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Guidance Note For Forensic Accounting And Investigation Standard No. 000 On Over Arching Documents provides technical clarifications and implementation guidance for the ‘Over Arching Documents’. This Guidance Note (GN) outlines the manner in which the Professional can implement the requirements of the three Over Arching Documents (OADs), forming part of the FAIS, when conducting Forensic Accounting and Investigation (FAI) engagements.

Digital Accounting Assurance Board
The Institute of Chartered Accountants of India
1st June, 2023

GUIDANCE NOTE FOR FORENSIC ACCOUNTING AND INVESTIGATION STANDARD NO. 000 ON OVER ARCHING DOCUMENTS

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 000, on “Over Arching Documents,” 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 The Preface to the Forensic Accounting and Investigations Standards (FAIS) introduces the Digital Accounting and Assurance Board (DAAB), the ICAI body under whose agies the FAIS, have been formulated and issued. It also provides an overview of the FAIS by covering its three Over Arching Documents (OADs), the Standard setting process and how the FAIS are structured and formulated.

1.2 These three OADs are as follows:

(a) The Preface to the FAIS;

(b) The Framework governing FAIS; and

(c) The Basic Principles of FAI.

1.3b The Framework governing FAIS presents the overall construct of the body of knowledge of FAI, and how sitting on the base of Ethics, the pillars of Basic Principles, Concepts, Standards and Guidance, everything comes together as one inter-related cohesive whole, to serve the needs of the FAI profession.

1.4 The Basic Principles are a set of core principles fundamental to conducting such engagements.

The first five of these principles relate to the attributes of the Professional and help to establish the credibility of the individual conducting the engagements while the next five principles relate to the performance of the Professional and help to establish the credibility of the manner in which the work is conducted.

1.5 In this regard, it’s important to mention that this document, the Guidance Note (GN), is issued to complement the FAIS in their effective implementation.

1.6 The Professional is expected to study and understand these three OADs as they provide an overall coverage to all the Standards as well as all its related documents. In fact, the cover of each Standard has a message box which explicitly states that the Standard…

“…should be read in conjunction with the “Preface to the
Forensic Accounting and Investigation Standards”, the
“Framework Governing Forensic Accounting and Investigation
Standards” and “Basic Principles of Forensic Accounting and
Investigations” issued by the ICAI”.

2.0 Objectives

2.1 This Guidance Note (GN) outlines the manner in which the Professional can implement the requirements of the three Over Arching Documents (OADs), forming part of the FAIS, when conducting Forensic Accounting and Investigation (FAI) engagements.

2.2 Objective of this GN is to assist the Professionals in implementing the requirements of the OADs in the following manner:

(a) Elaborate and clarify the definitions, where appropriate;

(b) Explain certain concepts and principles in more detail; and

(c) Provide examples and illustrations to guide on how the Standards can be implemented in true spirit and not just form.

2.3 The objective of the GN is not to introduce any new requirements, which being a key component of the Standard, can only be mandated by the Standard itself. However, the GNs serve an important role to ensure that the requirements of the Standard are understood and the manner of implementing the Standards is well explianed, thereby improve the level of compliance.

3.0 Procedures

3.1 Implementing requirements of the Preface:

3.1.1 DAAB: The DAAB, also referred to as the “Board”, undertakes a continuous, collaborative approach in the formulation and development of the Standards. However, given the rapid developments underway, it is difficult for the Board to stay abreast of all emerging challenges without the active support of its members. Therefore, it’s important for the Professional to participate in the formulation and development of the Standards. This can be done by some of the following initiatives which can be undertaken by the Professional in their individual capacity:

  • Make suggestions and recommendation on the new Standards required, and the changes required to the existing ones.
  • Volunteer to join drafting teams and become members of the study groups formed to develop new and revised Standards, Guidance Notes and Technical Guides.
  • Contribute articles, develop educational material and training programs on the various subjects of the FAIS.
  • Participate in FAIS awareness sessions and training programs as a student or faculty.
  • Represent the ICAI before legal and regulatory bodies and other stakeholders, in promoting the cause of the profession.

3.1.2 Mandatory Nature of Standards: Currently a full set of 20 FAIS have been issued in recommendatory form. These were prepared by following the laid out Standard setting process. They will become mandatory as and when they are notified by the Council of the ICAI st the appropriate time. This means that every member of the ICAI conducting FAI engagements, to which these Standards apply, would be required to ensure compliance with the provisions of the Standards.

