Digital Accounting Assurance Board
The Institute of Chartered Accountants of India
1st June, 2023
GUIDANCE NOTE FOR FORENSIC ACCOUNTING AND INVESTIGATION STANDARD NO. 210 ON ENGAGEMENT OBJECTIVES
EXPOSURE DRAFT Approved by DAAB (On 1 June’23)
This Guidance Note provides technical clarifications and implementation guidance on how to prepare for and conduct work procedures on Forensic Accounting and Investigation Standard Number 210, on “Engagement Objectives” issued by the Institute of Chartered Accountants of India (ICAI) and should be read in conjunction with all the Standards relevant to the topic. The contents of this Guidance Note are recommendatory in nature and do not represent the official position of the ICAI. The reader is advised to apply his best Professional judgement in the application of this Guidance Note considering the relevant context and prevailing circumstances.
1.0 Introduction
1.1 Setting engagement objectives involves identifying the purpose of the engagement and establishing its goals and desired outcomes when conducting Forensic Accounting and Investigation (FAI) engagement. Setting objectives.
1.2 To achieve engagement objectives, the Professional aligns these objectives with the nature of the engagement as per FAIS 110 on “Nature of Engagement”. This Standard explains the concepts behind various engagements such as a Forensic Accounting, Investigation or Litigation Support and distinguishes them from a regular audit.
2.0 Objectives
2.1 FAIS 210 on “Engagement Objectives” expects the Professional to ensure that the engagement objectives are established to ensure they are in line with one of the three natures of engagement outlined in FAIS 110. Annexure 1 to this Standard provides an indicative list of objectives which can be considered for each of the three different types of engagements.
2.2 In this Guidance Note (GN), this Annexure 1 list is used as a basis to further elaborate on these objectives and clarifies with detailed examples and illustrations to help the Professional establish the engagement objectives clearly with the Primary Stakeholder, and who will be relying on the work of the Professional.
3.0 Procedures
3.1 A methodical approach which can be deployed for setting the objectives of a FAI engagement is as follows:
(a) Identify the purpose of the engagement: Begin by identifying the reason for the engagement, such as financial impropriety, suspected fraud, or a legal dispute. Understanding the purpose will help to determine the specific objectives of the engagement.
(b) Determine the stakeholders involved: Who is impacted by the situation that requires a FAI engagement? Are there any victims, suspects, witnesses, or other parties that need to be considered?
(c) Consider the legal or administrative context: What are the relevant laws and regulations, policies, or standards that apply to the situation that requires a FAI engagement? What are the potential consequences or outcomes of the engagement?
(d) Identify the goals and outcomes: Based on the purpose and scope of the engagement, identify the specific goals and outcomes. For example, the goal may be to quantify the damages or losses, to identify the fraudulent transactions, or assist in legal proceedings.
(e) Communicate the purpose of the engagement: Once the Professional has framed the purpose of the FAI engagement, it needs to be communicated clearly and transparently to all Primary Stakeholders. This will help the Primary Stakeholder to understand the scope and objectives of the engagement and can contribute to its success.
4.0 Explanations with Examples
4.1 Forensic Accounting
Forensic Accounting aims to highlight any accounting, legal violations, regulatory deviations, or contractual breaches through ascertainment of facts and gathering of evidence admissible before a Competent Authority. A list of various types of Forensic Accounting engagements may be taken up by the Professional which are presented below and also the manner in which their objectives can be established.
4.1.1 Financial Statement Manipulation
When conducting a forensic accounting engagement on financial statement manipulations, the primary objective is to identify any fraudulent activities related to the financial statements of the organisation. Here are some specific objectives that may apply to such an exercise:
(a) Identify the nature and extent of the manipulation: Determine the specific methods used to manipulate the financial statements, such as falsifying transactions, or altering records, and the extent to which they were used.
(b) Determine the impact of the manipulation: Determine the impact that the financial statement manipulation had on the financial performance of the organizations, such as inflating profits or hiding losses.
(c) Identify the parties involved: Identify the individuals or groups that engaged in the financial statement manipulation, including any external parties.
(d) Identify any violations of laws and regulations: Determine whether the financial statement manipulation involved any violations of laws and regulations, such as securities fraud, accounting standards, inadequate disclosures as per The Companies’ Act, 2013, violation of anti-money laundering laws, Insolvency and Bankruptcy Code, etc.
