AIMA PA06FA Session 1.pdf

ppt

1. PGCM –Public Accounting Program
FORENSIC ACCOUNTING
Session 1
FUNDAMENTALS
13
th
March 2022
Harish DuaFCA, CPA, MBA, CFE
PA06-FA

2. Agenda –FA Fundamentals
1.Background:
•Recent events
•Emerging Challenges
2.Basic Definitions:
•Accounting and Auditing
•Forensic Accounting
•Fraud and Investigations
3.Role and Responsibilities:
•Auditor -Forensic Accountant -Investigator
4.Overview of FAIS:
•Standards
•Basic Principles
•Key Concepts
5.Conclusion
6.Q&A
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3. FORENSIC ACCOUNTING
FUNDAMENTALS
BACKGROUND
(Where are we coming from….
And where are we going?)
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4. Historical Perspective
•Anenvironmentof“fairdealings”hasalwaysexisted,butatthesametime,
alwaystested.Thepracticeof“unfairdealings”(Fraud)goesbacktotheoriginof
commerceandafeatureofeveryorganizedcultureintheworld.
•Numerouscasesoffraudhavealwaysexisted,aswellasthelawstopreventand
detectthem.Nevertheless,fraudcontinuestoaffectsmanyorganizations,
regardlessofsize,location,orindustry.
•Oneoutcomeoffraudsandirregularitieshasbeentheoriginationofthe
professionof“Auditing”.InGreatBritain,thepassageoftheJointStock
CompaniesActin1844andlatertheCompaniesActin1879contributedgreatlyto
theauditingfieldingeneralandtothedevelopmentofexternalauditing.
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The detection of fraud is the most important portion of the Auditor’s duties, and there will be
no disputing the contention that the Auditor who is able to detect fraud is—other things
being equal—a better man than the auditor who cannot. Auditor[s] should, therefore,
assiduously cultivate this branch of their functions. -Lawrence R. Dicksee(1892)

5. Recent Developments .. 1/2
(Enron Era)
5
S.N.Organisation
(Year)
Exposure Modus Operandi
1 Enron(2001) •US$ 74bn investor loss
•Jobs of 1000’s employees
•Customers/vendors
•Overstatement of revenues
•Off balance sheet liabilities
2 WorldCom
(2002)
•US$ 11bn +US$ 180bn
losses for investors
•Loss of 30,000 jobs
•Overstatement of capital assets
•Payments for fictitious expenses
3 Lehman
Brothers(2008)
•US$ 50bn in loans
disguised as sales
•Sold toxic assets with buy-back
arrangements (not honored).
4Bernie Madoff
(2008)
•US$64.8bn
•Largest ponzischeme in history
5 Satyam(2009) •US$ 1.5bn
•Inflated revenues, headcount,
margins and cash balance.

6. Recent Developments .. 2/2
(Post-Enron Era)
•Heightened Legal and Regulatory Scrutiny:
‒Tough new legislation (SOX’2002/CA’2013)
‒Oversight bodies (PCAOB/NFRA)
•New Standards of Accounting and Auditing:
‒GAAP to IAS (IndAS) +SAS99
‒COSO ERM (2004)
‒SIA/FAIS (2020-21)
•New Corporate Governance Listing Standards (SEC/SEBI)
–NYSE/NASDAQ (2003) and LODR (2015)
•Greater Penalties for violations and non-compliance:
‒United States Organizational Sentencing Guidelines(2004)
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7. Current status
•Accordingtothe2020ACFEsurvey,approximately$4.5trillionis
losttofraudgloballyeveryyear,and21%ofcasescostthe
organizationinexcessof$1million.
•Increasingcomplexityoffraudprevention,detection,and
investigation.
•Developmentsinthedigitaldomain(includingcyberspace)have
becomeadoubleedgedswordintheeffortstopreventand
detectthemenace!
•Greaterappreciationoftheneedforallstakeholdersto
understandthedynamicsoffraudandforensicaccounting.
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8. Multiple Stakeholders
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CORPORATE REPORTING SUPPLY CHAIN