While the FAIS may not be mandatory on Professionals who are not members of the ICAI, it would be incumbent on them to voluntarily comply with the FAIS to justify the quality of their services, and the credibility of their report.

The mandatory nature of the Standard is explained in para 5 of the Preface. The implication of any non-compliance to the FAIS could, if deemed appropriate, trigger the disciplinary process on the ICAI member. It is also possible that, in the absence of any other such Standards on the topic, the government and regulatory bodies may choose to apply these Standards on all Professionals (including non ICAI members) and therefore use them as a basis for their own disciplinary process. Suitable censure may follow such infractions.

3.1.3 Content of the Standards and Guidance Notes: Since the Standards are principle based, they mandate only the required outcome on a particular subject matter (e.g., Planning, Evidence or Reporting), also referred to as the “what” of the FAIS. The GNs, on the other hand are drafted to provide the Professional with guidance on the “how”. In this way, it is left to the judgement of the Professional to determine the most appropriate procedures which may be deployed to achieve the objective of the Standard (e.g., the steps required to conduct the planning exercise, or how to ensure that the evidence gathered is relevant and reliable).

While the Professional has to mandatorily attain the outcome (requirement) of the Standard, the manner chosen to achieve that is left to the judgement of the Professional, since this may vary, engagement to engagement, or even assignment to assignment.

3.1.4 Standard Setting Process: Each Standard goes through a detailed six-step Standard Setting Process as outlined in Annexure 1 of the Preface, which includes a 30-day exposure of the draft for comments from all Stakeholders.

The same process applies to the Guidance Notes (GNs), although the time frame for exposure may be reduced in these cases as GNs are always issued in a non-mandatory (recommendatory) form. All Stakeholders are encouraged to actively participate in the Standard setting process by publicising the exposure drafts and submitting their suggestions to help make the content world-class.

Experience from the past has confirmed the importance of the exposure draft stage as invaluable inputs and suggestions have been received from a whole spectrum of stakeholders allowing the ICAI to incorporate national and global best practices.

3.2 Implementing requirements of the Framework:

3.2.1 Definition: Professional: A professionally qualified accountant, carrying membership of a professional body, such as the ICAI, who undertakes forensic accounting and investigation assignments using accounting, auditing and investigative skills.

This clearly indicates that for forensic accounting, one is expected to be a professionally qualified accountant. In addition, it recognises that the FAI assignments require the use of multiple skills, especially accounting and investigative, but auditing skills are useful as well. In the case of ICAI members, the FAIS would apply to all members undertaking FAI assignments, irrespective of whether they are practicing or in industry.

3.2.2 Definition: Forensic Accounting is gathering and evaluation of evidence by a Professional to interpret and communicate findings before a Competent Authority.

Explanation: The overriding objective of Forensic Accounting is to gather facts and evidence, especially in the area of financial transactions and operational arrangements, to help the Professional report findings, to reach a conclusion (but not to express an opinion) and support legal proceedings.

Forensic Accounting by nature is an act of gathering evidences, conducting an evaluation of their relevance and reliability, and through interpretations of these evidences, reporting the findings, with a conclusion (if required) before a Competent Authority like a Court of Law.

3.2.3 Definition: Investigation is the systematic and critical examination of facts, records and documents for a specific purpose.

Explanation: A critical examination of evidences, documents, facts and witness statements with respect to an alleged legal, ethical or contractual violation. The examination would involve an evaluation of the facts for alleged violation with an expectation that the matter might be brought before a Competent Authority or a regulatory body.

Investigation is by nature an extension of a Forensic Accounting exercise because the evidences gathered go through a critical examination in order to make a determination whether they support a specific purpose, such as an alleged violation (legal, ethical or contractual), or whether they prove or disprove some suspicion or allegations, such as the existence of an error, irregularity or fraud.

3.2.4 Definition: Fraud is any intentional or deliberate act to deprive another of property or money through deception or other unfair means.

Where fraud (an intentional act) is suspected, the nature of an investigation would extend to exploring the role of certain individuals (involvement of people) to gather evidences supporting the intention behind their behaviour and actions.

