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FORENSIC ACCOUNTING

By: Aditya Mahajan Q1806 A17, Regd:- 10812595 MBA (International)

IntroductionRAPID CHANGES IN THE ACCOUNTING

PROFESSION > Operations of Day to day task of

debiting and crediting.

> Reports on internets (Technology)

> Demand of Global Economy and International market.

Over viewForensic accounting have been around for nearly 200

yearsFound in 1824

First institutions to use the services IRS (International Financial Statistics)GAAP ( General Accepted Accounting Principles) and tax laws became widespread and mandatory.Companies that manipulated accounting rules to boost their earnings in a stock market gone wild.The year 2002 the annals of accounting history as

the Year of Truth when companies disclosed billions of dollars of financial fraud. SEC issued earnings restatements between the years 1997 and 2002.The FASB (Financial Accounting Standard Board) and the SEC(Security and Exchange Commission) scrambled to find solutions to the problem of such ubiquitous financial fraud.

FBI decided to use forensic accountants and employed nearly 500 such agents during World War II.

Forensic Accounting

"Forensic accounting", provides an accounting

analysis that is suitable to the court which will form the basis for discussion, debate and ultimately dispute resolution.

Forensic Accounting encompasses both Litigation Support and Investigative Accounting.

Forensic accounting is hardly a new field in accountancy.Forensic accountants as preventative measures as the demand for trustworthy financial statements increases in the wake of the recent accounting scandals.

AssistanceForensic Accountant

• Litigation SupportIt deals primarily with

issues related to the quantification of economic damages. A typical litigation support assignment would be calculating the economic loss resulting from a breach of contract.

• Investigation Support“Investigative accounting",

is often associated with investigations of criminal matters. A typical investigative accounting assignment would be an investigation of employee theft. Other examples include securities fraud, insurance fraud, and proceeds of crime investigations.”

Forensic Accounting encompasses a wide range of activities :

• The expert witness – preparation of formal reports for filing in Court and giving evidence as an Expert

• Fraud Detection – assisting clients in detecting financial fraud by employees and others and tracing misappropriated funds. This section provides information for fraud-related engagements

• Computer Forensics – assisting in electronic data recovery and enforcement of IP rights etc

Forensic Activities Process

1. Preparation (of the investigator, not the data)2. Collection (the data)3. Examination4. Analysis5. Reporting6. Comparison to Physical Forensics

Need for Forensic accountant•Shareholder/partnership disputes• Personal injury claims/accidents• Business interruption/insurance claims• Employee fraud• Divorce/bankruptcy• Professional negligence• Financial statement fraud• Retained by lawyers, law enforcement, banks and companies

Money

Shareholders' and Partnership Disputes

These assignments often involve a detailed analysis of numerous years accounting records to quantify the issues in dispute.  For example, a common issue that often arises is the compensation and benefits received by each of the disputing shareholders or partners.

Personal Injury Claims / Motor Vehicle Accidents A Forensic Accountant is often asked to quantify the economic losses resulting from a motor vehicle accident.  A Forensic Accountant needs to be familiar with the legislation in place which pertains to motor vehicle accidents. Cases of medical malpractice and wrongful dismissal often involve similar issues in calculating the resulting economic damages.

Business Interruption / Other Types of Insurance Claims

Insurance policies differ significantly as to their terms and conditions.   Accordingly, these assignments involve a detailed review of the policy to investigate coverage issues and the appropriate method of calculating the loss.A Forensic Accountant is often asked to assist from either an insured or insurer's perspective in the settlement of a case.Examples of these types of assignments include; business interruptions, property losses and employee dishonesty (fidelity) claims.

Business/Employee Fraud Investigations

Business investigations can involve funds tracing, asset identification and recovery, forensic intelligence gathering and due diligence reviews.

Employee fraud investigations often involve procedures to determine the existence, nature and extent of fraud and may concern the identification of a perpetrator.  These investigations often entail interviews of personnel who had access to the funds and a detailed review of the documentary evidence.

