Guidance Note For Forensic Accounting And Investigation Standard No. 130 On Laws And Regulations to ensure that the Professional has a basic understanding of the relevant laws and regulations that govern the FAI engagements in such a manner that the work procedures and evidence gathered would adequately serve the requirements of Competent Authorities.
Digital Accounting Assurance Board
The Institute of Chartered Accountants of India
1st June, 2023
GUIDANCE NOTE FOR FORENSIC ACCOUNTING AND INVESTIGATION STANDARD NO. 130 ON LAWS AND REGULATIONS
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 130, on “Laws and Regulations,” 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.
Page Contents
1.0 Introduction
1.1 FAIS 130 on “Laws and Regulations” deals with the responsibility of the Professional to understand the provisions of laws and regulations and how these apply to Forensic Accounting and Investigation (FAI) engagements.
1.2 As mentioned in the Standard, either the Professional may be engaged as per the provisions of a particular law and regulation, or the appointment may be as per contractual arrangements.
For example, the Professional may be appointed by a bank to detect a Loan Fraud as per certain provisions of the Reserve Bank of India (RBI) or by Resolution Professional under the Insolvency and Bankruptcy Code (IBC). In other contractual cases, there would be no specific Act or regulation covering the appointment except the arrangement may be governed by the Indian Contract Act.
1.3 Irrespective of the basis on which appointment is made, legal disputes and litigation are fundamental to most engagements which are exposed to legal proceedings and hence the applicability of some or law and regulation.
1.4 Considering these circumstances, the Professional is expected to have a basic understanding of the relevant laws and regulations.
For example, there might be a dispute between two parties having a contractual arrangement of lending and borrowing and the debt is not being settled as per the terms of the contract, while the lender is seeking legal help to collect the pending debt. Funds flow and accounting treatment of these funds will provide the evidence required by the Competent Authority to establish the pending debt and contractual violations (if any).
2.0 Objectives
2.1 The objectives of this Guidance Note (GN) are to ensure that the Professional has a basic understanding of the relevant laws and regulations that govern the FAI engagements in such a manner that the work procedures and evidence gathered would adequately serve the requirements of Competent Authorities.
2.2 Understanding the provisions of laws and regulations can help the Professional to:
(a) Confirm the appointment under specific law or regulation.
(b) Accept the contractual assignment which may end up under specific provisions of law or regulation.
(Agree upon the scope with Primary Stakeholder considering the provisions.
Develop the plan and work procedures considering the legal or regulatory requirements and to ensure compliance to such laws and regulations.
2.3 One objective of Forensic Accounting engagement is to gather evidence which may be admissible before a Competent Authority. Therefore, the Professional is expected to plan the work procedure in such a way as to gather evidence in a manner which would be in compliance with relevant laws and regulations. Hence, understanding the provisions of applicable laws of the jurisdiction where the incident took place is important.
3.0 Procedures
3.1 While it is important for the Professional himself to have an understanding of the relevant laws and regulations, however under certain complex circumstances or unique situations there may be a need for the engagement of a legal expert to help with the engagement.
For examples, where the Professional is engaged to investigate Mining Royalty related frauds or other malpractices, the Professional may engage a geologist or lawyer with an understanding of both the terrain and the law. An understanding of the Mines and Minerals Act would help to appreciate the difference between mines, quarry, major mineral and minor mineral etc. and their relevance to the engagement. By appreciating such broad provisions, the Professional is not perceived to have all the expertise related to those laws or regulations. Therefore, in those situations the Professional may take the help of Legal or other Experts, in which case the FAIS 230 on “Using the work of an Expert” would provide necessary help.
3.2 The Standard has classified the Laws and Regulations into two classes – Direct Impact Laws and Engagement Specific Laws. Direct Impact Laws are an integral part of most engagements since they are broad in nature with an influence over most facets and types of engagements.
An example of a Direct Impact Law is the Evidence Act in India which defines aspects of evidence and the manner in which evidence can be gathered so that it is considered admissible in a court of law or before Competent Authorities. Other Direct Impact Laws can be decided upon by studying the nature of engagement.
3.3 The modus operandi of frauds is also a determining factor for considering the Direct Impact Laws.
For example, in case of a Forensic Engagement related to non-performing loan accounts of a Company, the Professional may require to conduct the assignment as per RBI’s guidelines and in case the funds are diverted or siphoned, it may involve money laundering aspects. Hence the assignment may require to incorporate relevant provisions of the Prevention of Money Laundering Act. Based upon the modus operandi the Professional may have to study the Information Technology Act and the Evidence Act to gather the evidences relevant to the case. If the borrower is a corporate entity, provisions of Company Act may also apply.
4.0 Explanations with Examples
4.1 In order to impress the importance of laws and regulations in a FAI engagement, an example of the term fraud can be used. In India, for a long period of time, this term was not clearly defined in any Statue or Act. Until recently the word “fraud” and related words like “fraudulently” and “intent to defraud” have been used in the Indian Penal Code and other statues. The courts, and some relevant statues (e.g., the Indian Contract Act) have helped to define the elements necessary (such as deception or intent to deceive) or to establish whether or not a fraud has occurred. It is only now in the Companies Act, 2013 that the word fraud has been defined in clear terms.
