EXCEL International Journal of Multidisciplinary Management Studies ________________ ISSN 2249- 8834

EIJMMS, Vol.3 (7), July (2013)

Online available at zenithresearch.org.in

FORENSIC ACCOUNTING: A NEW DYNAMIC APPROACH TO

INVESTIGATE FRAUD CASES
DR. SUDHIR YADAV*; DR. SUSHAMA YADAV**
*GUEST LECTURER,
DEPARTMENT OF CRIMINOLOGY AND FORENSIC SCIENCE,
DR. HARI SINGH GAUR UNIVERSITY,
**PH.D. FROM FACULTY OF COMMERCE,
BANARAS HINDU UNIVERSITY
VARANASI (U.P.), INDIA.

ABSTRACT
Forensic accounting is simply a specialty field within the broader arena of accounting. It is the
use of professional accounting skills in matters involving potential or actual civil or criminal
litigation, including, but not limited to, generally acceptable accounting and audit principles; the
determination of lost profits, income, assets, or damages; evaluation of internal controls; fraud;
and any other matter involving accounting expertise in the legal system. The main aim of this
article is to discuss frauds and their investigation as well as the role and importance of forensic
accounting and a forensic accountant in detecting frauds.
KEYWORDS: Forensic Accounting, Forensic Accountants, Frauds, Auditing, Law, Accounting
______________________________________________________________________________
1. INTRODUCTION
The forensic accounting (FA) market has seen a great deal of activity in modern era, the growth
of regulatory compliance requirements and the increase in fraud has seen a related growth in
demand for forensic accountants and forensic technologists both within and outside the
profession. FA is the integration of accounting, auditing and investigative skills or in other words
we can say that it is a field that deals with possible illegal and fraudulent financial transactions.1
Forensic Accounting, Forensic Accountancy or Financial Forensics is the specialty practice area
of Accountancy that describes engagements that result from actual or anticipated disputes or
litigation. "Forensic" means "suitable for use in a court of law", and it is to that standard and
potential outcome that forensic accountants generally have to work. Forensic accountants, also
referred to as forensic auditors or investigative auditors, often have to give expert evidence at the
eventual trial.2 All of the larger accounting firms, as well as many medium-sized and boutique
firms, have specialist forensic accounting departments and within these groups, there may be
further sub-specializations: some forensic accountants may, for example, just specialize in
insurance claims, personal injury claims, fraud, construction,3 or royalty audits.4
2. ROLE OF FORENSIC ACCOUNTANT
A Forensic Accountant is often retained to analyze, interpret, summarize and present complex
financial and business-related issues in a manner that is both understandable and properly

EXCEL International Journal of Multidisciplinary Management Studies ________________ ISSN 2249- 8834
EIJMMS, Vol.3 (7), July (2013)
Online available at zenithresearch.org.in

supported. Forensic Accountants can be engaged in Public Practice or employed by insurance

companies, banks, police forces, government agencies and other organizations.
(i) Criminal Investigations: Practicing forensic accountants could be called upon by the
police to assist them in criminal investigations which could either relate to individuals
or corporate bodies. The forensic accountant would use his/her investigative accounting
skills to examine the documentary and other available evidence to give his/her expert
opinion on the matter. Their services could also be required by Government
departments, the Revenue Commissioners, the Fire Brigade, etc for investigative
purposes.5
(ii) Personal Injury Claims: Where losses arise as a result of personal injury, insurance
companies sometimes seek expert opinion from a forensic accountant before deciding
whether the claim is valid and how much to pay.
(iii) Fraud Investigations: Forensic accountants might be called upon to assist in business
investigations which could involve funds tracing, asset identification and recovery,
forensic intelligence gathering and due diligence review. In cases involving fraud
perpetrated by an employee, the forensic accountant will be required to give his/her
expert opinion about the nature and extent of fraud and the likely individual or group of
individuals who have committed the crime. The forensic expert undertakes a detailed
review of the available documentary evidence and forms his/her opinion based on the
information gleaned during the course of that review.
(iv) Matrimonial Disputes: Solicitors often need the services of forensic accountants in
divorce cases involving disputes about matrimonial assets. Assignments of this sort
might require the forensic accountants to trace, locate and evaluate assets. Such assets,
for instance, might technically be owned by a business in which one of the parties to the
divorce case has a share. The assets would need to be accurately valued to ensure equity
when splitting the divorcing couples assets and liabilities.
(v)
Professional Negligence: The forensic accountant might be approached in a
professional negligence matter to investigate whether professional negligence has taken
place and to quantify the loss which has resulted from the negligence. A matter such as
this could arise between any professional and their client. The professional might be an
accountant, a lawyer, an engineer etc. The forensic expert uses his/her investigative
skills to provide the services required for this assignment.
(vi) Expert Witness Cases: Forensic accountants often attend court to testify in civil and
criminal court hearings, as expert witnesses. In such cases, they attend to present
investigative evidence to the court so as to assist the presiding judge in deciding the
outcome of the case.
(vii) Meditation and Arbitration: Some forensic accountants because of their specialist
training they would have received in legal mediation and arbitration, have extended
their forensic accounting practices to include providing Alternative Dispute Resolution
(ADR) services to clients. This service involves the forensic accountant resolving both
mediation and arbitration disputes which otherwise would have been expensive and
time consuming for individuals or businesses involved in commercial disputes with a
third party.
(viii) Litigation Consultancy: Working with lawyers and their clients engaged in litigation
and assisting with evidence, strategy and case preparation.

