Principles of Forensic Accounting – Case Studies | Practical Applications

Forensic Accounting is a specialized area of accounting that focuses on investigating financial discrepancies and frauds within organizations or among individuals. It combines accounting, auditing, and investigative skills to analyze financial information for use in legal proceedings. Forensic accountants, also known as forensic auditors or investigative auditors, play a crucial role in uncovering financial misconduct and ensuring transparency and accountability in financial reporting.

By Durgesh Pandey – Chartered Accountant | Doctorate in Forensic Accounting

Table of Contents

1. Introduction
2. Definition and Scope
3. As per FAIS – ICAI
4. Role of Forensic Professional
5. Forensic Accounting – What’s Different
6. Ethical Concerns
7. Financial Statement – Anomaly
8. Detection Techniques
9. Prevention Techniques
10. Reporting
11. Testifying
12. EPC Contractor – Investigation
13. EPC Contract Investigation

1. Introduction

• Use of Accounting skills to investigate a Financial Crime
• Implementation of robust framework to prevent Financial Crime
• It’s a para legal activity helping in effective delivery of justice

2. Definition and Scope

• Forensic accounting is use of

1. 1. Accounting
   2. Auditing
   3. Investigative
   4. Legal (Psychological)
   5. Data Analytical, Cyber Security

• Skills to examine the financial statements of an organization

3. As per FAIS – ICAI

Forensic Accounting is gathering and evaluation of evidence by a Professional to interpret and report findings before a Competent Authority

• Gather facts and evidence
• Financial transactions and operational arrangements
• To report findings (Not Opinion)
• Support Litigation

4. Role of Forensic Professional

• Forensic Accounting
• Investigation
• Litigation Support
• Report writing
• Testifying

5. Forensic Accounting – What’s Different

Unlike Conventional Accounting/Auditing

• Not Routine/Recurring – On Call
• No Mandate under any law
• No Opinion
• Only Statement of Facts
• May be Adversarial
• Onerous Burden of Proof
• No Sampling
• Testification before authority

6. Ethical Concerns

• Independence, Integrity and Objectivity
• Due Professional Care, skill and competence
• Confidentiality
• Seeker of Truth
• Respect for others’ rights
• Facts and only Facts – No Opinion

7. Financial Statement – Anomaly

• Books speak to professional
• Behavioral and financial indicators
• Financial and Non-Financial Techniques

Few Examples

• Building up of Debtors or Inventory
• Only Few Vendors favored
• Living beyond means

8. Detection Techniques

• Data Analysis

1. 1. Ratios
   2. Trend
   3. Specialized Ratios (Benford – Benish)

• Digital Forensics

1. 1. Email Analysis
   2. Meta Data Analysis

• Transactional Analysis

1. 1. Suspicious Transaction
   2. Round Tripping
   3. Journal Analysis

• Behavior Analysis

1. 1. Life Style Audits
   2. Employee/Vendor Audits

• Document Examination

1. 1. Invoice Verification
   2. Contract Verification
   3. Signature Verification

• AI and ML

1. 1. Predictive Modelling
   2. Pattern Recognisation

9. Prevention Techniques

In addition to the Detection following will help

• Fear of detection – Deploying all the above
• Whistle blower Program
• Cross-Function Collaboration
• Implementation of AI techniques like CCM

10. Reporting

• Prepare the report presuming litigation
• Clear Crisp and concise
• Report to be tied to scope and deliverables
• Assumptions and Methodology to be clearly specified
• Annexures and exhibits to be clearly marked

11. Testifying

• Be witness of the authority and not the client
• Testify in Professional Manner
• Refute or Confirm with Evidence
• Be a teacher – Simplify
• Never LIE

12. EPC Contractor – Investigation

• Understanding the client’s business is the key to success in such Audits
• Efforts should be made to prepare the detailed process flowchart for mapping of all the activities
• Based on the identified activities, resource can be deployed, and manpower mapping done based on skill set available with Auditor

13. EPC Contract Investigation

• Linear measurement of steel is taken
• Based on weight of cross section of similar material, weight of entire material was extrapolated
• Relation between physical quantity of stock, its measurement and weight was understood by Audit team
• Value derived was value of stock on date of Audit. Further actual consumption was derived with help of measurement book
• Theory of impossibility was used to explain that there cannot be savings of all three-principle item (Sand, Steel and Cement)
• At the best it is replacement of high-cost cement with low-cost sand so essentially sand consumption should increase instead of savings for low-cost item
• As scope was from beginning of the project, no opening stock existed so essentially Actual Consumption = Total Purchase – Closing stock
• Actual Consumption compared with consumption figure from measurement book and theoretical consumption
• As there was difference between Measurement book and Actual consumption, measurement book was ignored for further calculation
• There was savings in Cement though not to the extent claimed and presented by site office
• There was excess consumption of Sand instead of savings
• Though there was very small savings in steel
• However, due wastage of steel, which was not part of measurement book, it gave false report of savings of steel. Instead, there was excess consumption of steel
• Total savings as presented by the Site office was reduced by 109% due to above adjustments. So essentially there was wastage rather than saving

When conviction and determination prevent us from exploring alternative options, we limit our potential for thinking critically.