4.2 This legal definition, as per Section 447 (1) (i) Companies Act 2013 is:
“Fraud” in relation to affairs of a company or anybody corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.
4.3 If the Companies Act applies to the relevant FAI engagement, then this definition of fraud would apply to that particular situation and therefore, there would be (as an example) no need to prove whether or not there was any loss (the last line of the definition). However, this may not necessarily be the case in all situations. Hence, these finer nuances become relevant when FAI engagements are expected to lead to legal proceedings.
4.4 As another example, consider the need for gathering of evidence. Where the appointment of the Professional is on a contractual basis, by (say) the promotor of a small company, who is suspecting the accountant of defalcation and is seeking Professional help to gather evidence to confirm the suspicion. In such a scenario there may be no need to gather evidence in a manner as meticulous as stipulated by the Evidence Act and the promotor may be satisfied with mere “secondary” evidence and not insist on “primary” evidence as is usually the case when the appointment is expected to lead to legal proceedings. In the latter cases, the Professional is focused on gathering primary evidences and even the act of gathering the evidences is done in a manner such that these evidences may be admissible in the court and stand the test of cross examination.
4.5 Some examples for laws and regulations that can be looked upon to understand the basics of the nature of assignment are as follows:
4.5.1. Engagement Specific Laws are laws under the provisions of which the appointment is done and the engagement is to be executed.
For example, in case of piracy of software, the provisions of Copyright Acts are taken into account. This is in addition to the Direct Impact Laws of Evidence Act and the Information Technology Act. Another example to explain the case where in the Professional is appointed to investigate the allocation of coal to MSME entities under specific regulation. Here, the Professional has to study the particular regulation and the Act under which such coal is distributed and allocated to the entities. Further broad understanding of the Evidence Act and Indian Penal Code is also required to investigate the case.
4.5.2. Under Insolvency & Bankruptcy Code (IBC) the Professional may be appointed as transaction auditor to investigate specific transactions under such code. Predominantly such transaction uses the acronym of PUFE Transactions (Preferential, Undervalued, Fraudulent and Extortionate). Professional would understand the relevant provisions of IBC which explains these transactions and specific situation and reasons to identify such transactions as PUFE in the Insolvency Process. Understanding these provisions is important to identify, gather and collect relevant evidences during the engagement.
4.5.3. In case of banking and loan frauds, the Professional would first understand the Nature of Engagement as per FAIS 110 and the Objective of the Engagement as per FAIS 210. Also, the Professional would confirm whether the borrower is a Firm, a Company or an Individual. In case of loan frauds, where borrower company has submitted Overstated Financial Statements or Stock Statements, the Professional would understand whether the loan fraud may attract the provisions of Section 36 of Company Act. It will be helpful for the Professional to gather the evidence as per the requirements of these legal provisions.
4.5.4. The Professional may be involved in cases of card frauds where the bank’s credit card number along with login credential of bank customer is stolen and used by another person. These cases fall under the provisions of Information Technology Act. Understanding the provisions related to identity theft may be helpful to gather the relevant evidences.
4.5.5. In case of partnership firms, consider a situation where the partners deducted the withholding tax amount from vendor’s payment but did not deposit these amounts with the tax authorities. The amount was utilized for the personal benefit of the partners. In such types of frauds, the Professional may require the understanding of Direct Tax Act and Indian Penal Code as these provisions related to such offences will be mentioned in the charge sheet.
5.0 Annexures with Illustrations
5.1 In order to provide relevant guidance to the Professional, a summary of some of the more prevalent laws and regulations have been included as reference material in this Guidance Note so as to illustrate the nature of the provisions which may apply in a typical FAI Engagement.
5.2 The Table below provides an illustrative list of possible applicable laws (along with their relevant clauses) which the Professional may consider in order to understand the provisions and may find useful during the FAI engagements. NOTE: This is not a complete or comprehensive list and is merely an indicative summary of the more common and prevalent laws and regulations. The Professional is expected to undertake an evaluation of the relevance of this list and apply Professional judgment as to what may be applicable to an engagement, or otherwise.
