled since then.
Forensic accounting is a rapidly growing area of accounting concerned with the detection
and prevention of financial fraud and white-collar criminal activities. George A. Manning
in his book "Financial Investigation and Forensic Accounting" defines Forensic
Accounting as the science of gathering and presenting financial information in a form
that will be accepted by a court of jurisprudence against perpetrators of economic crimes.
The integration of accounting, auditing, and investigative skills yields the specialty
known as Forensic Accounting which focuses very closely on detecting or preventing
accounting fraud. "Forensic", according to the Webster's Dictionary means, "Belonging
to, used in or suitable to courts of judicature or to public discussion and debate."The word
accounting is defined as "a system of recording and summarizing business and financial
transactions and analyzing, verifying, and recording the results." The term forensic
accounting' refers to financial fraud investigation which includes the analysis of
accounting records to prove or disprove financial fraud and serving as an expert witness
in Court to prove or disprove the same. Thus, basically, the forensic accounting is the use
of accounting for legal purposes. Forensic accounting is very important tool to detect,
investigate and prevent the frauds whether it is stock market fraud or bank fraud or cyber
fraud, forensic accounting has become an indispensable tool for investigation. With India
being ranked as the 88th most corrupt nation, the need for forensic accountants become
all the more profound.
Forensic Accounting Beginnings
The term "forensic accounting" was first used in 1946 by Maurice E. Peloubet, a partner
in a New York accounting firm. He wrote about the use of accounting in courtroom
proceedings as part of testimony, but acknowledged that investigation was becoming
more prevalent for accountants due to the increase in government agencies that regulated
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financial practices. Journals began to publish articles about the connections between law
and accounting. In 1953, a New York lawyer named Max Lourie claimed that he invented
the phrase "forensic accounting," although Peloubet wrote about it first. Lourie stressed
the need for forensic accounting literature and training. Forensic accounting service has
been the growth industry in the 1990s. Called the private eyes of the corporate culture,
forensic accountants must have an investigative mentality. A normal accountant acts like
a watchdog, but a forensic accountant must be trained to act like a bloodhound. They
look behind the facade and do not accept financial records at their face value.
"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
accounting” is the practice of utilizing accounting, auditing, and investigative skills to
assist in legal matters. Forensic accounting is the specialty practice area of accountancy
that describes engagements that result from actual or anticipated disputes or litigation.
Forensic accounting is the application of accounting principles, theories, and disciplines
to facts or hypotheses at issue in a legal dispute, and encompasses every branch of
accounting knowledge. There are two major aspects within forensic accounting practice -
1. Litigation support services that represent 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. If a dispute reaches the
courtroom, the forensic accountant may testify as an expert witness.
2. Investigative services that make use of the forensic accountant’s skills, which may or
may not lead to courtroom testimony. It 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. Investigation may also occur in civil matters. For example, the
forensic accountant may search for hidden assets in divorce cases. An important criterion
is the ability to respond immediately and to communicate financial information clearly
and concisely in a courtroom setting. A forensic accountant must be open to examining
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all alternatives, scrutinising the fine details and at the same time seeing the big picture.
Forensic accounting can involve the application of special skills in accounting, auditing,
finance, quantitative methods, certain areas of the law and research, and investigative
skills to collect, analyze, and evaluate evidential matter and to interpret and communicate
findings.

Application of Principles of Forensic Accounting to an organisation

One premise of forensic accounting is to look for indications of abnormal occurrences in
the accounting and financial reporting systems. Having a forensic accounting orientation
to designing the accounting processes will provide an opportunity to design in steps for
verification of key assumptions and data while also providing the opportunity for
identifying possible fraud. The related area of forensic auditing can help in reducing the
transaction processing risk by helping to perform audit type procedures on a routine
schedule. Timely performance of audit type procedures can help management and
internal audit function be more effective by helping to identify and resolve potential
internal control breakdowns quickly and thoroughly. It can reduce external audit costs by
regularly completing testing procedures that are part of the annual certified audit. In
instances where information processing systems cover a broad array of businesses and/or
locations establishing routine or continuous monitoring of all transaction processing
systems, it can be considered as a type of forensic accounting. Some of the areas that the
principles and activities of forensic accounting can apply in an organization include:
• Reviewing operational transactions for compliance with standard
operating procedures and approvals.
• Completing analysis of financial disbursement transactions in the
accounting system to determine if they are normal or outside company
policy and, thus, possibly fraudulent.
• Reviewing general ledger and financial reporting system transactions for
possible improper classification or manipulation of data or accounts and
its impact on the resulting financial reports.
• Examining warranty claims or returns for patterns of fraud or abuse.
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 • Helping estimate the economic damages and the resulting insurance
claims that stem from calamities such as fires or other natural disasters. •
Evaluating or confirming business valuation in mergers and acquisitions.

Forensic Accountants - The Bloodhounds of Book-keeping

Forensic accounting requires the most important quality a person can possess: the ability
to think. There is no book that tells you how to do a forensic investigation. It is about
solving a puzzle or peeling an onion. It takes creativity. All of the larger accounting
firms, as well as many medium-sized and boutique
firms, have specialist forensic accounting departments. Within these groups, there may be
further sub-specializations: some forensic accountants may, for example, just specialize
in insurance claims, personal injury claims, fraud, construction, or royalty audits.
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. In the United Kingdom, relevant legislation is contained in the Proceeds of
Crime Act 2002. In India, there is a separate breed of forensic accountants called
Certified Forensic Accounting Professionals. Some forensic accountants are also
Certified Fraud Examiners, Certified Public Accountants, or Chartered 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. 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 advisers to audit committees, fraud deterrence engagements, and
assisting in investment analyst research. The forensic Accountant is a bloodhound of
Bookkeeping. These bloodhounds sniff out fraud and criminal transactions in bank,
corporate entity or from any other organization’s financial records. They hound for the
conclusive evidences. External Auditors find out the deliberate misstatements only but
the Forensic Accountants find out the misstatements deliberately. External auditors look
at the numbers but the forensic auditors look beyond the numbers. Forensic accountant
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takes a more proactive, sceptical approach in examining the books of Accounting. They
make no assumption of management integrity (if they can assume so then there is no need
for their appointment) show less concerns for the arithmetical accuracy have nothing to
do with the Accounting or Assurance standards but are keen in exposing any possibility
of fraud. In addition to the specialized knowledge about the techniques of finding out the
frauds one needs patience and analytical mindset. One has to look beyond the numbers
and grasp the substance of the situation. It is basically the work of the intelligent
accountants. He needs to question seemingly benign document and look for
inconsistencies. He searches for evidence of criminal conduct or assists in the
determination of, or rebuttal of, claimed damages.

Who needs Forensic Accountants?

Forensic accountants are more than just number crunchers who happen to work on
criminal or civil disputes -- these accountants possess additional skills. They must
conduct investigations, know how to use a variety of computer programs and
communicate well. Some forensic accountants specialize in specific industries that are
susceptible to fraud, such as insurance or banking, and learn the business practices
associated with those fields. 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.

Forensic Accounting in India

Forensic accounting is unique in that it combines accounting with investigation. These
bloodhounds— as opposed to the watchdogs that are auditors— attempt to sniff out
fraudulent transactions from the financial records of banks and companies. Sherlock
Holmes was probably the most famous practitioner But Kautilya was the first economist
who openly recognized the need of the forensic accountants. He mentioned forty ways of
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embezzlement centuries ago. The Opportunities for the Forensic Accountants are
growing at the rapid speed. Collapse of Enron and World Trade Centre twin towers have
blessed the
American Forensic Accountants with the opportunities. Forensic accounting is still
nascent in India. However, the nature of fraud in India has undergone a change. Reserve
Bank of India has made forensic accounting audit compulsory for banks in India.
However banks are hesitant in approaching certified fraud examiners, and are mostly
dependent on their internal auditors. 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.In the Indian context the Forensic Accountants are the most required in
the wake of the growing frauds. After the Satyam scam, forensic auditors are much in
demand as many companies want to understand what could be the initial warning signals
of a Satyam kind of fraud in other Indian companies. Even the government’s Serious
Fraud Investigation Office (SFIO) has sought the help of forensic accountants to get to
the root of the financial fraud at Satyam.

