FORENSIC ACCOUNTING
INTRODUCTION
Forensic accounting is a fast-emerging field in the world of accounting and gaining constant
increased prominence due to rapid increase in financial frauds and white-collar crimes resulting in
collapse of many corporate giants, viz., Maxwell Communication Group in UK, Enron & Lehman
Brothers in USA and Satyam in India. The corporate auditors largely at present are only expected to
check the compliance of companies' books of account to the generally accepted accounting principles,
auditing, standards and companies’ policies. However, many white-collar crimes and financial frauds
could not be detected by the auditors because they were not trained to look the business reality of the
situation. This created the need for development of an accounting system integrating accounting,
auditing and investigative skills. This resulted in the emergence of a new concept of accounting
popularly known as 'Forensic Accounting.
MEANING OF FORENSIC ACCOUNTING
The meaning of forensic accounting is changing in response to the growing needs of business
and industry. In simple words, forensic accounting is accounting that is suitable for legal review
offering the highest level of assurance about the accuracy of the financial statements based on
scientific and objective verification.
Some of the definitions of forensic accounting are as under:
a) "Forensic Accounting is the science of gathering and presenting financial information
in a form that will be accepted by a court of jurisprudence against perpetrators of
economic crimes." – George A. Mannie
b) "Forensic Accounting is the application of financial skills and an investigative
mentality to unresolved issues conducted within the context of rules of evidence. As
an emerging discipline it encompasses financial expertise, fraud, knowledge and
understanding of business reality and the working of the legal system." – Bologana &
Lind Quist.
c) "Forensic Accounting is the application of accounting principles, theories and
discipline to facts or hypotheses at issues in a legal dispute and encompasses every
branch of accounting knowledge."- American Institute of Certified Public
Accountants (AICPA).
d) "Forensic Accounting is the science that deals with the relation and application of
finance, accounting, tax and auditing knowledge to analyse, investigate, enquire, test
and examine matters in civil law, criminal law and jurisprudence in an attempt to
obtain the truth from which to render and expert opinion."- Horty.
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From the above definition it can be concluded that forensic accounting includes use of accounting,
auditing and investigating skills to assists in a legal matter. Thus, forensic accounting the bridge
which connects accounting system to legal system. It consists of two major components.
i. Litigation services that recognize the role of an accountant as an expert consultant; and
ii. Investigative services for looking deep into the financial books, records and data to uncover
for hidden assets, siphoned funds, etc.
ROLE OF FORENSIC ACCOUNTANT
An accountant engaged in the forensic accounting is known as forensic accountant. He
utilizes his understanding of business information, financial reporting systems, accounting and
auditing standards. investigative techniques and legal knowledge in performance of his job which may
include the following:
a. Investigating and analysing financial evidence.
b. Developing appropriate computerized applications which could help in the analysis and
presentation of financial evidence.
c. Communicating his findings in the form of documents, reports, exhibits, etc.
d. Assisting in legal proceedings including testifying in a law court as a key and expert
witness.
It may be noted that a forensic accountant does not win or lose a case but seeks only the truth
by conducting evaluations, examinations and enquiries. The services of a forensic accountant are in
great demand in the following areas:
1. Assessment and settlement of insurance claims. The claims may relate to loss of property,
loss of profits or loss due to any other risk insured.
2. Detection of fraud committed by employees. Such frauds may relate to loss of property or
embezzlement of funds by dishonest employees.
3. Assistance in criminal investigation proceedings. A criminal offence may also have
financial implications. The services of a forensic accountant are quiet useful in preparing
and presenting the desired evidence.
4. Arbitration services. The parties to a dispute may like to get the financial liability settled
through arbitration. In some cases, settlement of dispute through arbitration may be
mandatory as per the terms of the agreement. The services of a forensic accountant may be
used in such cases.
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5. Miscellaneous disputes. These disputes may relate to the following matters:
a. Settlement of dues of an outgoing partner.
b. Liability for professional negligence.
c. Matrimonial matters.
d. Infringement of patents and trademarks etc.
REQUISITES FOR A SUCCESSFUL FORENSIC ACCOUNTANT
The discussion in the preceding pages explains that the job of a forensic accountant is quite
demanding and therefore requires high degree of both personal and professional skills summarized as
under:
(i) Knowledge of accounting and financial systems. He should be a specialist in accounting
and financial systems. He should have in depth knowledge of preparing and presenting financial
statements and the ability to examine and analyse them critically.
(ii) Understanding of fraud schemes. He should have the thorough understanding of fraud
schemes concerning misappropriation of assets, money laundering, bribery and other corrupt
practices.
(iii) Computer savvy. He should have the proficiency and knowledge of computers and
network systems. This will help him considerably in conducting investigations in areas where e-
banking or computerized accounting system are being used.
(iv) Knowledge of human psychology. He should have a knowledge of human psychology
to enable him in understanding the impulses behind criminal human behaviour. This will also help
him in setting and developing fraud prevention programs and motivating and encouraging the
employees to join them.
(v) Communication skills. He should have excellent interpersonal and communication
skills. This will be helpful to him in interviewing and interrogating employees to detect frauds.
(vi) Expert legal knowledge of laws. He should have a thorough knowledge of
(a) Corporate governance principles
(b) Civil and criminal laws
(c) Legal systems
(d) Court procedures
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(vii) Personal traits. He should have the following personal qualities
i. To remain cool even in the most provocative situations.
ii. To be patient and be a good listener.
iii. To have an analytical mind-set.
GROWTH OF FORENSIC ACCOUNTING
The western countries particularly USA & Canada are utilizing forensic accounting expertise
to deal with the financial fraud cases. In USA, the Association of Certified Fraud Examiners (ACPE),
grants certification for forensic accounting to persons interested in this accounting field. The
Canadian Institute of Chartered Accountants (CICA) has even recognized investigative and forensic
accounting as an accounting specialty. The institute has started granting its members to use the
designation initials, CAIFA to their members who have besides completing the chartered accountancy
course also have a diploma in investigative and forensic accounting from an institution recognized by
the Institute. In India, this branch of accounting has not so far got its formal recognition. No specified
education is provided by any of the university in country in this area. The two leading Indian institutes
of accountants, viz, The Institute of Chartered Accountants of India (ICAI) and Indian Institute of
Cost and Work Accountants of India (ICWAI) have still to come up with a post qualification course
such as diploma in investigative and forensic accounting for its members. At present, the work of
forensic accountants is done in some or the other form in India by chartered/cost accountants, tax
consultants and lawyers. Some of the Indian legislations where forensic accounting is referred or
required are the Companies Act 1956, the Securities Exchange Board of India Act 1992, The
Insurance Act 1938, The Prevention of Money Laundering Act 2002, The Foreign Exchange
Management Act, 1999, The Reserve Bank of India Act 1935 and the Income tax Act 1999. Indeed,
there is a future in forensic accounting as a separate niche consulting area in India.
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