4.1.2 Fund diversions or Asset tracing
The objectives of forensic accounting in fund diversions or asset tracing cases can vary depending on the specific case, but generally, the following objectives may apply:
(a) To identify misutilisation funds or assets: The primary objective of forensic accounting in fund misutilisation or asset tracing cases is to identify any funds or assets that have been diverted or misappropriated in contravention to the original intentions or agreements. For example, funds received as a loan from the bank to expand production capacity are not used to buy the equipment but diverted to some other businesses, or to buy land for accommodation of individuals, unrelated to the business. Hence the objectives in this case may involve tracing funds through bank accounts or other financial records, or tracing assets through ownership records or other documentation.
(b) To quantify losses: The objectives may be to quantify the losses suffered as a result of fund misutilisation or asset misappropriations. This may involve calculating the value of diverted funds or misappropriated assets, as well as any financial damages resulting from the diversion or misappropriation.
(c) To establish a timeline: The objectives may be to establish a timeline of events relevant to the case. This may involve identifying when funds or assets were transferred, or when financial statements or other documents were altered, or when other irregularities actually took place.
(d) To identify the parties involved: The objectives may be to identify the parties involved in the diversion or misappropriation. This may involve tracing financial transactions and analysing financial records to determine the people involved in processing the transactions from the bank or on the books of account.
(e) To assist in asset recovery: The Professional may be called upon to assist in the recovery of diverted funds or misappropriated assets. This may involve working with law enforcement agencies or other professionals to recover assets or providing information that can help identify the location of missing funds or assets.
4.1.3 Money laundering
The objective of a FAI engagement in Money Laundering offence is to trace the properties. The following objectives may apply in these situations:
(a) To trace assets generated by commitment of schedule offenses:
The Money Laundering offence involves the properties generated by commitment of certain scheduled offenses proscribed under Prevention of Money Laundering Act 2002 (PMLA). The Law Enforcement Agencies (LEAs) expect the Professional to trace those properties or to trace the funds and assets.
(b) To verify and gather evidences of laundered assets:
The Professional is expected to verify and examine various documents such as Accounting Records, Bank Statements, Property related documents etc to trace the properties. These documents are to be evaluated as per FAIS 320 for submission of evidence.
4.1.4 License Fees/Dues/Tax Evasion
The objectives of forensic accounting in license fee or dues or tax evasion cases can vary depending on the specific case, but generally, the following objectives may apply:
(a) To identify the extent of the evasion: The primary objective of forensic accounting in license fee or dues or tax evasion cases is to identify the extent of the evasion. This may involve analysing financial records, reviewing tax returns, or conducting other financial analysis to identify any discrepancies or irregularities.
(b) To identify the parties involved: The Professional may be called upon to identify the parties involved in the evasion. This may involve tracing financial transactions and analysing financial records.
(c) To determine the amount owed: The Professional may be called upon to determine the amount owed as a result of the evasion. This may involve calculating the amount of taxes or fees owed, plus any penalties and interest.
4.1.5 Related or Connected Parties
The objectives of forensic accounting in related party transactions cases can vary depending on the specific case, but generally, the following objectives may apply:
(a) To identify potential conflicts of interest: The primary objective of forensic accounting in related party transactions cases is to identify potential conflicts of interest. This may involve analysing financial transactions, reviewing contracts, or conducting other financial analysis to determine whether the transactions were conducted at arm’s length.
(b) To assess the risk of fraud: The Professional may be called upon to assess the risk of fraud in related party transactions. This may involve evaluating the potential for fraudulent activities based on the transaction’s characteristics, such as the size, nature, or timing of the transaction.
(c) To quantify the impact on financial statements: The Professional may be called upon to quantify the impact of related party transactions on financial statements. This may involve adjusting financial statements to reflect the fair value of the transactions or assessing the impact on financial ratios.
4.1.6 Valuations/Estimations of loss or damages
The primary objective of forensic accounting valuations or estimations of loss or damages is to provide an independent, objective, and reliable assessment of the financial impact of a particular event or dispute. These events or disputes may include fraud, embezzlement, breach of contract, insurance claims, or any other situation where there is a financial loss or damage.
The specific objectives of forensic accounting valuations or estimation of loss or damages may vary depending on the nature of the event or dispute. Some of the common objectives include:
(a) Determining the extent of the financial loss or damages incurred by the affected party: The Professional may be engaged to calculate the amount of financial loss or damages resulting from an event such as fraud, breach of contract or negligence.
(b) Identifying the root cause of the financial loss or damages: The Professional may be called upon to investigate and determine the root cause of a financial loss or damages.
(c) Evaluating the impact of the loss or damage: The Professional may also assess the impact that a financial loss or damage has had on an individual or organisation. This can involve analysing the financial, operational, and reputational impacts of the loss or damage.