Matrimonial Disputes

Matrimonial disputes from a Forensic Accounting point-of-view often involve the tracing, locating and evaluation of assets.  The assets to be evaluated and valued may be businesses, property or other assets.

Business Economic Losses

Examples of assignments involving business economic losses include; contract disputes, construction claims, expropriations, product liability claims, trademark and patent infringements and losses stemming from a breach of a non-competition agreement.

Professional Negligence

These investigations are often approached from two different but complimentary perspectives, these being:•Technical - has a breach of Generally Accepted Accounting Principles or Generally Accepted Auditing Standards or other standards of practice occurred; and •Loss Quantification. If the professional in question is an accountant then a Forensic Accountant could be involved with both perspectives.  If the matter involves some other profession a Forensic Accountant will normally be retained to perform only a loss quantification.

FORENSIC ACCOUNTING TECHNIQUES

1. Indirect Method 2. Direct Method

FORENSIC ACCOUNTING TECHNIQUES

• The Direct Method, also known as the Transaction Method, is similar to traditional auditing procedures. In this method, the appraiser commonly examines:

• Cancelled checks & invoices

• Contracts & agreements • Public records & notices • Interview management &

staff (multi levels)

• Indirect Method is commonly employed when the conventional Direct Method is not productive. The most widely used techniques under the Indirect Method are the:

• Cash T Method • Source & Application of

Funds Method • Net Worth Method • Bank Deposit Method

Cash T Method •Simplest indirect method •Used to determine understated income  •Compares all cash received to all cash spent  • If cash spent exceeds cash received from taxable & nontaxable sources than excess may represent unreported income •Don’t forget to adjust for loan proceeds & use of savings •Frequently used to analyze Retail/Wholesale Businesses & its owners

Source & Application of Funds Method • Employed when large sums are spent on lifestyle instead of purchasing assets or investments • Similar technique to Cash “T” Method • Used often because of ease of presentation •People (including Judges & Jury) understand cash coming in & out

Source & Application of Funds Format

Funds Applied: Increase in assets Decrease in liabilities Plus Expenses paid Equals Total Funds Applied

Sources of Funds: Decrease in assets Increase in liabilities Plus Income received Equals Total Source of Funds

Net Worth Method 

•Balance Sheet approach to estimating income  •Net worth calculated at beginning & end of period •Difference in beginning & ending net worth compared to reported income  •Don’t forget nontaxable income & other reconciling items  •Un-reconciled differences represent underreported income

Bank Deposit Method

• Analyzes funds deposited during the year by reconstructing gross taxable receipts • An appropriate method when income is deposited in banks & most of expenses are paid in cash

Bank Deposit Method / Gross Receipts Formula

Total Bank Deposits Less: Nontaxable deposits Equals: Net Taxable receipts Add: Business/Personal expenses, Capital purchases, Cash accumulated Less: Nontaxable cash used Equals: Corrected Gross Receipts The application of these and other methods are frequently determined by industry. In fact, a useful resource for industry specific methods is the Market Segment Specialization Program, published by the Internal Revenue Service.

Forensic Accountant A Forensic Accountant is often retained to analyze, interpret, summarize and present complex financial and business related issues in a manner which is both understandable and properly supported.Forensic Accountants can be engaged in public practice or employed by insurance companies, banks, police forces, government agencies and other organizations.

Who retains a Forensic Accountant? Forensic Accountants are often retained by the following groups:•Lawyers; •Police Forces; •Insurance Companies; •Government Regulatory Bodies and Agencies; •Banks; •Courts; and•Business Community.

“Auditor should be watchdog ”. It’s a good quote that every auditor should know. This quote makes the definition of Forensic accountants even more simple.”

Growing cyber crimes, failure of regulators to track the security scams,

Satyam scandal

Conclusion:……………………….The importance of the forensic

accountant’s role in the detection of fraud is continuously growing. Armed with combination of skills, these financial detectives are today important assets to modern legal teams. In the backdrop of increasing levels of frauds, the demand for forensic accountants is bound to substantially increase in the future.

End of Satyam Empire

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