How to become a Forensic Accountant

Commerce graduates can easily take up forensic accounting as a career. You need to
become a chartered accountant and then specialise in forensic accounting. The forensic
accountants prior audit and accounting experience will be of tremendous assistance. But
ultimately, it is only through working with experienced forensic accountants on various
cases that one can learn the skills necessary to become a capable forensic accountant.
There are several organizations that provide training and additional certification for
forensic accountants. Each organization requires that its members possess varying
degrees of education and experience, and they must sit for additional exams. These
certifications show that a forensic accountant has training and experience beyond that of
a standard accountant. Some places where one can study and/or obtain certifications as
Forensic Accounting Professional are
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 Institute of Chartered Accountants of India, New Delhi
Association of certified fraud examiners (ACFE), USA
Indiana University, Bloomington, USA
British Columbia Institute of Technology, Canada
Charles Stuart University, New South Wales, Australia
Some forensic accountants take courses in:
Sociology
Psychology
Law enforcement
Criminal law
Business law
Business and finance
Information systems
Communication
Forensic accountants are trained to detect evidence of frauds. Forensic accounting is
about more than legal matters and financial numbers. There is an acute shortage of
forensic accounting skill sets in India. A huge demand for forensic accountants has come
up in the wake of the requirements from the investors after the Satyam fiasco. There are
only about 400 forensic accountants in the country though India loses approximately $40
billion because of frauds.

4.2 Meaning and Definition of Forensic Accounting

The word forensic is derived from the Latin adjective, forensic which refers to one who is
in the public square. In ancient Rome, forum or square was the place where various
commercial and state affairs, debates and often trails were performed. The person, who
would have been accused of a crime, had to appear in front of a group of individuals in
the forum and together with the person who had accused him, answer to the questions
about the allegations.
For more precise definition of Forensic Accounting, many authors provide their
interpretations, thus in the literature, various definitions of this term could be found. The
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authors Bologna and Lindquist define forensic accounting as a general term used to
describe any financial investigation that could result in the judicial proceedings. Williams
states that forensic accounting represents a certain type of professional expertise, which is
supported by features that can be clearly identified as rationality, objectivity and
independence. The aforementioned author states that forensic accountants have particular
social recognition, which is crucial to the economic issues and its translation into trust
T.Singleton and Singleton A. believe that the term “forensic” in accounting refers to the
relation and implementation of financial items in legal problems, therefore the evidence
in forensic accounting in related to the court. Over time , the court proceedings began to
apply knowledge from other scientific fields, so today forensic has become an
interdisciplinary field using different scientific achievements and knowledge, with the
aim of assisting in delivering unbiased, substantiated and fact-based court judgments.
Considering the variety of services provided by forensic accounting, different authors use
a wide range of activities that forensic accountants conduct in order to examine the
financial, but also non-financial information for the clarification of disputed facts. Kahan,
Manning and Wells state that forensic accountants by using financial information, can
understand, interpret and distinguish the important from the insignificant as well as can
reconstruct, identify, preserve, report and testify financial information, obtained in the
process of investigating fraud in court. Forensic accountants often analyze financial
statements through various indicators such as financial ratios, horizontal and vertical
analysis of financial statements, data mining techniques like Benford’s Law and many
others. The Member of the AICPA and professor, Dahli Gray, indicates that forensic
accountants provide services in civil proceedings in respect of different situations,
including commercial procurement, valuation of marital property in divorce proceedings
compensations claims, lost profits due to fraud and other illegal acts, degradation of taxes
and money laundering techniques.. Wells believes that investigation skills and research
mentality should also adorn the forensic accountant, but many years of experience
working on complex fraud cases in law implementation provide priceless knowledge and
experience.

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Although forensic accounting involves performing a wide range of activities, in general,
it can be divided into two broad areas. Investigative accounting and Judicial support. As
part of the investigative accounting there may appear Financial Crime examination and
Independent forensic audit while judicial support refers to consulting services, expertise
and other services.
Criminal activities represent an attack on basic social values and goods. Economic
criminality as a specific type of criminal act, has all characteristics of criminality and can
be seen as a concrete criminal occurrence, which took place in the past, while its
detection and proving come later, through reconstruction based on indications and
evidence. The increase in crime is one of the basic social disorders, which manifests in
the crisis of the legal system and morality and represents a significant economic burden
to the society The global report of the Association of Certified Fraud Examiners (ACFE),
which includes the analysis of 1,483 occupational fraud cases in more than 100 countries,
according to the respondents, estimates that a typical legal entity loses 5% of its revenue
each year due to criminal acts committed in the organization Misappropriation of assets
occurs in 85% of cases, with a median loss of 130,000 dollars. In contrast, only 9% of the
cases related to fraud in the financial statements, although these cases, according to the
survey, have the greatest financial impact, with an average loss of 1,000,000 dollars.
Although external audits were conducted in many organizations, they proved to be the
least effective method of control against fraud. External audit detected the fraud only in
3% of cases, compared with 7% of cases which were detected incidentally. Thus,
although the independent audit plays a vital role in organizational management, the
results suggest that it should not be seen as a primary mechanism for detecting fraud in
financial reporting. Furthermore, with the increasing number of laws and regulations,
their frequent changes, together with the increase in the complexity of criminal activity in
legal entities, there is a need for further development of forensic accounting and forensic
auditing. The ACFE as an international organization offers people interested in the field
of forensic accounting, various programs and training, such as the certification for
Certified Fraud Examiner - CFE, while the AICPA offers the certification for Certified in
Financial Forensics – CFF intended for the Certified Public Accountants specialized for
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forensic accounting. Regarding the countries in our region, in the Republic of Serbia, in
2012 there was introduced a new professional title of Certified Forensic Accountant,
while in the Republic of Croatia this title was introduced in 2009. Unfortunately, so far,
in the Republic of Serbia, in 2011 there was introduced only a course of forensic
accounting in financial investigations for prosecutors,
organized by the Organization for Economic Co-operation and Development (OEEC) in
Serbia and the Ministry of Justice of the United States. This course was aimed to improve
the work of the Prosecutor’s Office, through the analysis of financial data, as well as
gathering information on money laundering, corruption or other criminal acts of
economic crime.

What exactly is forensic accounting or forensic audit? How does it differ from an
audit?
A very simple description of forensic accounting is the use of accounting, auditing and
investigative skills to analyze financial information for use in legal proceedings. The
word is “Forensic” means” suitable for use in a court of law”. Forensic accountant also
referred to as forensic auditors or investigative auditor; often have to give expert
evidence at the eventual trial. There are many differences between an audit and forensic
audit. The most important difference between the two can be described as follows.
An auditor usually relies on documentary evidence for expressing an opinion. While
Forensic auditor examines the reliability of the documentary evidence for making an
assertion or a statement in a court of law. The forensic accountant has much greater
responsibility and his report may have far reaching ramifications in a court of law.
Forensic audit is specific to an issue and more often than not its’ genesis is a dispute and
its objectives and deliverables are unique in each situation. The forensic accountant
usually visualizes what kind of deliverables would be possible and there is some degree
of flexibility in this aspect. However, an audit usually does not stem from any dispute and
objectives and disclosures of audits mandated under the Companies Act, 2013 or the
Income Tax Act, 1961 etc are defined in the relevant Acts.

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The concept of forensic audit can be best understood through a real-life case, the
chairman of a bank was worried. A borrower had failed to repay a huge loan of Rs 70
crores. The bank had 2 options. One option was to take legal recourse and commence
recovery proceedings. The second option was to agree to the borrower’s request to fund a
further 8 crores to revive his business. The borrower claimed the recessionary conditions
which had caused his losses, had receded and now he had some big export orders on
hand. Therefore he had a good chance to turn the corner and he expected to repay the
loan to the bank in 4 years. Should the bank take the first option? If so it was certain that
the legal battle would drag on for years and the chances of recovery , in the foreseeable
future were slim. On the other hand, in option two, the bank would be able to get the
money back in 4 years. But the question was “is the borrower taking the bank for a ride?
Was the past loss purely due to recessionary conditions and not due to mismanagement or
siphoning of funds? The borrower had indeed provided audited statements of his
company for the past few years. However, the information given in the audited financial
statement and the auditor’s report did not spell out the reasons for the business loss. The
financial information was not sufficient for the bank to ascertain whether there could
have been any malpractice or abuse or misuse of assets or funds. This was a situation
where the bank wanted information which was more specific, to enable it to decide which
of the two options stated above to be selected. Essentially the bank wanted to know
whether the borrower was a genuine victim of recessionary business conditions or not.
The bank had to rule out the probability that the borrower was a manipulative, conniving
or deceptive borrower who had hoodwinked the bank in the past. The bank chairman was
advised to get a forensic audit conducted to get answers to all these questions. The bank
thus appointed a forensic accountant who was able to find a lot of information which
provided valuable insights for the bank to take the right decision. The forensic audit
report, on the one hand, prevented the bank from losing a further sum of 8 crore per
option two. On the other hand, the report facilitated the bank to go in for option one of
recovery and legal proceedings including the police compliant for criminal actions of
fraud and falsification of documents.