EXCEL International Journal of Multidisciplinary Management Studies ________________ ISSN 2249- 8834
EIJMMS, Vol.3 (7), July (2013)
Online available at zenithresearch.org.in

(ix)

Computer Forensics: Assisting in electronic data recovery and enforcement of IP

rights etc.

3. ROLE OF FORENSIC ACCOUNTANTS UNDER INDIAN STATUTES

There is no mention of Forensic accountants in the Indian statutes so far but there are various
provisions related to Forensic accountants/auditors in the statutes6. It can be categorized under
the following heads:
(1) INVESTIGATION AND INSPECTION: Forensic auditors may help the Police, ACB
and other investigating authorities in collecting evidences and other investigation
purposes. For example section 157 Cr.P.C, 1973; section 17,18 of Prevention of
Corruption Act, 1988; Section 6 of The Bankers Books Evidence Act, 1891; Section 78
of Information Technology Act, 2000; Section 209A, 227 of the Companies Act, 1956
wherein the Court or Police may require the skills of Forensic accountants while
inspecting any books in so far as related to the accounts of an accused.
(2) EXPERT OPINION: Forensic accountants may see and carefully examine the accounts
and balance sheets and use his skills to find out whether there is any fraud committed or
any anomaly associated with it by giving his expert opinion. This finds place in for
example s.45, s.118 of Indian Evidence Act, 1872; s.293 of Cr.P.C, 1973.
(3) FORENSIC ACCOUNTING UNDER CARO (The Companies (Auditors Report)
Order, 2003): It can be categorised under following heads:
(i)
DISPOSAL OF FIXED ASSETS: CARO, 2003 requires the auditor to report to the
effect that if a substantial part of fixed assets have been disposed off during the year,
whether it has affected the going concern status. In order to carry out the duties, the
auditor has to draw a corollary and reference to the section 293 Companies Act,
1956, AS 24 (Discontinuing Operations) and to AAS 16 (Going Concern) and
thereafter makehis observations on this matter.
(ii) REPORT ON FRAUDS: If any fraud on or by the company has been noticed or
reported during the year. Following provisions CARO, 2003 are important in this
aspect:
AAS 4(Revised) guides the Auditor to obtain a management representation letter as the
frauds reported and detected during the year because of the nature of the fraud and the
difficulties encountered by the Auditors in detecting material misstatements in the
financial statements resulting from fraud. Accordingly, it may be concluded that it is
enough if the Auditor expresses his opinion on the frauds noticed and reported by the
management and not expected to be a detective to approach his work with suspicion
Another major issue under this clause is that it also requires reporting of frauds
committed by the Company. The Auditor is left with no clues and is expected to travel
beyond the books to search for market information about frauds committed by the
Company, which is highly illogical.
(iii) TRANSACTIONS WITH RELATED PARTIES: The focus of the primary
reporting under this clause is to report whether transactions that need to be entered
into a Register in pursuance of Section 301 of the Companies Act, 1956 have been so
entered. This Clause may be considered as a further step towards the investors
protection. However, the major issue here is that the audit focus has to be shifted/
further intensified towards proprietary areas to find out the transactions that need to
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Online available at zenithresearch.org.in

