An Introduction to Forensic Accounting

Forensic Accounting is an accounting technique which uses accounting, auditing and investigative skills to conduct an examination from the root of the problem. It deals with the application of accounting facts gathered through auditing methods and procedures for those legal problems usually dealing with financial and valuation issues. It is frequently used in fraud, embezzlements and scam cases to find out the cause of the problem and explain it to the court and related parties.

Forensic accountants analyse, understand and recapitulate the complex financial and business dealings. They are generally employed by insurance companies, banks, police force, government agencies or public accounting firms. For example: If a one party in a contract defrauds the other party, a forensic accountants comes in to handle the matter and find the true cause.

EVOLUTION OF FORENSIC ACCOUNTING IN INDIA:

Forensic accounting was first mentioned by Chanakya’s eminent book “Arthashastra: forty ways of misappropriation”. Chartered accountants were present in the country, but they either helped people in doing the fraud or supressed the matter. So, there was a great need of accountants who could deal with fraudulent cases. Forensic Accounting was widely used in India after Enron case, Rajat Gupta case and Satyam Case.

There are very few chartered accountant firms like Sharad Joshi, S.K. Jain that have fraud examination as a separate practice. However, this area is by and large dominated by the big four consultancy firms such as Deloitte, KPMG, Price Waterhouse Coopers (PWC) and Ernst and Young. In India, the formation of Serious Fraud Investigation Office is the landmark creation for the Forensic Accountants. Section 211 and 212 in Companies Act, 2013 paved the way for a special approach to prevent economic fraud and preserving national wealth. Thus, forensic accounting was called for to detect planning and execution of the frauds and the culprits behind it.

A short video of how Forensic Accountants work:

ROLE OF FORENSIC ACCOUNTANTS:

1) Detective rather than Preventive:

Forensic accounting does not prevent frauds from happening always, it is actually about detecting frauds that are already happening i.e it does not guarantee that frauds will be prevented, but it makes sure that if a fraud or misappropriation is happening, then it is detected and rectified.

2) Identifier of Issue

Forensic accounting does a very deep analysis of the accounts of a firm, and actually points out the exact problem with the company’s accounts, so it makes sure that the issue with the accounts, i.e the origin of problem, accounts affected/manipulated, impact on financial position, etc is identified and deeply taken into consideration.

3)Gatherer of Information

To do what forensic accounting does, it is necessary to have each and every detail about the accounts of a firm, thus Forensic accountants have to gather a lot of information about the transactions that take place through the organization, in and out, all the source documents and the financial statements have to be rechecked.

4)Reporter and Expert Witness 

Forensic accountants are very good at reporting how a fraud or misappropriation took place, they can tell the exact origin of a fraudulent transaction and the exact impact of it on every aspect of business. In this process, they become Expert Eyewitnesses of the fraud because they have practically seen how everything was done form the eyes of accounts.

5)Analysis of the Document

Forensic accountants’ first trait is great analytical skills, all they have to do is actually analyse the documents, so most of the work is actually all about analysing the source documents in relation to their financial treatment and the significance of the changes/manipulations on such transactions.

 So, these are the roles of a forensic accountants.

Here is a crossword puzzle for the readers to test their knowledge!

(Stay Tuned For Answers)

References:-

http://www.ijetsr.com/images/short_pdf/1516209079_443-448-SJ27_8.pdf
https://youtu.be/iQhRDxgILSw
https://www.linkedin.com/pulse/role-importance-forensic-accounting-financial-fraud-examiner-n-rao
https://www.dolmanbateman.com.au/1323/the-role-of-forensic-accountants/
theteacherscorner.net