As per Indian Company law, there may not be a need to establish a loss or deprivation of money or property. The law is considered violated by the mere intentional act even if the intent of unlawful gain was not achieved.

3.2.5 Code of Ethics: Since the FAIS apply to the members of ICAI only, the Code of Ethics of ICAI would be applicable. However, considering the fact that non-member Professionals may also be conducting FAI assignments, the assumption is that these Professionals would comply with either the ICAI Code of Ethics or that of their own Institute of which they are members.

3.2.6 Key Concepts: Currently the FAIS have issued 4 Standards on Key Concepts, viz., Nature of Engagement, Fraud Risk, Laws and Regulations and Applying Hypotheses. Any other concepts, as they emerge, will be added to this list and supported with a suitable Standard.

3.3 Implementing requirements of the Basic Principles:

3.3.1 Principles of Attributes:

(a) Independence: Neutrality, a key element implicit within independence, is rightly mentioned explicitly in para 3.1 on Independence. It is also a state of mind and therefore difficult prescribe through rules and norms. Never-the-less, concerns of Independence, which need to be kept in mind, may arise through any of the following situations (indicative list):

  • Influence of an overpowering individual personality over the free functioning of the Professional, sometimes without any official relationship, e.g., a person of political influence.
  • Employment or other concurrent fee-paying relationship, such as an Audit or attestation related service by a partnership/firm of the Professional.
  • Promise of future reward or favour on completion of the engagement to suit the needs of the appointing stakeholder.
  • Contingent fee arrangement, such as one involving sharing of loss recovered, post completion of engagement.
  • Any other service or arrangement which may be perceived to influence the required neutral approach (or introduce an element of bias in the outcome) in the performance of the engagement.

(b) Integrity (including Conflict of Interest): This is very much an individual trait requiring high moral and ethical standards of the Professional. Regular acts of not seeking any undue benefits from others is a normal and acceptable display of such ethical traits. However, perceptions of integrity are just as important and play a big role in the need to display the absence of any conflicting situations. Concerns of such conflict of Interest, which need to be kept in mind, may arise through any of the following situations (indicative list):

  • Presence of personal relationships (e.g., blood or marriage relations, etc) with company officials.
  • Personal interactions (i.e., interactions beyond business dealings) with certain key stakeholders;
  • Financial or pecuniary interest with the organisation, such as shareholding, debt or borrowings, etc.
  • Other fee-paying arrangements or contracts with related parties of the company or organisation;
  • Participation or influence in the operational or strategic decision making of the organisation.

(c) Objectivity: Work performed, and conclusions reached need to be free from external influences and driven only from facts and evidences. Concerns over objectivity may arise, which need to be kept in mind, through any of the following situations (indicative list):

  • Presence of discrimination or personal prejudices towards some religion, age, gender or a certain community (e.g., handicaps, business class etc.).
  • Personal affinity, sympathy or favouritism towards certain individuals or groups (e.g., politicians or radical ideology);
  • Pre-conceived notions or self-fulfilling biases towards certain actions or behaviours (e.g., “poor are thieves”)
  • Engagements which mandate a certain pre-conceived outcome, such as, a confirmation of violation or the presence of fraud;
  • Due Professional Care: Due professional care in FAIS context is no different from the due professional care parlance applied in all professional engagements covered by other pronouncements of the ICAI. Hence, the same would apply in an FIA engagement.
  • Confidentiality (including Privacy): The Professional always displays the ability to maintain a high level of confidentiality. However, most FAI engagements have an extra degree of sensitivity, such that a casual sharing of information considered trivial may alert a suspect to destroy certain critical (primary) evidence. At the same time, the need to protect the privacy rights of individuals poses a challenge requiring the Professional to balance between the two conflicting objectives. For example, a situation where there are suspicions of sexual harassment, confidentially seeking personal call details to identify off-business hour interactions made by the male boss may violate the personal privacy of the individual. This type of information would have to be gathered with due approvals of the individuals involved.

(f) Skills and Competence: The skills required to undertake an FAI engagement are quite specialised and unique. Beyond the basic skills of accounting, auditing and investigation, there are a multitude of other specialised expertise required, especially in the dual domains of Law and Technology. Both these areas are changing in a very rapid manner and both subjects now impacting the FAI engagements in a significant manner.