be entered (a thorough scrutiny of all entries in the books of accounts may be

needed); and then to check the Register for actual recording of the same Mere
reliance on the 301 Register is not enough and the Auditor has to scrutinise Form
No.24AA (Disclosure of interest by the Directors) to ascertain likely transactions that
need to be entered in the 301 Register.
4. THE TECHNIQUES OF FORENSIC ACCOUNTING
The conventional accounting and auditing with the help of different accounting tools like ratio
technique, cash flow technique, a standard statistical tool examination of evidences are all part of
forensic accounting. In cases involving significant amounts of data, the present-day forensic
accountant has technology available to obtain or source data, sort and analyze data and even
quantify and stratify results through computer audit and various other techniques. Some of the
techniques involved in Forensic Accounting to examine the frauds are7:
(i) BENFORDS LAW: It is a mathematical tool, and is one of the various ways to
determine whether variable under study is a case of unintentional errors (mistakes) or
fraud. On detecting any such phenomenon, the variable under study is subjected to a
detailed scrutiny. The law states that fabricated figures (as indicator of fraud) possess a
different pattern from random figures. The steps of Benfords law are very simple. Once
the variable or field of financial importance is decided, the left most digit of variable
under study extracted and summarized for entire population. The summarization is done
by classifying the first digit field and calculating its observed count percentage. Then
Benfords set is applied. A parametric test called the Z-test is carried out to measure the
significance of variance between the two populations, i.e. Benfords percentage numbers
for first digit and observed percentage of first digit for a particular level of confidence. If
the data confirms to the percentage of Benfords law, it means that the data is Benfords
set, i.e. there is 68% (almost 2/3rd) chance of no error or fraud. The first digit may not
always be the only relevant field. Benford has given separate sets for 2nd, 3rd , and for
last digit as well. It also works for combination numbers, decimal numbers and rounded
numbers. There are many advantages of Benfords Law like it is not affected by scale
invariance, and is of help when there is no supporting document to prove the authenticity
of the transactions.
(ii) THEORY OF RELATIVE SIZE FACTOR (RSF): It highlights all unusual
fluctuations, which may be routed from fraud or genuine errors. RSF is measured as the
ratio of the largest number to the second largest number of the given set. In practice there
exist certain limits (e.g. financial) for each entity such as vendor, customer, employee,
etc. These limits may be defined or analyzed from the available data-if not defined. If
there is any stray instance of that is way beyond the normal range, then there is a need to
investigate further into it. It helps in better detection of anomalies or outliners. In records
that fall outside the prescribed range are suspected of errors or fraud. These records or
fields need to relate to other variables or factors in order to find the relationship, thus
establishing the truth.
(iii) COMPUTER ASSISTED AUDITING TOOLS (CAATs): CAATs are computer
programs that the auditor use as part of the audit procedures to process data of audit
significance contained in a clients information systems, without depending on him.
CAAT helps auditors to perform various auditing procedures such as: (a) Testing details
of transactions and balances, (b) identifying inconsistencies or significant fluctuations, (c)
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Online available at zenithresearch.org.in

(iv)

(v)

Testing general as well as application control of computer systems. (d) Sampling

programs to extract data for audit testing, and (e) Redoing calculations performed by
accounting systems.
DATA MINING TECHNIQUES: It is a set of assisted techniques designed to
automatically mine large volumes of data for new, hidden or unexpected informations or
patterns. Data mining techniques are categorized in three ways: Discovery, Predictive
modeling and Deviation and Link analysis. It discovers the usual knowledge or patterns
in data, without a predefined idea or hypothesis about what the pattern may be, i.e.
without any prior knowledge of fraud. It explains various affinities, association, trends
and variations in the form of conditional logic. In predictive modeling, patterns
discovered from the database are used to predict the outcome and to guess data for new
value items. In Deviation analysis the norm is found first, and then those items are
detected that deviate from the usual within a given threshold (to find anomalies by
extracted patterns). Link discovery has emerged recently for detecting a suspicious
pattern. It mostly uses deterministic graphical techniques, Bayesian probabilistic casual
networks. This method involves pattern matching algorithm to extract any rare or
suspicious cases.
RATIO ANALYSIS: Another useful fraud detection technique is the calculation of data
analysis ratios for key numeric fields. Like financial ratios that give indications of the
financial health of a company, data analysis ratios report on the fraud health by
identifying possible symptoms of fraud.