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What did the forensic auditor find out that the other officials of the bank, the auditor, the
internal auditor, the tax auditor and others in corporate governance were unable to find?
The forensic auditor found that the borrower had been transferring funds to satellite
entities, having his family concerns. Personal expenses and expenses of those satellite
companies had been debited to the borrower’s company to show losses. Moreover the
forensic auditor did some field investigation which revealed that the borrower used to
take a lot of income in cash, thereby showing lesser sales. The combined effect of all
these methods was that the borrower had been able to siphon out huge funds from those
loaned by bank and palm off such transfers as expenses resulting into losses. The process
of collection of specific information and evidence which the bank could use for decision
making and also for the court proceedings is what is forensic auditing all about. The
terms forensic accounting and forensic audit mean the same and are often used
interchangeably

4.3 Scope of Forensic Accounting

A large part of forensic accounting work relates to fraud detection and fraud
investigation. Forensic accountants are asked to take up assignments related to disputes,
financial crimes, corrupt practices, business leakages and siphoning of funds,
whistleblowers complaints of any kind and the many other situations where any
wrongdoing is suspected. Forensic accountants can be appointed by corporate
management, third parties affected in any situation, bankers, or even under the law or by
government agencies. In the last decade, some of the really intensive users of forensic
accountants are the police, ED, Reserve Bank of India, tax authorities and large public
sector corporations. A recent trend is emerging where in individual court room cases even
judges appoint forensic accountants for their own evaluation of disputes.

Does forensic accounting relate only to financial Fraud?

Generally speaking, the answer is yes. However, it would be incorrect to say that forensic
accountants are not approached to investigate non-financial crimes. For example in a
public listed company there was a lady employee who got an obscene letter placed on her
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desk. She threatened to complain to the police. However, the ethics counselor stepped in
and assured the lady that the company would look into this matter seriously and
investigate and apprehend the culprit. They requested her to hold on till they completed
an internal investigation. She relented and the ethics counselor approached a professional
forensic accountant and he did a remarkable job. The forensic accountant used his team
which had comprehensive skill sets to perform computer forensics interviewing
techniques and handwriting evaluation to nail the culprit. The aggrieved lady was
satisfied and the company management was saved by the astute forensic accounting
work. Similarly, forensic accountants may even be used for marital disputes to
understand what kind of assets and finances are held by the opposite spouse and to
facilitate a fairer settlement. However non-financial cases are few in number.
What are the tasks usually performed by a forensic accountant?
A forensic accountant is expected to be able to perform all the tasks that an accountant
and an auditor is able to perform. In addition, he should have in his team, reasonable
expertise in interviewing, interrogation, data mining and investigative analysis, field
investigations, computer forensic and handwriting and specimen signature analysis.
Steps in performing forensic accounting
The broad steps in forensic accounting are 1) Establishing a clear mandate outlining
specific objectives and deliverables 2) Data and evidence collection 3) Data analysis and
4) Evaluation of all data and evidence collected and finally 5) Reporting
Forensic accounting and fraud investigation have been gaining more and more
importance particularly after the commencement of Companies Act, 2013. Opportunities
for Chartered Accountants are plenty and appear to be increasing every day. It would be
well worth the effort of Chartered Accountants to learn and implement forensic type
techniques. They will be useful in regular audits in any case and further enhance their
areas of practice in the foreseeable future.

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4.4 Pillars of Forensic Accounting
There are two big pillars of forensic accounting. These are;
LITIGATION SUPPORT
It provides assistance of an accounting nature in a matter involving existing or pending
litigation. It deals primarily with issues related to the quantification of economic damage.
A typical litigation support assignment would be calculating the economic loss resulting
from a breach of contract
INVESTIGATIVE ACCOUNTING
It is often associated with investigations of financial frauds. A typical investigative
accounting assignment would be an investigation of occupational fraud. Other examples
include securities fraud, insurance fraud, kickbacks.
By and large the litigation support is the area of interest for the students of law but
dealing with the financial frauds falls in the purview of any management student who
understands finances. Hence the focus of this study is more on the investigation side than
the litigation support. Fraud is a taboo subject which brings jitters to the management.
Especially if the company is listed then the management personnel visualize losing jobs,
falling share prices, downgrading by brokerage houses and complete fiasco. Hence
understanding the impact of corporate frauds, and potential losses associated with fraud
and establishing effective loss control measures are critical for companies from cost,
cultural, and risk management perspective.

4.5 Forensic Accounting in Abroad

Forensic Accounting can be described as the use of auditing and investigative skills to
examine financial statements in preparation to be used in a court of law. However, there
are many avenues and variations of the job that can be utilized that do not necessarily
coordinate with that description. A Forensic Accountant can be hired to do everything
from settle divorce disputes to uncovering fraud in large corporations. The amplified
awareness and importance of catching and preventing fraud has begun a steady increase
in the demand for Forensic Accountants. However, fraud is not the only reason the
industry has changed since its inception. Forensic Accounting has taken many great leaps
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of growth in recent history. The Accounting industry has gradually called for more and
more Forensic Accountants. It is predicted that growth of the industry, based on the
amount of jobs, will reach 6.7% for the years between 2013 and 2018. The revenue the
industry brings in is also steadily increasing as time goes on. In 2013 the industry brought
in $4.5 billion and is expected to bring in $6.3 billion by 2018 (Chiang, 2013). Like any
other job, Forensic Accounting has evolved with time. The industry has been affected by
changes in technology, society, and the economy. As one aspect of the world changes so
has the job of a Forensic Accountant. Continuing education is only one way in which
Forensic Accountants learn how to adjust to new challenges. The profession has been
around since the early 1900’s and has greatly altered the way fraud is discovered and
handled since then. In the 1990’s the FBI announced that white-collar crime made up
only 5% of all cases they saw. They also noted that white-collar crime was responsible
for 95% of the financial losses suffered by victims (Manning, 2005). Forensic
Accountants are used to mitigate these losses and recover them if possible.

Forensic Accounting in Action

One of the most well known cases of Forensic Accountancy is the capture of Al Capone.
A team of Forensic Accountants gathered information in an irrefutable case against
Capone in 1931 (Buckstein, n.d.). He captured their attention by failing to claim all of his
“earnings” on his taxes. This income was from embezzlement, gambling, prostitution,
and many other illegal activities. It is obvious why he would not want to declare this
money on his taxes. The biggest irony of Capone’s life was that of all of his illegal
activities the one that finally put a stop to him was tax evasion. As horrible as his other
crimes may have been the fact that he was stopped was all that mattered. Forensic
Accountant’s lay claim to that glory, though, Accountants have been used as expert
witnesses in court cases since the case of Meyer v Sefton in 1817. The case is the first
known instance in which an accountant was used as an expert witness in a court of law.
This instance was how the profession Forensic Accounting began however it did not
become well known or in high demand until much later. The same techniques and goals
were used before but it was not a defined profession until this time. Forensic Accountants
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use techniques that have been referenced since the 18th century in Scotland (Tucker,
2011). The name Forensic Accounting wasn’t even coined until 1946 implying that this
specialty career path was not especially common. Even the first Forensic Accounting
book did not come out until 1982 (“Introduction to Forensic,” 2011). The popularity and
need for the services Forensic Accountants provide has steadily and more rapidly grown
in the past few decades. In the 1960’s the FBI employed over 700 Special Agent
Accountants. They have maintained a similar level of employment in their Financial
Crimes Section to this day. They investigate cases of financial fraud, crimes over the
Internet, money laundering, and many other economic crimes. Six weeks of intense
training are required before anyone starts their job with the FBI Financial Crimes team.
As most Forensic Accountants must, they testify to any findings in court on a regular
basis and are often broken up into investigation and litigation support. However, the two
go hand in hand. In the early 2000’s the infamous Enron scandal took the accounting
world by storm. Enron borrowed money in order to maintain their rate of growth, which
had skyrocketed very quickly in 1999 and 2000. They hid debt from their books and
investors by partnering with fake companies such as Chewco, named after the Star Wars
character Chewbacca. They offered secret information about the company in order to get
bigger investors interested. Skepticism about how Enron was making their money began
to emerge in the news. In late 2001, the SEC began to investigate Enron’s partnerships
and it soon became apparent they owed over $6 billion in debt (“Enron Scandal,” n.d.).
This scandal put Forensic Accountants
even further onto the map. The more financial misrepresentation that were uncovered in
the scandal the more pressure was put on accountants to prevent it. Sarbanes-Oxley of
2002 put major requirements on accountants but it also put pressure on Forensic
Accountants to make sure the requirements get carried out correctly. Sarbanes-Oxley
opened up a whole new field of investigation for Forensic Accountants. For one, it
requires management to certify that their financial statements are free from material
misstatement and fraud. Since the Enron scandal and others like it there has been in
increased demand for audits and scrutiny of all companies. Often these audits take a
Forensic Accountant with them for their expertise. Forensic Accountants have also been
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called in to discover whether any misstatements were intentional or by mistake. There is
a lot of pressure on management to provide nearly perfect financial statements. therefore,
there is an increase in demand for Forensic Accountants valuable knowledge in that area.
In 1996, Orinda-Moraga Disposal Services was put under scrutiny when they wanted to
raise their rates. The suspicion became known when California’s Contra Costa County
had to give their approval of such a raise. They knew the company had recently asked to
lower rates. After Forensic Accountants got involved it became known from Orinda-
Moraga’s records that the company had been sending checks to fake companies at fake
locations (Freeman, n.d.). Forensic Accountants were even critical when it came to
Hurricane Katrina. They got involved with insurance companies when victims of the
natural disaster had large claims and needed to make sure they had good estimates for
claims. They understood the policy and coverage and made sure any lost items were
classified and accounted for correctly (“Lodging Hospitality,” 2008). Divorce, seemingly
more often than not, involves a Forensic Accountant as well. In well-known Beatles
singer Paul McCartney’s divorce in 2008, they were called in to investigate how much he
was really worth. McCartney claimed only about half of what he actually had. A team of
Forensic Accountants found money he had put in bank accounts in Switzerland,
laundered through business, hid in safety deposit boxes, and put in unregistered bearer
bonds (Levine, 2008). Detecting this kind of fraud is very common in divorce cases.