(d) Assessing the reliability of financial statements: The Professional may be called upon to investigate financial statements, particularly in situations where there is suspicion of fraud or misappropriation of funds.
4.1.7 Transactions under Insolvency and Bankruptcy Code (IBC) 2016
During the Corporate Insolvency Resolution Process, the Resolution Professional (RP) or Liquidator may appoint a Professional for examining specific transactions, viz., Preferential, Undervalued, Fraudulent and Extortionate, which collectively are referred to as PUFE transactions. A summary of these is as follows:
(a) Preferential Transactions
Preferential Transactions are those transactions in which the Corporate Debtor has transferred the property or any interest thereof, for the benefit of creditors, surety or guarantor on account of an antecedent financial debt or operational debt or other liabilities owed by the Corporate Debtor which has resulted into putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with the provisions of IBC.
The objective of the engagement is to evaluate whether or not these transactions were conducted in the ordinary course of the business of the Corporate Debtor or the transferee and to gather evidences supporting any preference given as prescribed in the provisions of the Code.
(b) Undervalued Transactions
Undervalued Transactions are those transactions which are determined by Resolution Professional where the Corporate Debtor makes a gift to a person, enters into a transaction with a person which involves the transfer of one or more assets by the Corporate Debtor for a consideration the value of which is significantly less than the value of the consideration provided by the Corporate Debtor.
The objective of the engagement is to evaluate whether or not these transactions were conducted in the ordinary course of the business of the Corporate Debtor or the transferee and to gather evidences related to its valuation.
(c) Fraudulent Trading or Fraudulent Transactions
These are transactions carried out with an intent to defraud creditors of the Corporate Debtor or for any other fraudulent purpose.
The objective of the engagement is to evaluate whether these transactions were of a fraudulent nature and to gather evidences related to their impact on creditors, corporate debtors etc.
(d) Extortionate Transactions
Extortionate Transaction are transactions where the corporate debtor has been a party to an extortionate credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date.
The objective of the Engagement is to evaluate such transactions whether these transactions are done in the ordinary course of the business and to gather evidences related to:
- Debt is provided is in compliance with the provisions of laws and regulation or not.
- Exorbitant payment is required to be made by the Corporate Debtor.
(e) Concealment or removal of property of corporate debtor
The objective of the Engagement is to evaluate whether these transactions done in the ordinary course of the business and to gather evidences related to:
- Property of Corporate Debtor is concealed.
- Any debt due to or from Corporate Debtor is concealed.
- Any Property of Corporate Debtor is removed fraudulently.
- Falsified books of accounts of Corporate Debtor.
In all these cases the Professional is appointed by the Resolution Professional or by the Liquidator.
The objectives of identifying suspicious transactions under IBC through forensic accounting are:
(a) Fraud detection: Forensic accounting can help detect fraudulent transactions that may have taken place during the insolvency process. This includes identifying transactions that were made with the intention of deceiving creditors, hiding assets, or inflating liabilities.
(b) Identifying preferential transactions: Forensic accounting can help identify transactions that may have given preference to certain creditors over others. This includes transactions that may have taken place before the company was declared insolvent or transactions made with related parties.
(c) Building evidence for legal proceedings: Forensic accounting can help build evidence to support legal proceedings against those who may have engaged in fraudulent activity or violated regulations during the insolvency process.
4.2 Investigation Services
The purpose of the Investigation is to examine facts and circumstances and discover evidence to prove or disprove hypotheses formulated regarding alleged legal violations, unethical conduct or the possibility of a fraud by suspected individuals.
4.2.1 Fraud investigations
When conducting a forensic investigation on suspected fraudulent activities, (including Cyber fraud) the following are some specific objectives that may apply:
(a) Identify the nature and extent of the suspected fraud: The Professional may be called upon to determine the scope and severity of the illegal or fraudulent activities that have taken place.
(b) Determine the impact of the suspected fraud: The Professional may be called upon to assess the financial, legal, and reputational effects of the fraudulent activity. The investigation may be required to determine the amount of financial loss caused by the fraud.
(c) Identify the parties involved: The Professional may be called upon to identify the individuals or entities responsible for the suspected fraudulent activity. This can include the person or group who perpetrated the fraud, as well as any third-party individuals or organizations that may have enabled the fraud to occur.
(d) Identify any violations of laws and regulations: The Professional may be called upon to determine whether the suspected fraudulent activities involved any violations of laws and regulations, such as money laundering, bribery and embezzlement.