5. MAJOR FINANCIAL SCAMS OF INDIA

Financial scams have a habit of cropping up with an alarming regularity in the Indian financial
system. In the present article author has compiled a list of ten leading financial scams in India,
which have affected a large population of investors, and involved huge sums of money. They
managed to shake the very foundations of our financial system, and were driven by that most
basest of human instincts Greed. In most cases, it was the greed of just one individual, or a
very small group of individuals, who managed to pull of such huge scandals8.
(i) Insurance Scam: This scam had originated and prospered in the period immediately
following Independence in 1947. At that time, the insurance sector was not
nationalized, and a handful of private companies ruled the roost. These companies were
more concerned with providing benefits to selected industrialists, and ignored the
interests of the common man. The government responded by nationalizing the insurance
sector, and the LIC was founded under a special Act passed by the Parliament. This
scam laid the foundation of the nationalization culture in India.
(ii) Securities Scam: This is perhaps the most well known of all financial scams probably
because it happened in a highly visible period economic reforms had just been started in
1991. Harshad Mehta was quick to understand the weaknesses of the banking system,
and exploited these weaknesses to the hilt. He managed to procure huge amounts of
money using the so called Ready Forward deals, and used this money to purchase
large amounts of shares at hugely inflated prices. He earned the sobriquet of Big Bull
due to this penchant. Later, the banks got a clue of his shady deals, and demanded their
money back. The house of cards collapsed, and the rest, as they say, is history.
(iii) CRB Scam: This scam took place in the years 1992-1996, the period immediately
following the Harshad Mehta fallout. This makes the scam even all the more daring and
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EXCEL International Journal of Multidisciplinary Management Studies ________________ ISSN 2249- 8834
EIJMMS, Vol.3 (7), July (2013)
Online available at zenithresearch.org.in

(iv)

(v)

(vi)

(vii)

(viii)

surprising. CR Bhansali, the perpetrator of this scam, floated more than 100 companies,
such as CRB Mutual Funds and CRB Capital Markets. The primary purpose of these
companies was to attract huge funds from the public by promising high rates of interest.
This interest was later paid form further borrowings, and so on. In 1995, the stock
market collapsed, and this proved to be the undoing of CR Bhansali. He was
investigated, and later arrested. After a brief 3 months stint in jail, he has disappeared
without a trace, and nobody is asking.
UTI Scam: The UTI scam involved the flagship US-64 scheme of UTI, which was
meant to channel the funds of small investors into instruments bearing high returns.
Gradually, US-64 developed an investor base of around 2 crore investors. The economic
liberalization in India, coupled with the absolute opacity in the operations of UTI, led to
a situation wherein the Government was forced to announce a huge bailout of about Rs
3,500-4,000 crores in an order to prevent default in payments to the investors. The
consequences of such a situation are unimaginable. But the story does not end here.
Later, it turned out that the UTI Chairman appointed at this time, Mr P S Subramanyam,
along with a couple of executive directors, acted wrongly to selectively benefit a
powerful coterie of brokers and industrialists, while at the same time, jeopardizing the
interest of lakhs of small investors.
Home Trade: Around the year 2000, a finance portal emerged on the financial
landscape, and gained quick recognition on the back of endorsements by personalities
like Hrithik Roshan, Sachin Tendulkar and Shahrukh Khan. The portal, owned by
Sanjay Agarwal, claimed to deal in gilts. Soon, RBI got suspicious of activities of some
cooperative banks in the gilt market, and a scam was uncovered. The same old saga
brokers and bankers combining to rob people of their hard earnings were repeated.
Funds from Seamans Provident Fund and PPF were affected. The total scam size was
reported to be around Rs 300 crores, and more than Rs 200 crores were spent on
publicity costs alone.
Securities Scam: That our system never learns its lessons was proved by this scam.
Ketan Parkekh, a qualified CA, and a stock broker, identified a number of stocks
(popularly called the K-10), and took up huge positions in these. For this purpose, he
used a large number of Benami accounts and smaller stock exchanges, such as the
Kolkata and Ahmedabad stock exchanges. He also borrowed heavily from banks such
as Global Trust Bank and Madhavpura Mercantile Cooperative Bank. Unfortunately, he
was stuck in a bear cartel, and was soon pounded to pulp on the stock exchange. The
extent of the scam was estimated to be around Rs 1,500 crores.
Fake Stamp Papers: This scam promised to be the mother of all scams in India, with
the initial reports quoting a figure of Rs 30,000 crores as the scam size. Later, RBI
clarified that this figure was rather exaggerated, and the correct figure was around
Rs 200 crores. Again, this scam exposes how the India system works Mr Abdul Karim
Telgi, the scam kingpin, paid bribes to get access to the security press in Nasik, where
stamp papers and currency notes are printed. He later used this knowledge to print fake
stamp papers. At the height of the scam, Telgis network spanned 14 states, 125 banks
and more than 1,000 employees.
DSQ Software: Though this scam was modest in terms of money involved (only Rs
600 crores), and did not affect the general public to a great extent, yet it is notable for
how it came into being. The main player in the scam was Mr Dinesh Dalmia, who was
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Online available at zenithresearch.org.in

