Introduction- With an upsurge in financial accounting fraud in the global economy, forensic accounting has become an emerging topic of great importance for academic, research and industries. Forensic accounting is perceived to have evolved in response to certain emerging fraud related cases. The scandals that shocked the corporate world with classical examples being the often cited Enron, WorldCom and Satyam Computer Service cases have also brought the field of forensic accounting to the upfront.

Forensic accounting is the three tiered practice of accounting, auditing and investigation. It is a specialized field of accounting that describes engagements that result from actual or anticipated disputes or litigation. The objective of forensic accounting and fraud investigations is timely detection of financial frauds and taking the measures to hold back the same from occurring within due course. Forensic accounting can, therefore, be seen as an aspect of accounting that is suitable for legal review and offering the highest level of assurance.

LITERATURE VIEW

The application of accounting methods and techniques to track and collect forensic evidences, usually for investigation and prosecution of criminal acts such as embezzlement, fraud or other financial claims is Forensic Accounting. It is an integration of accounting, auditing and investigation skills. Forensic Accounting assists in establishing the accountability and responsibility of the fraud as well.

“Forensic”, according to the Webster’s Dictionary means, “Belonging to, used in or suitable to courts of judicature or to public discussion and debate.” In other words, forensic means anything suitable for use as evidence in the court of law. Clearly, forensic accounting helps in discovering the solid and strong evidences which can be acceptable in the court of law. Forensic accountants are trained to look beyond the numbers, lift the veil behind the business decisions and deal with the reality of a situation.

DIFFERENCE BETWEEN FORENSIC ACCOUNTING AND AUDITING

Forensic Accounting can be differentiated from Auditing in a number of aspects.

  • Auditing is designed to provide an overall opinion on financial reporting and requires an auditor to certify the financial reports as free from material misstatement while forensic accounting is much more detailed and focused, particularly to a specific issue or family of issues, and often used in resolving disputes, including litigation support.
  • Auditing is based on much more assumptions and sampling whereas in forensic accounting, every transaction in the area of inquiry is verified.
  • Auditing is done for the corporation’s audit committee and for the sake of stakeholders under the legitimate needs while forensic accounting and investigation is done for someone specific like government departments, banks or board of the corporation itself.
  • Auditors conducting the audit generally have background in accounting whereas forensic accountants have a background in the field of accounting, criminology and law.

FINANCIAL FRAUDS

Financial fraud has been variously described in literature. No one description suffices. Wikipedia dictionary describes Fraud as crimes against property, involving the unlawful conversion of property belonging to another to one’s own. Oxford dictionary defines a financial fraud as wrongful or criminal deception intended to result in financial or personal gain. Many fraud cases involve complicated financial transactions conducted by ‘white collar criminals’ such as business professionals with specialized knowledge and criminal intent.

Following are some of the financial fraud practices notified by many investigation departments including FBI undertaken by the white color criminals:

  • “Get-Rich-Quick” schemes
  • Telemarketing Frauds
  • Identity Theft
  • Advance Fee Schemes
  • Investment related schemes

We often come across with a term ‘White collar crime’. What is a white collar crime? Lying, cheating, and stealing is white-collar crime in a nutshell. The term reportedly coined in 1939 is now synonymous with the full range of frauds committed by business and government professionals. It is not a victimless crime. A single scam can destroy a company; devastate families by wiping out their life savings, or cost investors billions of dollars.

Some of the financial frauds in the world history which shook the planet and warn the nations to take some stringent steps to prevent such frauds from future occurrences are:

i. Harshad Mehta Scam (1992):

Harshad Mehta was an Indian stockbroker, had been charged with numerous financial crimes that took place in 1992. It was alleged that Mehta engaged in a massive stock manipulation scheme financed by worthless bank receipts, which his firm brokered in “ready forward” transactions between banks. Mehta was convicted by the Bombay High Court and Supreme Court of India for his part in a financial scandal valued at 49.99 billion which took place on the Bombay Stock Exchange (BSE).

ii.  Enron Scam (2001):

The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the de facto dissolution of Arthur Andersen, which was one of the largest audit and accounting partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was attributed as the biggest audit failure. Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Enron’s $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history until WorldCom’s bankruptcy the next year

iii. WorldCom Scam (2002):

On June 25, 2002, WorldCom, announced that it had overstated earnings in 2001 and the first quarter of 2002 by more than $3.8 billion. The announcement stunned financial analysts and, coming on top of accounting problems at other corporations, had a noticeable effect on the financial markets. The accounting maneuver responsible for the overstatement – classifying payments for using other companies’ communications networks as capital expenditures – was characterized by the press as scandalous. WorldCom filed for bankruptcy protection on July 21st. On August 8th, the company announced that it had also manipulated its reserve accounts in recent years, affecting an additional $3.8 billion.

iv. Ketan Parekh Scandal (2008):

Ketan Parekh is a former stock broker who was convicted in 2008, for involvement in the Indian stock market manipulation scam in late 1999-2001. Currently he has been debarred from trading in the Indian stock exchanges till 2017. He was trainee of Harshad Mehta. Parekh is alleged to have been involved in circular trading throughout the time period and with a variety of companies, including Global Trust Bank and Madhavpura Mercantile Cooperative Bank. Parekh’s sole conviction, which carried a one year sentence, came as a result of a transaction he conducted involving a unit of Canara Bank in 1992. In March 2014 he was convicted by a special CBI court in Mumbai for cheating and sentenced to two years rigorous imprisonment

v. Satyam Computer Service Scandal (2009):