4.2.2 Ethical/Code of Conduct violations
The objectives of a forensic investigation into ethical or code of conduct violations are to determine if any violation has occurred, identify the extent of the violation, and establish a basis for disciplinary action or legal action, if required. Here are some of the primary objectives of such an investigation:
(a) Establish Facts: The objective of a forensic investigation into ethical or code of conduct violations is to establish the facts. This may involve gathering evidence, interviewing witnesses, reviewing relevant documents, and analysing data.
(b) Identify Violations: The investigation aims to identify any violation of the ethical or code of conduct policies of the organisation. This may include actions such as discrimination, harassment, retaliation, conflicts of interest, fraud, or other violations of company policies.
(c) Assess the Extent of the Violation: The investigation aims to assess the extent of the violation to determine the impact on the organization and its stakeholders. This may involve evaluating the financial impact, reputational damage, and legal implications of the violation.
(d) Determine Accountability: The investigation aims to identify the individuals or groups responsible for the violation and assess their level of culpability. This may involve evaluating the actions of employees, supervisors, managers, and executives.
4.2.3 Whistle-blower complaints and Prevention of Sexual Harassment (POSH) allegations
The objectives of a forensic investigation on whistle-blower complaints or POSH are to identify any incidents of misconduct, assess the severity of the incident, determine the individuals responsible for the misconduct or harassment. These could be non-financial matters pointing towards some behavioural infractions or violations by individuals. Here are some of the primary objectives of such an investigation:
(a) Establish Facts: The objective of a forensic investigation on whistle-blower complaints or POSH is to establish the facts and seek out the truth of what actually happened. This may involve gathering evidence, interviewing witnesses, reviewing relevant documents, and analysing data to determine if any incident of misconduct or harassment has occurred.
(b) Identify the Extent of the Misconduct or Harassment: The investigation aims to identify the extent and severity of the misconduct or harassment to determine the impact on the victim and the organisation. This may involve evaluating the emotional, physical, and psychological impact of the misconduct or harassment on the victim, as well as any financial, legal, or reputational implications for the organisation.
(c) Determine Accountability: The investigation would generally require the need to identify the individuals or group responsible for the misconduct or harassment and assess their level of culpability. This may involve evaluating the actions of employees, supervisors, managers, and executives.
4.3 Asset theft/Bribery/Corruption
The objectives of an investigation on asset theft, bribery, or corruption are to determine the amount of financial loss or damage caused to the organization from these activities, assess the extent and scope of the wrongdoing, identify (if possible) the individuals or groups involved in the misconduct. Here are some of the primary objectives of such an investigation:
(a) Identify the Extent of misconduct: The objective of an investigation on asset theft, bribery, or corruption is to identify the extent of the misconduct. This may involve gathering evidence, reviewing financial records, interviewing witnesses, and analysing data to determine the scope and severity of the wrongdoing.
(b) Determine Accountability: The investigation may require the need to identify the individuals or groups responsible for the wrongdoing and assess their level of culpability. This may involve evaluating the actions of employees, supervisors, managers, and executives.
(c) Assess the Financial Impact: The investigation aims to determine the amount of financial loss or damage caused to the organisation by the asset theft, bribery, or corruption. This may involve evaluating the financial records and analysing data to determine the extent of the financial loss. Sometimes there is a need to seek restitution from the parties involved so as to try and recoup or mitigate the losses.
4.4 Litigation Services
4.4.1 Testimony
The objectives of a testifying professional can vary depending on the specific case, but generally, the following objectives may apply:
(a) To provide factual information: The primary objective of a witness is to provide factual information relevant to the case. In the case of forensic accounting, this may involve providing information about financial transactions, accounting practices, or other financial matters.
(b) To help establish a timeline: A witness may be asked to provide information that helps establish a timeline of events relevant to the case. This may include information about when specific financial transactions occurred or when certain documents were created.
4.4.2 Alternate Dispute Resolution
The objectives of forensic accounting in alternate dispute resolution (ADR) can vary depending on the specific case, but generally, the following objectives may apply:
(a) To facilitate a settlement agreement: One of the primary objectives of forensic accounting in ADR is to facilitate a settlement agreement between the parties. The Professional may be called upon to provide financial information, analysis, or expert opinions that can help the parties reach a mutually acceptable settlement agreement.
(b) To identify financial issues: The Professional may be called upon to identify financial issues that are relevant to the dispute. This may involve reviewing financial records, analysing financial statements, or conducting other financial analysis to identify financial discrepancies or irregularities.