Forensic accounting Job

Education to become a Forensic Accountant is a relatively new concept. Until recently, it
was common for a Forensic Accountant to learn through experience on the job. Now,
students can attend schools that specialize in Forensic Accounting and offer programs
and degrees in the subject. This is one indication that the profession is taking off. Now
there are a variety of schools that offer actual programs in Forensic Accounting. Most
colleges at minimum offer a course in the subject. Programs can be expected to pop up
more often in the future. The job of a Forensic Accountant has recently been treated more
like an FBI Special Agent with a CPA emphasis. In 1946, Maurice Peloubet coined the
term Forensic Accounting commonly used now (Brown, 2008). The term literally
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describes the role of an accountant as using financial knowledge, technology, and
techniques to provide information presentable to a court of law. In 1997 Derek Donohoe
shared his views on the job of a Forensic Accountant: Principally, it involves the
distinction between fact and opinion. Matters of fact can be investigated and determined
by the forensic accountant who can then prepare a definitive report on the facts.
Alternatively, it may be necessary for the forensic accountant, using professional
judgment, to report the findings by using an opinion report.It’s a well-known reality that
accountants use facts and techniques that make their information highly dependable if not
perfect. The criminal justice system employs the “beyond a reasonable doubt” rule. In the
same way, the accounting world uses materiality as a threshold level of acceptability for
misstatements. For Forensic Accountants there is no such thing. Sample testing is
generally not done. All records in a time period would be reviewed. Sometimes even the
smallest transaction can be an indication of fraud (Hecht, 2010). One tool that Forensic
Accountants use to discover fraud is Donald Cressey’s Fraud Triangle. Cressey
developed this tool as a distinguished sociologist and criminologist in the 1940’s. He
became highly specialized in detecting fraud. Cressey interviewed 200 people that were
found to have committed fraud to develop the Fraud Triangle. The Fraud triangle shows
the three characteristics that must be present in the situation for fraud to be committed.
These three things are opportunity, rationalization, and pressure. If a Forensic Accountant
on the job feels that these three attributes are present in the organization it is likely that
they will find fraud. They will use professional scepticism in situations such as these.
Even if they do not find fraud though, it is still their duty to search for it to the best of
their ability.

Legislation
Sarbanes-Oxley provided one of the biggest changes in history to the Forensic
Accounting job. Even though the legislation was meant to affect internal auditors and
management of organizations it also provided Forensic Accountants with new
opportunities. After it became effective Forensic Accountants were in higher demand
because whistle blowers were protected. Under the legislation, organizations could not
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retaliate against whistle blowers and they had to have an avenue available for them to
come forward anonymously (Kleckner, 2004). Whistle blowers are often the reason
Forensic Accountants are called into investigate. Since they are now protected they are
more likely to come forward. Sarbanes-Oxley also made it very difficult for organizations
to handle fraud investigations internally. They will almost certainly need outside services
to maintain their independence. If there is indeed a reason to call in outside auditors there
may eventually be a need for a Forensic Accountant to be used as well. The issues that
normally arise are from an unlawful reduction of the organizations assets. Legal
involvement is almost always going to be necessary. Therefore, Forensic Accountants are
the best option for organizations in that situation. In United States of America in July
2010, the Securities and Exchange Commission issued the Dodd-Frank Act. This piece of
legislation is an even bigger motivator for whistle blowers to come forward. If a whistle
blower brings forward information that results in successful enforcement of monetary
penalties over $1,000,000 they will be rewarded monetarily. The award can be from 10-
30% of the monetary penalties (“Federal Issues,” n.d.). This is a huge motivating reason
for people to act ethically and bring attention to fraudulent activity within their
organization. With that comes more demand for Forensic Accountants to be involved and
it will encourage other nations to bring in similar provisions.

Societal Changes
It has been said on numerous occasions that corporate fraud has been on the rise but is it
really? In a survey done by Kroll provided by Georgetown University for their 2013/2014
Global Fraud Report it was discovered that over 70% of companies were affected by at
least one type of fraud in the past year. That is an increase from the previous year that
showed only 61% had been affected. Corporate fraud is just one area that Forensic
Accountants deal with. The real reason behind the appearance of this increase might also
be that the effectiveness of discovering fraud has increased. Fraud appears in many forms
including internal financial fraud, bribery, corruption, and embezzlement. Not to mention
all of the personal cases people may have such as divorce cases and identity fraud. Each
form of fraud requires different skills to uncover and prevent. Additionally, society has
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changed the way it occurs and affects the process of Forensic Accounting. Therefore, the
demand for Forensic Accountants is also rising. Society itself has changed the Forensic
Accounting environment drastically. For instance, there have been improvements in
technology that make it not only easier to commit fraud but can also be helpful to
Forensic Accountants in catching fraud. There have been economic downturns that have
put pressure on businesses. This can lead to even more pressure to commit fraud so as to
hide bad financial numbers from investors. Society has put more pressure on people to
become perfect and work harder. The pressure to succeed leads to more fraud as well.
Pressure is one of the three points of the fraud triangle and society has had a great deal to
do with that. In a study done by Caroline Flammer in 2012 it has been proven that there is
a positive correlation between the announcement of an eco-friendly program and an
increase in stock prices for an organization. It also found that this force, although still
present, has weakened over time. The study looked at the years 1990-2009. The
weakening of this force means that companies have to find other ways to make
themselves look good to investors. It is a prime example of the evolving pressure society
has put on businesses. All this pressure means that fraud is likely to increase. This is a
horrible outcome for the world in general but it is what has made the Forensic
Accounting field so viable. Fraud is the reason Forensic Accounting is necessary.