the MD of DSQ Software Ltd. This company issued around 1.3 million shares in 2001,
and these shares were allotted to four companies on a preferential basis. NSDL, a stock
depository, dematerialized and helped in delivering the shares. Nothing wrong in that,
except that the shares were not even listed on any stock exchange.
(ix) IPO Scam A number of key operators, including corporate stock brokers such as
Karvy and Indiabulls, were involved in the IPO scam that spanned the years 2004
2005. The modus operandi was simple the operators would open thousands of fake
accounts to purchase shares in IPOs, in the hope of selling later at huge profits. A spate
of IPOs issued during this period was heavily oversubscribed due to this scam,
sometimes by as much as 40 times.
(x)
Satyam: On a cold January morning in 2009, Ramalinga Raju, chairman of Satyam
Computer Services, admitted to falsification in the company accounts and various other
irregularities, and sent a chill down the collective spine of the Indian financial system.
Coming on the back of the global recession, this incident promised to bust the Indian
outsourcing industry and the stock market, but for some deft bailout work by the
government. The matter is still under investigation and litigation, and the true extent of
the scam will be known in the future, perhaps. Mr Raju himself had admitted to
irregularities worth around Rs 12,000 crores.
An analysis of the scams reveals a common script greed, corruption, unscrupulous brokers,
colluding bankers, irresponsible authorities and hapless investors, who refuse to learn their
lessons. But then, these are the essential ingredients of a worthy financial scam.
Recently in the year 2012, a worldwide survey on fraud and its effect on business have been
conducted by Kroll commissioned the Economist Intelligence Unit. In this survey more than
800 senior executives worldwide from a broad range of industries and functions were polled in
July and August 2012. Twenty six percent were based in North America, 28% in Europe, 24% in
Asia Pacific, 13% from Latin America, and 10% in the Middle East & Africa. The survey
covered 10 industries with no fewer than 50 respondents from each. These include: Financial
Services; Professional Services; Retail, Wholesale & Distribution; Technology Media &
Telecoms; Healthcare, Pharmaceuticals & Biotechnology; Travel, Leisure & Transportation;
Consumer Goods; Construction, Engineering and Infrastructure; Natural Resources; and
Manufacturing. The detail of findings of above mentioned survey has been incorporated in the
Table No. 1 and 2.
Table-1: Percentage of Companies Affected by Listed Frauds
2012
2011
24%
25%
Theft of physical assets
21%
23%
Information theft
14%
21%
Management conflict of interest
12%
20%
Vendor, supplier or procurement fraud
12%
19%
Internal financial fraud
11%
19%
Corruption and bribery
11%
11%
Regulatory or compliance breach
8%
10%
IP theft
3%
9%
Market collusion
1%
4%
Money laundering
Source: Global Fraud Report, Key Facts and Figures, Annual Edition: 2012/2013
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Online available at zenithresearch.org.in

Table-2: Type of Fraud Suffered by Respondents in the Last 12 Months by Region

All
Middle Lat AM N.
AsiaRespondents Africa East
America Pacific
32%
18%
19%
24%
27%
Theft
of 24%
physical assets
21%
34%
13%
16%
21%
25%
Information
theft
14%
25%
15%
12%
15%
13%
Management
conflict
of
interest
12%
30%
8%
8%
8%
15%
Internal
financial fraud
12%
9%
8%
16%
11%
17%
Vendor,
supplier
or
procurement
fraud
14%
10%
10%
9%
14%
Regulatory or 11%
compliance
breach
21%
10%
7%
6%
18%
Corruption and 11%
bribery
8%
11%
3%
3%
6%
11%
IP theft
4%
11%
5%
2%
4%
3%
Market
collusion
1%
2%
0%
2%
1%
2%
Money
laundering
Source: Global Fraud Report, Key Facts and Figures, Annual Edition: 2012/2013

Europe
23%
18%
13%

12%
9%

11%

10%
9%
3%
1%

CONCLUSION
Forensic accounting in India has come to limelight only recently due to rapid increase in Frauds
and the white collar crimes and the belief that our law enforcement agencies do not have
sufficient expertise or the time needed to uncover frauds. A large global accounting firm believes
the market is sufficiently large to support an independent unit devoted strictly to forensic
accounting.
Therefore, forensic accountants are currently in great demand, with the public need for honesty,
fairness and transparency in reporting increasing exponentially. These forensic accountants need
accounting, finance, law, investigative and research skills to identify, interpret, communicate and
prevent fraud. However, as the incidence of white collar crime (fraud, bribery and corruption,
money laundering etc) continues to increase, demand for the services of the forensic accountant
looks set to grow.

EXCEL International Journal of Multidisciplinary Management Studies ________________ ISSN 2249- 8834
EIJMMS, Vol.3 (7), July (2013)
Online available at zenithresearch.org.in

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TPI,
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