| SR.NO. | NAME OF THE LAW | SECTION NO | SECTION TITLE |
| 1 | Indian Evidence Act 1872 | ||
| 15 | Facts bearing on question whether act was accidental or intentional | ||
| 22 | When Oral Admissions as to content of documents are relevant | ||
| 22A | When Oral Admissions as to content of electronic records are relevant | ||
| 24 | Confession caused by inducement, threat or promise when irrelevant in criminal proceedings | ||
| 34 | Entries in books of Accounts including those maintained in an electronic form when relevant | ||
| 45 | Opinion of Experts | ||
| 62 | Primary Evidence | ||
| 63 | Secondary Evidence | ||
| 65 | Cases in which secondary evidence relating to documents may be given | ||
| 65B | Admissibility of electronic records | ||
| 85B | Presumption as to electronic record and digital signatures | ||
| 101 | Burden of proof | ||
| 106 | Burden of proving fact especially within knowledge | ||
| 2 | THE INDIAN PENAL CODE 1860 | ||
| 23 | Wrongful Gain & Wrongful Loss | ||
| 24 | Dishonestly | ||
| 25 | Fraudulently | ||
| 120A | Definition of criminal conspiracy | ||
| 405 | Criminal breach of trust | ||
| 415 | Cheating | ||
| 418 | Cheating with knowledge that wrongful loss may ensue to person whose interest offender is bound to protect | ||
| 420 | Cheating and dishonestly inducing delivery of property | ||
| 463 | Forgery | ||
| 464 | Making a false document | ||
| 467 | Forgery of valuable security, will, etc | ||
| 468 | Forgery for purpose of cheating | ||
| 471 | Using as genuine a forged document | ||
| 477A | Falsification of accounts | ||
| 3 | Information Technology Act 2000 | ||
| 43 | Penalty and compensation for damage to computer, computer system, etc | ||
| 65 | Tampering with computer source documents | ||
| 66 | Computer related offences | ||
| 66B | Punishment for dishonestly receiving stolen computer resource or communication device | ||
| 66C | Punishment for identity theft | ||
| 66D | Punishment for cheating by personation by using computer resource | ||
| 66E | Punishment for violation of privacy | ||
| 67 | Punishment for publishing or transmitting obscene material in electronic form | ||
| 67A | Punishment for publishing or transmitting of material containing sexually explicit act, etc., in electronic form | ||
| 67B | Punishment for publishing or transmitting of material depicting children in sexually explicit act, etc., in electronic form | ||
| 4 | Companies Act 2013 | ||
| 210 | Investigation into affairs of company. | ||
| 211 | Establishment of Serious Fraud Investigation Office. | ||
| 212 | Investigation into affairs of company by Serious Fraud Investigation Office. | ||
| 213 | Investigation into company‘s affairs in other cases | ||
| 245 | Class action | ||
| 447 | Punishment for fraud | ||
| 448 | Punishment for false statement | ||
| 34 | Criminal liability for mis-statements in prospectus | ||
| 36 | Punishment for fraudulently inducing persons to invest money | ||
| 5 | THE PREVENTION OF MONEY-LAUNDERING ACT, 2002 | ||
| 22 | Presumption as to records or property in certain cases | ||
| 23 | Presumption in inter-connected transactions | ||
| 24 | Burden of proof | ||
| 3 | Offence of money-laundering | ||
| 6 | THE PREVENTION OF CORRUPTION ACT, 1988 | ||
| 2(c) | public servant | ||
| 7 | Offence relating to public servant being bribed | ||
| 7A | Taking undue advantage to influence public servant by corrupt or illegal means or by exercise of personal influence | ||
| 8 | Offence relating to bribing of a public servant | ||
| 9 | Offence relating to bribing a public servant by a commercial organisation | ||
| 12 | Punishment for abetment of offences | ||
| 7 | The Indian Contract Act, 1872 | ||
| 17 | “Fraud” defined | ||
| 18 | “Misrepresentation” defined | ||
| 8 | Securities and Exchange Board of India Act, 1992 | ||
| 12A | Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control | ||
| 9 | THE EMPLOYEES’ PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT, 1952 | ||
| 14 | Penalties | ||
| 14AB | Certain offences to be cognizable | ||
| 10 | THE ARBITRATION AND CONCILIATION ACT, 1996 | ||
| 7 | Arbitration agreement | ||
| Chapter V | Conduct of arbitral proceedings | ||
| Chapter VI | Making of arbitral award and termination of proceedings | ||
| 11 | Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (POSH Act) | ||
| 3 | Prevention of sexual harassment | ||
| 4 | Constitution of Internal Complaints Committee | ||
| 9 | Complaint of sexual harassment | ||
| 12 | THE NEGOTIABLE INSTRUMENTS ACT, 1881 | ||
| Chapter XIII | Special Rules of Evidence | ||
| 138 | Dishonour of cheque for insufficiency, etc., of funds in the account | ||
| 139 | Presumption in favour of holder | ||
| 145 | Evidence on affidavit | ||
| 13 | THE BANKERS’ BOOKS EVIDENCE ACT, 1891 | ||
| 4 | Mode of proof of entries in bankers’ book | ||
| 5 | Case in which officer of bank not compellable to produce books | ||
| 14 | Sarbanes Oxley Act of 2002 | ||
| 802 | Criminal penalties for altering documents | ||
| 803 | Debts non-dischargeable if incurred in violation of securities fraud laws | ||
| 303 | Improper influence on conduct of audits | ||
| 406 | Code of ethics for senior financial officers | ||
| 807 | Criminal penalties for defrauding shareholders of publicly traded companies | ||
| 902 | Attempts and conspiracies to commit criminal fraud offenses | ||
| 906 | Corporate responsibility for financial reports | ||
| Title XI | Corporate fraud and accountability | ||
| 15 | Foreign Corrupt Practices Act of 1977 | ||
| 104 | Prohibited foreign trade practices by domestic concerns | ||
| 104(h) | Definitions | ||
| 102 | Accounting Standards | ||
| 30A | Foreign corrupt practices by issuers | ||