Advances in technology
In the past 10-15 years Forensic Accounting has evolved it’s processes in order to be
more effective. In an article by Ankit Doshi, Rohit Mahajan of India’s Deloitte Forensic
said, “Earlier the investigations were restricted to books and records but now there is a
significant element of intelligence gathering.” One reason why intelligence gathering has
become more important is because of the developments in technology. It has become
easier for fraud to occur because technology has made it so. Therefore, it makes sense
that Forensic Accountants would use the same technology to combat it. A second point to
the Fraud Triangle is opportunity. Technology has given people plenty of opportunity
throughout history. Since the creation of Quicken in 1983 and many other computer
based accounting programs it has become easier for accountants to do their jobs.
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Unfortunately, with power come great responsibility and the opportunity to abuse it.
Financial misrepresentation can be brought about by something as easy as creating fake
invoices or changing a transaction in the general ledger. Using financial computer
programs has saved hours upon hours of manual work for accountants. Even more
opportunity for fraud has been created over this time once again increasing the demand
for Forensic Accountants. One example of technology being used to commit fraud is the
case of Centennial Technologies, Inc. in 1996. They had created fake documents to make
it appear as though sales were being brought in. They reported over $12 million dollars in
sales when in actuality they had lost about $28 million (“The biggest stock scams,”
2011). As a technology company they knew just how to manipulate documents to make
them appear real.
On the other hand, Forensic Accountants have used technology to find fraud as well. One
way this can be done is to use software that detects when invoices or documents are
entered into a system. For example, if an invoice is entered at the end of the year but
dated for the beginning of the year a red flag would be raised. The example given is just
one simple way Forensic Accountants have been able to find fraud in the past. The
amount of software and information technology available now has escalated rapidly in
the past few decades. In the 1920’s a man named Frank Benford discovered an unlikely
mathematical law so called Benford’s Law (“Using software,” 2003). The law states that
in almost any numerical set of data any certain digit will appear as the first or second
digit at a predictable rate. For example, 1 is likely to be the first digit 31% of the time
while 9 appears only 5% of the time. Although this seems unlikely it has been proven
many times. In the early stages of Forensic Accounting this was a helpful tool simply
because fraudsters were not likely to follow this rule when fabricating numbers. More
recently software has been used that can detect when too many transactions have been
made just below a threshold that requires a supervisor’s attention. It would send a
significant red flag up that fraud could be involved. It would indicate a Forensic
Accountant should be involved and looking at each transaction individually. Even though
technology has made it easier for fraud to occur it has become a double-edged sword.
Forensic Accountants have developed their own technology in order to keep up with the
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growth of methods for committing criminal financial acts. Technology has provided the
opportunity for fraud to occur as the Fraud Triangle predicts.

Economic Changes
It would be expected that with economic hardships at large fraud instances would follow
suit. There would be many reasonable explanations for this pattern. For one, employee
fraud might increase because when times are hard people tend to make drastic moves. If
an employee can’t afford to make his car payment he may rationalize the idea of stealing
from his employer. For two, if organizations are losing investors because they cannot
afford to stay invested during such economic hardship the organization might rationalize
fudging the numbers on financial statements. They might tell themselves it will only be
for a year or two until the economy sparks up again. However, in most instances once
fraud has been committed it tends to snowball and become hard to undo. Forensic
Accountants know that in hard economic times they will have to pay utmost attention to
detail as it is likely they will discover more fraud than usual.In an article written for the
American Institute of Certified Public Accountants, “With the current economic
downtown, we have seen an increased demand for forensic accounting services as the
public deals with financial collapses, increased white collar crime and growing
occurrences of occupational fraud.” With that being said, there have been increases in
demand for forensic accountants throughout history. The Great Depression was obviously
one of the times that increased demand for Forensic Accountants. There is a slight
recession in the economy every 3 to 5 years and each time Forensic Accountants work a
little bit harder to ward of fraud.

Personal Experience and the Future

In 2010 a survey of Forensic Accountants was done asking them what the biggest
challenges in their job were (Baysden, 2013). The article explained the top answers.
“‘Keeping up with professional standards’” was No. 1, while “keeping up with the
evolving valuation body of knowledge” placed second. “Bringing in new clients and
client retention, ”then categorized as a single response option, placed third in 2010.” In
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the 2013 survey the answers were drastically different. After just three years the original
number one answer was the twentieth most popular chosen and the original number two
was the sixteenth. The difference is speculated to be because of the improvements in the
economy. The new challenge being focused on by Forensic Accountants is attracting new
clients. Forensic Accountant Bob Gray said, “FVS services don’t involve repeat business
as much.” When he said FVS he was referring to forensic and valuation services (Farrell
& Ogilby, n.d.). He calls the profession “the emergency room of the accounting hospital.”
His analogy is quite fitting and timeless. Forensic Accountants have always been the ones
to go to when something is wrong or out of place. They are used when something out of
the ordinary comes up. Attracting new clients would definitely be a considerable
challenge. “As forensic accounting evolves from being a department within the Big Four
to a niche sector in its own right, it is only natural that the training model of forensic
accountants will evolve,” said James Stanbury and Chris Paley-Menzies in an article in
2010. The job of a Forensic Accountant is becoming a staple in the corporate world.
There will be more interest in having a permanent Forensic Accountant on staff as time
goes on. There will also be more businesses specifically devoted to aspects of Forensic
Accounting. Intellectual property, product liability, breaches of warranty, and business
interruption are just a few of the specialty areas in which Forensic Accountants can focus
their business. Mark Stephanic, Forensic Accountant at Walworth & Nayh, P.C. in Grand
Rapids, Michigan, shared some of his 36 years of experience. When asked if he had seen
a shift in the nature of cases he has worked on over his career he responded with the
following: Yes, I have noticed a shift lately. For many years the majority of assignments
consisted of calculating lost profits usually resulting from a fire or flood. Today, we are
seeing a lot more assignments for calculation amounts resulting from employee
dishonesty or fraud. The computer and many software programs have reduced the
number of individuals in the accounting department of many companies. Thus has led to
a reduction in internal controls in many organizations which makes it easier for theft and
fraud.

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His experience supports many of the changes that have been discussed. All aspects of the
evolving world have played a role in the history of Forensic Accounting. The field has
grown tremendously since it’s start as a profession and will continue to do so for many
years to come.

4.6 Forensic Accounting in India

In India, Forensic Accounting has not got its due recognition even after alarming increase
in the complex financial crimes and lack of adequately trained professionals to
investigate and report on the complex financial crimes. The task of Forensic Accountants
is handled by Chartered Accountants who apart from
handling traditional practice of auditing as required under the Companies Act, 1956 or
Income Tax Act are called upon by the law enforcement agencies or the companies or
private individuals to assist in investigating the financial crime or scam. The CA or
CWAs in India are best suited for this profession due to their financial acumen acquired
during their rigorous training which can be further honed by introducing post
qualification degree or diploma in Investigating and Forensic accounting/audit. The CA
or CWA who acquire post qualification in Investigative & Forensic Accounting can use
the designation CA-IFA or CWA-IFA and be legally recognized as the Forensic
Accounting Experts to handle the investigation of financial crimes and give expert
testimony in the Court of Law. However, growing financial fraud cases, recent stock
marker scams, failure of non-financial banking companies, phenomena of vanishing
companies and plantation companies and failure of the regulatory mechanism to curb it
has forced the Government of India to form Serious Fraud Investigation Office (SFIO)
under Ministry of Corporate Affairs which can be regarded the first step of Government
of India to recognize the importance and advance the profession of forensic accountants.
The SFIO is a multidisciplinary organization having experts from financial sector, capital
market, accountancy, forensic audit, taxation, law, information technology, company law,
customs and investigation. These experts have been taken from various organizations like
banks, Securities & Exchange Board of India, Comptroller and Auditor International
,General and concerned organizations and departments of the Government. However, the
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main important law enforcement agency involved directly in combating frauds is the
Police, CBI, DRI etc.