Practically, no assignment exists where digital evidence or data analysis is not required and similarly all assignments are leading to some level of legal proceedings. The Professional is therefore expected to have, or procure, the require expertise in these two areas in particular. Similarly, given that expertise is getting so specialised, one person alone can not be expected to be the “master of all”! Hence, its indeed safer to recognise one’s own limitations and seek out the expertise required to gather all the compelling evidence which may be avaible.

3.3.2 Principles of Performance

(a) Contextualisation of situation (Predication): What makes each FAI engagement unique is the context of the situation and the environment in which the respective events take place. Similarly, no engagement begins in the anticipation of “finding something” and there is always a need to have the “probability of the occurrence of some activity” even if it is only a suspicion. In fact, the mandate coming from the appointing stakeholders will always indicate some type of predication or a suspicion (e.g., the suspicion of the involvement of a purchasing manager with a vendor or supplier).

This is particularly important at the time of establishing the objectives of the engagement through discussions with the Primary Stakeholder. A subsequent risk assessment will also help to identify the important fraud risk indicators, which again will assist in establishing the predication.

(b) Primacy of Truth: One way to label a Professional would be to use the term “the seeker of truth”! Which is why, whenever there are any doubts in the mind of the Professional, the compass of truth will provide the right direction. In most cases this is also a very comforting thought, since there would always be some evidece or another to support the truth, it only needs to be discovered. On the other hand, evidence to support something else (a lie) would have to be generated and then it might be in conflict with something else – like the evidence of truth.

This basic principle of “truth being primary to everything else” is particularly relevant when case theories (or hypothesis) are being formulated at the time of planning the work procesures. These statements, when drafted in the form of truth seeking statements, will be most effective and give a fillip to the investigation.

For example, in a situation where bid procedures were short circuited at the time of procuring half-dozen water pumps, one will contexculise the situation and develop a case theory which seeks to find out why that was the case. The truth might point in the direction of solving a problem of flooding in an emergency situation as the real intent, as opposed to any unethical intent of kick-backs. Hence, the truth may even justify the violations in certain unique scenarios.

(c) Rights and Obligations: The Professional always faces the on­going challenge of balancing their obligation of unearthing the truth with persoanal rights of the suspects. This basic principle places an added obligation on the Professional to not just acknowledge that all suspects have the right to defend their innocence, but that the process of gathering evidences should also acknowledge the right to privacy etc,. Unfortunately, its also fair to accept that many time, the suspect use these rights to manipulate the system and even destroy evidence etc,.

For example, many cases hit the media where the accused is aquitted on “technical grounds” of not having enough evidence to judge them guilty. In some of these cases, the evidence gathered may have been considered “in-admissible” in the court due to some deviation from the legal requirements of evidence.

Most often, the smart defence lawyers take benefit of these rights provided by law to the other extreme and try to defeat the strict legal requirements of proof, as a result of which the truth becomes the casuality. Good Professionals are alert to such pitfalls when developing their own cases for legal proceedings.

(d) Separating Facts from Opinions: A major pitfall in FAI engagements is the wastage in resources stemming from diversions which creep in due to the difficulty in seperatenig facts from opinions. While this is now a societial problem in the day and age of social media, this expertise of the Professonal is most important in FAI engagements. Many years of expertise gives the Professional an added advantage in quickly accepting facts and rejecting opionions, and this makes a big difference in applying precious time and resources chasing evidences to support facts and not opinions. If such filteration is not done at the time of evidence gathering, then the professional runs the risk of embarrassing rejection of their evidence from cross examination during the legal proceedings.

(e) Quality & Continuous Improvement: The only guideance which can be given to any Professional with regard to quality is to make sure that this aspect is built into the process of daily functioning, as opposed to an occasional project to be undertaken towards the end of the engagement. The outcome of the engagement, either in the form of a written report, or during legal proceedings will clearly bring out the quality aspects since the deliverable will be more reliable and have greater credibility when the work has been done with high quality standards.

3.4 Other Issues: The FAI profession is going through a lot of challenges where the number of cases are going up, but the number of Professionals conducting quality engagements is not keeping pace. This is partly due to the fact that certain unqualified individuals are also entering the field and undertaking engagements at very low fees which are not sustainable. As the economics of conducting these complex engagements find the right balance, the Professional is well adviced to take the correct steps, keeping all the risks and rewards in mind.

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