The Satyam Computer Services scandal was a corporate scandal that occurred in India in 2009 where chairman Ramalinga Raju confessed that the company’s accounts had been falsified. The Global corporate community was shocked and scandalised when the chairman of Satyam, Ramalinga Raju resigned on 7 January 2009 and confessed that he had manipulated the accounts by US$1.47-Billion. On admission of fraud by the chairman, C B Bhave, chairperson of the Securities and Exchange Board of India (SEBI) stated “This is an event of horrifying magnitude and it’s first of its kind”.

SARBANES-OXLEY ACT 2002

In reaction to the above mentioned frauds in the period of pre 2002, one of the major steps taken by the US government was enactment of Sarbanes Oxley Act. The bill was passed as an aftermath of a number of major corporate and accounting scandals besides Enron and WorldCom, including Tyco International, Adelphia and Peregrine Systems. These scandals cost investors billions of dollars when the share prices of affected companies collapsed and shook public confidence in the US securities markets.

The Sarbanes–Oxley Act of 2002 (enacted on July 30, 2002), also known as the ‘Public Company Accounting Reform and Investor Protection Act’ (in the Senate) and ‘Corporate and Auditing Accountability and Responsibility Act’ (in the House) and more commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law that set new or enhanced standards for all U.S. public company boards, management and public accounting firms. It was named after sponsors U.S. Senator Paul Sarbanes (D-MD) and U.S. Representative Michael G. Oxley (R-OH). As a result of SOX, top management must individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity made much more severe. Also, SOX increased the oversight role of boards of directors and the independence of the outside auditors who review the accuracy of corporate financial statements.

NEED OF FORENSIC ACCOUNTING

Numerous financial frauds such mentioned earlier from the past and the beginning of the century as well as the appearance of the global financial and later economic crisis have brought to the fore the relevance and reliability of financial information. The system of financial reporting and the accounting and auditing profession are often accused because of the appearance of frauds and the loss of trust in the reliability of financial information on the part of the users and makers of economic decisions. Forensic accounting aims securing the reliability and creditability of financial statements.

With increase in the number of fraud and scams, not only in the field of accounts but in other aspects too, forensic accounting is need of the hour. Financial Fraud is real and has become prevalent in contemporary business environment. This trend needs to be arrested before it is too late. Forensic accounting is the new branch of accounting which has the sole aim of unearthing fraudulent activities within and outside an organization so far as the third party’s action is in any way reflective on the activities of that organization.

ROLE OF FORENSIC ACCOUNTANT

With the ever-changing business climate, we are seeing an evolving role for the forensic accountant. A forensic accountant under present conditions is very important. This is because forensic accountants, in accord with the essence of forensic accounting, investigate and document frauds. Going beyond investigative accounting, the role of an accountant/auditor is expanding into a broader, multidisciplinary profession that surpasses a basic understanding of financial records. The role of a forensic accountant can be crucial in helping to obtain a beneficial outcome in a settlement or in the courtroom.

Forensic accountants are not always brought on a case to find the suspected fraudulent activity, but can also be called in after the fraud has been detected to assess the magnitude of the fraudulent activity. A forensic accountant can provide valuable insights for many different scenarios such as financial reporting fraud, shareholder/partner disputes, intellectual property infringement, asset impairment, business valuation and white-collar criminal investigations, among other instances where their expertise in assessing the financial situation can be useful.

CONCLUSION

In recent years, corruption in the companies across the globe has attracted the attention on fraud in many organizations. Detection and prevention of corruption have given rise to the profession of forensic accounting. Forensic accounting has been growing rapidly as a profession in the world and has been accepted as a profession.

The landmark legislation Sarbanes-Oxley Law has significantly contributed and consolidated the effectiveness of the code of ethics and moral standards in the organizations. Countries enact and adopt new regulations as the need arises as a result of fraud, and bankruptcies due to unethical applications on the part of corporate entities. But rules and legislations are one side of the issue. In order to have a solid and strong fight against fraud and other wrongdoings in the companies, forensic accountants should be trained as a person primarily in charge of identification, investigation, and detection of fraud.

In conclusion, forensic accounting will no doubt be one of the best careers of the future. Countries and companies in every part of the world should make substantial and ethical investments for this profession, in order to ensure that individuals, corporations, government departments and countries are protected and consequently the entire world would be a better place for all.

(CA Prassan Goyal – B.Com(H), ACA)

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0 responses to “Forensic Accounting: An Emerging Sector”

  1. Prassan says:

    If you want to make your concrete career in forensic accounting, you can opt for CFE i.e. certified fraud examiner which is done through ACFE. Otherwise if you already is a CA, you can pursue post qualification course of ICAI in forensic accounting and try to get into this field practically to enhance your knowledge and interest.

  2. Mohammad Shujatullah says:

    Sir,

    It is very informative and dynamic.
    Whether Forensic Accounting been taught any where?If it is, then please supply me the Address and the qualification required for admission to the said course.An immediate response will be highly appreciated.

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