4.7 Process of Forensic Accounting

The conventional accounting and auditing with the help of different accounting tools like
ratio technique, cash flow technique, a standard statistical tool examination of evidences
is all part of forensic accounting. In cases involving significant amounts of data, the
present-day forensic accountant has technology available to obtain or source data, sort
and analyse data and even quantify and stratify results through computer audit and
various other techniques.. Some of the techniques involved in Forensic Accounting to
examine the frauds are:
(1) Benford’s Law: It is a mathematical tool, and is one of the various ways to determine
whether variable under study is a case of unintentional errors (mistakes) or fraud. On
detecting any such phenomenon, the variable under study is subjected to a detailed
scrutiny. The law states that fabricated figures (as indicator of fraud) possess a different
pattern from random figures. The steps of Benford’s law are very simple. Once the
variable or field of financial importance is decided the left most digit of variable under
study extracted and summarized for entire population. The summarization is done by
classifying the first digit field and calculating its observed count percentage. Then
Benford’s set is applied. A parametric test called the Z-test is carried out to measure the
significance of variance between the two populations, i.e. Benford’s percentage numbers
for first digit and observed percentage of first digit for a particular level of confidence. If
the data confirms to the percentage of Benford’s law, it means that the data is Benford’s
set, i.e. there is68% (almost 2/3rd) chance of no error or fraud. The first digit may not
always be the only relevant field. Benford has given separate sets for 2nd, 3rd and for last
digit, as well. It also works for combination numbers, decimal numbers and rounded
numbers.
There are many advantages of Benford’s Law like it is not affected by scale invariance,
and is of help when there is no supporting document to prove the authenticity of the
transactions.
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(2) Theory of relative size factor (RSF): It highlights all unusual fluctuations, which
may be routed from fraud or genuine errors. RSF is measured as the ratio of the largest
number to the second largest number of the given set. In practice, there exist certain
limits (e.g. financial) for each entity such as vendor, customer, employee, etc. These
limits may be defined or analysed from the available data-if not defined. If there is any
stray instance of that is way beyond the normal range, then there is a need to investigate
further into it. It helps in better detection of anomalies or outliners. In records that fall
outside the prescribed range are suspected of errors or fraud. These records or fields need
to relate to other variables or factors in order to find the relationship, thus establishing the
truth.
(3) Computer Assisted Auditing Tools (CAATs):
CAATs are computer programs that the auditor uses as part of the audit procedures to
process data of audit significance contained in a client’s information systems, without
depending on him. CAAT helps auditors to perform various auditing procedures such as:
(a) Testing details of transactions and balances, (b) identifying inconsistencies or
significant fluctuations, (c) Testing general as well as application control of computer
systems. (d) Sampling programs to extract data for audit testing, and (e) Redoing
calculations performed by accounting systems.
(4) Data mining techniques: It is a set of assisted techniques designed to automatically
mine large volumes of data for new, hidden or unexpected information or patterns. Data
mining techniques are categorized in three ways: Discovery, Predictive modelling and
Deviation and Link analysis. It discovers the usual knowledge or patterns in data, without
a predefined idea or hypothesis about what the pattern may be, i.e. without any prior
knowledge of fraud. It explains various affinities, association, trends and variations in the
form of conditional logic. In predictive modelling, patterns discovered from the database
are used to predict the outcome and to guess data for new value items. In Deviation
analysis the norm is found first, and then those items are detected that deviate from the
usual within a given threshold (to find anomalies by extracted patterns). Link discovery
has emerged recently for detecting a suspicious pattern. It mostly uses deterministic

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graphical techniques, Bayesian probabilistic casual networks. This method involves
“pattern matching” algorithm to ‘extract’ any rare or suspicious cases.
(5) Ratio Analysis: Another useful fraud detection technique is the calculation of data
analysis ratios for key numeric fields. Like financial ratios that give indications of the
financial health of a company, data analysis ratios report on the fraud health by
identifying possible symptoms of fraud.
Three commonly employed ratios are: -
1. The ratio of the highest value to the lowest value (max/min);
2. The ratio of the highest value to the second highest value (max/max2); and
3. The ratio of the current year to the previous year
Using ratio analysis, a financial expert studies relationships between specified costs and
some measure of production, such as units sold, dollars of sales or direct labor hours. For
example, to arrive at overhead costs per direct labor hour – Total overhead costs might be
divided by total direct labor hours. Ratio analysis may help a forensic accountant to
estimate expenses.

4.8 Forensic Accountant

“Forensic accountants inhabit a cloak and dagger corner of the accounting world.
Their job: respond at a moment’s notice when a client spots trouble – anything from
procurement fraud to a top executive cooking the books to industrial espionage.”
– Justin Pope, Associated Press
“You have an external auditor – that’s like a guard dog. Maybe a bulldog,” he said.
“An internal auditor is a seeing eye dog. A forensic accountant is a bloodhound.”
–Dr. Larry Crumbly, editor – “Journal of Forensic Accounting”
Forensic Accounting is the specialty practice area of accounting that describes
engagements that result from actual or anticipated disputes or litigation. “Forensic”
means suitable for use in Court, and it is to that standard and potential outcome that
forensic accountants generally have to work.

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Forensic accountants often have to give expert evidence at the eventual trial. Forensic
accountants not only utilize their accounting and auditing skills, but also use their
investigative skills to determine what events actually took place in a financial setting.
Engagements relating to civil disputes may fall into several categories:
Calculating and quantifying losses and economic damages, whether suffered
through tort or breach of contract.
Disagreements relating to company acquisitions, perhaps earn outs or breaches of
warranties.
Business valuation.
Forensic accountants often assist in professional negligence claims where they are
assessing and commenting on the work of other professionals.
Engagements relating to criminal matters typically arise in the aftermath of fraud.
They frequently involve the assessment of accounting systems and accounts
presentation – in essence assessing if the numbers reflect reality.
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.
What types of assignments does a Forensic Accountant perform?
Forensic Accountants become involved in a wide range of investigations, spanning many
different industries. The practical and in-depth analysis that a Forensic Accountant will
bring to a case helps uncover trends that bring to light the relevant issues. Forensic
accountants are trained to look beyond numbers and deal with the business like situation.
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. Detailed
below are various areas in which a Forensic Accountant will often become involved.
I. Professional negligence: Forensic accountants also take up cases relating to
professional negligence. Whenever there is a breach of generally accepted accounting
standards (GAAS) or auditing practices or ethical codes of any profession, forensic

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accountants are required to quantify the loss resulting from such professional negligence
or deficiency in service.
II. Detection of fraud by employees: This often involves procedures to determine the
existence, nature and extent of fraud or embezzlement and may concern the identification
of a perpetrator. These investigations often entail interviews of personnel who had access
to the funds and a detailed review of the documentary evidence.
III. Criminal investigation: Where the matter under investigation involves financial
implications, the investigation department, law society, and etc avail of the services of a
forensic accountant. The report of an accountant is very much useful in preparing and
presenting evidence.
IV. Personal Injury Claims / Motor Vehicle Accidents: A Forensic Accountant is often
asked to quantify the economic losses resulting from a motor vehicle accident. A
Forensic Accountant needs to be familiar with the legislation in place, which pertains to
motor vehicle accidents. Cases of medical malpractice and
wrongful dismissal often involve similar issues in calculating the resulting economic
damages.
V. Business economic losses: Examples of assignments involving business economic
losses include; contract disputes, construction claims, product liability claims, trademark
and patent infringements and losses stemming from a breach of a non-competition
agreement.
Other areas include:
VI. Shareholders' and Partnership Disputes
VII. Other Types of Insurance Claims
VIII. Matrimonial Disputes
IX. Mediation and Arbitration
In the nutshell, the following services can be provided by a forensic accountant:
quantifying the impact of lost earnings, such as construction delays, stolen trade secrets,
insurance disputes, damage/loss estimates, malpractice claims, employee theft, loss of
profits, financial solvency reports, disturbance damages, loss of goodwill, compensable

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losses suffered in expropriation determination, assessment of the potential business
compensation costs, and consultation on business defalcation minimization.

What is a typical approach to Forensic Accounting assignment?

Each forensic accounting assignment is unique. Accordingly, the actual approach adopted
and the procedures performed will be specific to it. However, in general, many Forensic
Accounting assignments will include the steps detailed below.
I. Meet the client: To understand the important facts and issues.
II. Perform a conflict check: This should be carried out as soon as relevant parties are
established.
III. Perform an initial investigation: prior to detailed plan of action for better planning
of the investigation.
IV. Develop an action plan: based on the meeting and investigation and set the
objectives to be achieved.
V. Obtain the relevant evidence: depending on the nature of the case documents, assets,
persons, proof of the occurrence of the event.
VI. Perform the analysis: includes regression and sensitivity analysis, calculating
economic dangers, perform tracing of assets, use computerized applications etc.
VII. Prepare the report: giving out clear exceptions, scope of assignment, approach,
limitations to scope, findings and/or opinions

Who retains a Forensic accountant?

The following groups often retain forensic Accountants:
Lawyers;
Police Forces;
Insurance Companies;
Government Regulatory Bodies and Agencies;
Banks;
Courts; and
Business Community.
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What characteristics/skills should Forensic Accountant posses?
A forensic accountant is expected to be a specialist in accounting and financial systems.
Yet, as companies continue to grow in size and complexity, uncovering fraud requires a
forensic accountant to become proficient in an ever-increasing number of professional
skills and competencies.
The major skills can be divided in to two:
I. Core skills (specialized skills and knowledge).
II. Non-core skills (personal skills).
I. Core skills:
Ability to critically analyze financial statements. Theses skills help Forensic Accountants
to uncover abnormal patterns in accounting information and recognize their source.
Ability to grasp internal control systems of the client and to set up a system that achieves
management objectives informs employees of their control responsibility and monitors
the quality of program and changes made to them. Proficiency in Information technology
and computer network systems. These skills assist accountants to conduct investigations
in the "E-Areas" (E-banking, Ecommerce etc) and computerized accounting systems.
Knowledge of psychology in order to understand the thinking and motive behind criminal
behavior and to set up prevention programmes that motivate and encourage employees.
An in-depth understating of the fraud schemes such as misappropriations, money
laundering, bribery and corruption. Thorough insight and knowledge into company's
governance policies and laws that regulate these policies. Interpersonal and
communication skills, which aid in acquiring information about the companies ethical
policies and assist forensic accountants to conduct interviews and obtain crucially needed
information. Command of criminal and civil laws, legal system and court procedures.
II. Non-core skills: includes, but are not limited to Sound professional judgment. Look
beyond numbers and grasp substance of situation.A "sixth" sense that can be used to
reconstruct details of past accounting transactions is also beneficial. A photographic
memory that helps when trying to visualize and reconstruct these past events. Curiosity,
persistence and creativity. Pay attention to smallest of detail, observe and listen carefully
Ability to maintain his composure when detailing these events on the witness stand. In
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addition to personal characteristics accountants needs other requirement i.e. a
professional qualification or a certificate, 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 prevalent in US, based on their laws. However, there is no formal
body that provides formal education of the frauds in India.
What is the presence of Forensic Accounting in India?
As mentioned above Indian chapter of Association of Certified Fraud Examiners (ACFE)
offers courses in India but they are based on laws prevalent in US. Other than this India
forensic is the only formal body that provides formal education about forensic accounting
in India. India forensic is however not affiliated to any of the Universities. India forensic
offers three types of programs:
. Certified Forensic Accounting Program - CFAP
. Certified Bank Forensic Accounting - CBFA
. Certified Anti-Money Laundering Expert - CAME
In India Serious Fraud Investigation Office (SFIO) is the landmark in creation of
Forensic Accountants. SFIO is the dedicated division of the Department of Company
affairs, which looks into the frauds that involves the violations of multiple laws such as
Income Tax, FEMA and RBI Act etc. SFIO recognize CFE as the designation for the
purpose of employment and empanelment. Other than SFIO there are few more agencies
that are dedicated to combating frauds in India such as Central Bureau of Investigation
(CBI), Central Vigilance Commission (CVC). CBI has specialized wing to deal with
financial frauds called as Economic offences wing. CVC handles the crucial part of the
occupational frauds i.e. Corruption. It also helps in resolving the bank fraud cases.

4.8.1 Qualities of Forensic Accountant

It requires lot of courage to be the forensic Accountant as it is not an easy task to do the
litigation support work or investigative accounting work. Apart from the courage it also
requires following qualities

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SUSPICION
Forensic accountant needs to be the bloodhounds of the accounting and not the
watchdogs. Forensic Accountants should be cautious of obvious things and wary of
persons who are quick to provide alibis and identification. Forensic Accountants should
demand verification whenever possible as the evidence that a forensic accountant is
required to be conclusive.
CURIOSITY
Forensic accountants should develop their own curiosity and follow up on it. Forensic
Accountants should have the desire to learn the truth. An inquisitive mind is essential to
the forensic accounting professionals.
OBSERVATION
Five senses of the forensic accountants are important tools of the trade. It may be
important for forensic accountants to remember unusual things about an individual (i.e.,
his manner and posture or the way he dresses). Learn to observe details
MEMORY
The ability to recall accurately the facts, events and the physical characteristics of a
suspect is a valuable skill every time everything cannot be documented unlike the
auditors.
AN UNBIASED AND UNPREJUDICED MIND
A fraudster can cause harm during the investigations. Forensic accountants should not
form the opinions about any one unless there is conclusive evidence. Bias and prejudice
will result in a poor investigation, unfairness to suspects and clouding of facts that need
to be uncovered objectively. Do not let personal likes or dislikes interfere with
investigations.
ABILITY TO PLAY A ROLE
This skill is especially important for forensic accountants who work alone most of the
time. Using his own identity could expose the forensic accountant to recognition and
danger. The ability to assume convincing identities is particularly valuable in
surveillance, under cover activities, and a variety of confidential inquiries.

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PERSISTENCE AND CAPACITY FOR HARD WORK
Many times, you will find yourself working late into the night to follow up a promising
lead or question a particularly valuable witness or even to seize the hard disks after the
office hours get over for the origination.
ABILITY TO OBTAIN COOPERATION OF OTHERS
In the course of your work you will make many contacts. Some will be clients, some will
be witnesses, some will be suspects and some will just be well-meaning citizens who can
provide information. It is essential that you obtain cooperation from as many people as
possible in order to secure the vital facts and information that you will need to conclude
an investigation. You will need patience, courtesy, tact and understanding. A suspect or
witness who has been intimidated, frightened, or angered by impatient forensic
accountant is of no value.
INTEREST & PRIDE OF ACCOMPLISHMENT
True success in any profession is based on sincere interest and pride in a job well done.
The knowledge that your efforts can bring a criminal to justice, locate a missing loved
one, or save a business large sums of money can bring you immense satisfaction.
COMMON SENSE
You should have an intuitive understanding of the way the world works and how people
move through it. This can be developed and refined. The more time you spend on the
street and the more attention you pay to detail, the sharper your street sense will become.
This can be learned and sharpened as you work in the investigative field.
GOOD LISTENING SKILLS
Accounting data may be available easily but to turn it back in information is the skill of
forensic accountant and one needs to conduct interviews for the same. You need to be a
good listener in order to effectively communicate. In order to be a good interviewer, you
must be able to understand the person who you are questioning. If you do not have good
listening skills, you will never be an effective interviewer. Therefore, you will not be a
successful legal or corporate forensic accountant.

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ABILITY TO PUT PEOPLE AT EASE
In order convince people to submit to interviews, you need to be able to chat socially and
agreeable which also help to make people feel comfortable talking to you. This is a very
necessary skill to have in order to conduct successful interviews.
ABILITY TO SPEAK AT THE LEVEL OF AUDIENCE
There is nothing that turns a person off quicker than someone speaking down or using
language that is difficult to understand. You must be able to speak to anyone from a high
school drop out to a professional doctor in language that is appropriate and
understandable.
UNDERSTANDING OF BODY LANGUAGE
To know if a person is truthful in an interview situation, you must be able to read body
language. As a forensic accountant, you may interview a potential witness. At the end of
that time, you must gauge that person’s honesty and credibility as a potential witness
INTUTIVE UNDERSTANDING OF HUMAN NATURE
People are people regardless of the circumstances you may be investigating. As a forensic
accountant, we are people---our clients, subjects and suspects ----often at time of extreme
emotional distress.
SELF CONFIDENCE
You need to have belief in your ability to handle any situation. In my opinion, if you
possess the above skills, you will be successful as a forensic accountants and, more
importantly, as a human being.
4.8.2 Services offered by Forensic Accountant
There are various service lines where the forensic accountant can play an important role
INVESTIGATION CONSULTANCY
While financial statement scandals of Xerox, WorldCom have brought forensic
accounting into limelight it accounts for only one fifth of total work. Corporate
investigations into expense and purchasing frauds are the hot cake followed by the
siphoning of funds also being relatively frequent

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Due to the increased sophistication of fraud and the requirement of prior experience in
conducting fraud investigations, organizations have begun to realize that it is best for an
expert who is independent and unbiased to conduct an investigation.
The overall objectives in a typical investigation are to
• Investigate and determine if the alleged material financial irregularities and /or
improprieties have occurred.
• Attempt to quantify whether or not any of these alleged financial irregularities
resulted in a monetary loss.
• Attempt to identify persons who could be responsible for the aforesaid
irregularities and /or improprieties
These kinds of services are required by the Banks, Corporate and Regulators such as RBI,
SEBI and law enforcement officials
FRAUD RISK ASSESSMENT
Operational Risk is an integral part of business. Managing the risk of fraud is a crucial
and integral part. The upcoming regulations BASEL-II accord and the Sarbanes Oxley
Act are the bi products of Fraud risk. A fraud risk assessment is aimed at creating an
environment that frustrates the fraudster. Interaction of the clients with the Fraud Risk
experts helps to leverage off the knowledge of the cultural and working environment and
the Industry knowledge. This approach allows for any immediate buy-in on the
recommendations made, as the client himself has been a part of the risk assessment
exercise. The corporate kings of our country require these services
DUE DILIGENCE
Due diligence enable the clients to enter a foreign market or open a foreign operations,
seek new sources of capital; recruit new dealers, franchisees, or distributors; license their
product or services to another company ; establish a strategic alliance or joint-venture
partnership ; invest in a business ; acquire or merge with another business; appoint
directors; extend credit. These kinds of investigations can also be carried out with the aid
of the forensic accountant.

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INFORMATION SECURITY RISK ASSESSMENT
Information security is the buzzword of the new era. It includes formulating policies,
practices and procedures to prevent any loss of sensitive and confidential information.
These services address the concerns of clients in respect of safeguarding their critical
information against unethical and illegal attempts by rivals and interested parties.
Forensic accountants with technology exposures are the best fit candidates for the role of
the information security assessment. In USA Sarbanes Oxley act has compelled the
companies to get assessed their Information security systems. Generally, software
companies prefer the technology forensic accountants.
ASSET TRACING
Stamp Paper scam was the biggest scandal amounting to over 30,000 crores of rupees.
However, when Telgi was arrested he had assets worth few billions of Rupees.
The tracing of the bank transactions convertible into the tangible assets is important since
the assets are sold out to repay the losses. Understanding the bank transfers is a technical
job which must be looked with the suspicion. Involvement of Benami Transaction into
the creation of assets makes it even more difficult for the law enforcement officials to
recover the assets.
Tracing and identifying client assets that are in the unlawful possession or control of third
parties is the area that is looked after by Forensic Accountants worldwide.
When a loss arising from fraud is detected, an organization has the option of turning to
forensic accountants to trace the assets created out of the illegal proceedings
VENDOR MONITORING
Companies who are involved in the production and marketing of consumer products
internationally have become increasingly aware of the importance of monitoring the labor
and business practices of their vendors.
Similarly, the bankers in our country are also tracking their borrowers with full
concentration. There are not less incidences where the companies across the world have
duped the banks in the working capital loans

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MONEY LAUNDERING COMPLIANCE
In the wake of Money Laundering Act 2003 the compliance program is the need of an
hour. Money Laundering is a serious crime associated directly with the terrorism.
The compliance program may address four areas
• Compliance regulations
• Designation of a Compliance officer
• Independent Testing
• Training
This programme provides our client with a highly trained, motivated and diligent work
force. It further given them the comfort of proof that they have been diligent, in their
compliance programme.
LITIGATION SUPPORT
The renowned Forensic accountants provide opinions on technical questions of audit,
accounting, taxation or other areas. It may also involve quantification of losses in the
context of fraud, disputed business valuation, loss of profits, insurance claims, and
intellectual property disputes and in many other situations.
FUNCTIONAL CONSULTANCY
The software companies have developed the internal audit tools for the compliance with
the SOX provisions. Similarly, a pre-defined set of the rules for identification of the red
flags of the frauds in software the functional consultants with Forensic Accounting
Background are preferred. To sum up the forensic accounting field is the boom of
tomorrow in the field of accountancy. The collapse of Enron gave birth to Sarbanes
Oxley Act and proved to be boom time for the forensic accountants. Mishaps worldwide
also increase the demand of forensic accountants

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OTHER SERVICES
The services rendered by the forensic accountants are in great demand in the following
areas:
1. Fraud detection where employees commit Fraud:
Where the employee indulges in fraudulent activities and are caught to have committed
fraud, the forensic accountant tries to locate any assets created by them out of the funds
defalcated, then try interrogating them and trying to find out the hidden truth.
2. Criminal Investigation: Matters relating to financial implications the services of the
forensic accountants are availed of. The report of the accountants is considered in
preparing and presentation as evidence.
3. Cases relating to professional negligence:
Professional negligence cases 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 professional negligence or shortage in services.
4. Arbitration service: Forensic accountants render arbitration and mediation services
for the business community, since they undergo special training in the area of alternative
dispute resolution.
5. Settlement of insurance claims: Insurance companies engage 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 property loss due to various risks, fidelity insurance and other
types of insurance claims.
6. Dispute settlement: Business firms engage forensic accountants to handle contract
disputes, construction claims, product liability claims, infringement of patent and trade
marks cases, liability arising from breach of contracts and so on.

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4.9 Forensic Reporting
Reporting is nothing but compilation of all the observations, results, conclusions gathered
from the investigations. A poorly drafted report can mar completely the efforts by the
forensic investigator. Documenting an investigation is as important as performing it. A
poorly documented can lead to the following
• Disappointing audit conclusion
• Dissatisfied Client who gave the assignment
• Cause damage to the reputation of the forensic accountant
The form of report whether oral or written is a matter to be discussed with client and with
counsel. Reporting is critical responsibility of the forensic accounting investigator, and
adequate preparation is necessary to present the status of the investigation in a manner
that enables the decision maker to assess how to proceed. What you say or write to
qualify your comments once a document leaves your hands or words leave your lips, you
cannot control the further distribution of the information you have communicated
4.9.1 Types of Forensic Reports
The following types of Forensic reports are relevant
Written Forensic reports
• Investigation Forensic reports- This form of written forensic report is given
directly to the company’s management, board, audit committee of the board, in
house counsel or outside counsel. The Forensic report should be complete in all
aspects and should stand on its own, it should identify all the evidence that were
used in concluding on the allegations under investigation. The Forensic report
might be used for various purposes such as corporate filings, lawsuit, employment
actions or diversion to procedures and controls.
• Expert Forensic report filed in civil court proceedings.
• Affidavit- These are voluntary declarations of facts and are communicated in
written form and sworn to by the witness before an officer authorized by court.

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 • Informal Forensic reports- These consists of memos to file, summary outlines
used in the reports, interview notes, spreadsheets, explanatory notes. These are
used in the preparation of the final Forensic reports.
Oral Forensic reports- These are given by the Forensic accountants to those who are
overseeing an investigation e.g. Company board or those outside the company such
investors or outside counsel
Oral forensic reports involves disposition which involves everything said by all the
parties to the deposition is transcribed by a court reporter.
One of the main ingredients in forensic reporting is working papers which plays an
important role in forensic auditing. Working papers contains the data, information
collected during the audit process and are to be preserved for future reference or if the
similar assignment comes for scrutiny. The working papers may be permanent or
temporary and may be reclassified as substantive, internal or administrative. Custody of
working papers which might contain sensitive data influencing the audit report has to be
kept safely and securing. It has to marked correctly for future identification and usage.
An ideal Forensic audit report has the following characteristics-
1. Preparation- if the forensic investigation has been carried out and documented
properly then reporting of procedures and findings should flow as a natural
extension of the investigation.
2. Accuracy-All reporting should be accurate. Accuracy applies not only in terms
of information conveyed in report but also with respect to communication,
grammar, spelling, basic data, dates, events and names is critical
3. Clarity- The language used in report should be clear and simple. Forensic
accounting investigators are fact finders, the fact pattern described in report
should make the evidence clear for reaching to proper conclusion.
4. Impartiality- Bias destroys credibility. Integrity and objectivity should be used in
reporting. Subjective opinions and impressions often express unstated bias and
have no place in reporting written or oral. The facts must speak for themselves.
5. Relevance- The report should include only facts relevant to the facts being
investigated.
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 6. Timeliness- The report should be released in a timely manner to be relevant
4.9.2- Basic Elements to be included in the Forensic reporting
• Knowledge about the client
• Identify the parties in case of lawsuit
• Nature of task for forensic auditing
• Scope and time frame of forensic examination
• Restriction and secrecy to the distribution of the forensic report
• Professional standards to be observed during forensic audit
• Exclusions and disclaimers related to Forensic audit assignment
• Procedures, technical pronouncements relied in the assignment
• Conclusions and summarization of findings at the end for the forensic accounting
assignment.
4.9.3 Sample table of content of Forensic Investigation report
A) Executive Summary
• Background of Client
• Origin of Audit
• Objective
• Proposed results of Audit
• Implementation or road map of Audit,
• Audit program and layout
B) Risk Analysis
• Internal / External Environment risks and forces
• Customers, products, competitors, human elements
• Business processes
• Information Technology
• Influence of Economic forces and financial market conditions
• Political and legal scene
• Banking policy

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C) Evidence of risk events
• Conflict of interest
• Bribery
• Extortion
• Cash Theft
• Inventory Frauds
• Fraudulent disbursements
• Misuse of business assets
• Financial statements fraud
• Audit recommendations
D) Governance on recommendation implementation
• Budgetary considerations
• Stakeholders
E) Enclosures/Annexures
• Interview of Members
• Organization Chart
• Financial Performance
• Audit recommendations
• Analysis of Key risk elements
4.9.4 Mistakes to be avoided in Forensic Reporting
• Stick to facts and figures
• Avoid judgmental statements
• Avoids opinions which are personal and cannot collaborated by facts and figures
• Report/Conclusions should be drafted in simple and straight forward language
focused on facts
• Report should be of ideal length and does not contain unnecessary facts which are
not relevant for the problem in hand
• Jargons to be avoided so that layman can understand report clearly
• Report should be signed and dated to give authencity.
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