9. Emerging Challenges
•Increasingsize,numberandcomplexityofcases
•Complicatedbytechnology,political-businessnexus,
bankNPA,andnowthepandemic.
•FraudexpectationGAP:
•Nodoubtitisanimperfectworld—buteverything
mustbedonetodeter,detect,investigate,and
penalizefraud.
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…therearethosewhoseperceptionofwhatcanberealisticallyaccomplishedin
anauditfrequentlyexceedstheservicesthatanyaccountantorauditorcandeliver
and,intermsofcost,exceedswhatanybusinessmightbewillingtopay…

10. FORENSIC ACCOUNTING
FUNDAMENTALS
BASIC DEFINITIONS
(Understanding the terms)
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11. Define –Accounting
•Dictionarydefinition:
‒theskilloractivityofkeepingrecordsofthemoneyapersonororganizationearnsand
spends.
‒thesystemofrecordingandsummarizingbusinessandfinancialtransactionsand
analyzing,verifying,andreportingtheresults.
‒theprocessofrecordingfinancialtransactionspertainingtoabusiness.
‒thetheoryandsystemofsettingup,maintaining,andauditingthebooksofafirm;artof
analyzingthefinancialpositionandoperatingresultsofabusiness.
•Bookdefinition:
‒“Accountingmaybedefinedasthecollection,compilationandsystematicrecordingof
businesstransactionsintermsofmoney,thepreparationoffinancialreports,the
analysisandinterpretationofthesereportsandtheuseofthesereportsforthe
informationandguidanceofmanagement”..A.W.Johnson
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12. Define –Auditing
•Dictionarydefinition:
‒conductanofficialfinancialinspectionof(acompanyoritsaccounts)
•Bookdefinition:
‒Auditingtypicallyreferstofinancialstatementauditsoranobjective
examinationandevaluationofacompany’sfinancialstatements–
usuallyperformedbyanindependentexternalthirdparty.
•FAISdefinition:
•Auditprimarilyrelatestoprovideassurancethroughtheexpressionof
anindependentopinionoverthetruthandfairnessoffinancial
statements.
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13. Accounting Vs. Auditing
•Therelationshipofauditingtoaccountingisclose,yettheirnaturesareverydifferent;the
arebusinessassociates,notparentandchild.
•Accountingincludesthecollection,classification,summarization,andcommunicationof
financialdata;itinvolvesthemeasurementandcommunicationofbusinesseventsand
conditionsastheyaffectandrepresentagivenenterpriseorotherentity.
•Thetaskofaccountingistoreduceamassofdetailedinformationtomanageableand
understandableproportions.
•Auditingdoesnoneofthesethings.
•Auditingmustconsiderbusinesseventsandconditionstoo,butitdoesnothavethetaskof
measuringorcommunicatingthem.Itstaskistoreviewthemeasurementofand
communicationofaccountingforpropriety.
•Auditingisanalytical,notconstructive;itiscritical,investigative,concernedwiththebasis
foraccountingmeasurementsandassertions.Auditingemphasiseproof,thesupportfor
financialstatementsanddata.
•Thus,auditinghasitsprincipalroots,notinaccounting,whichitreviews,butinlogicon
whichitleansheavilyforideasandmethods.
-Muatz,R.K.andHusseinA.Sharaf,ThePhilosophyofAuditing(1961)
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14. Define –Forensics
•Dictionarydefinition:
‒pertainingto,connectedwith,orusedincourtsoflaworpublic
discussionanddebate.
‒relatingtoordealingwiththeapplicationofscientificknowledgeto
legalproblems.
•Technicaldefinition:
‒beingabletomeettheexactingstandardsofacourtoflaw.
‒relatingtoordenotingtheapplicationofscientificmethodsand
techniquestotheinvestigationofcrimeorrelatingtocourtsoflaw.
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15. Define –Forensics Accounting
•Bookdefinition:
‒Forensicaccountingistheapplicationofinvestigativeandanalyticalskillsfor
thepurposeofresolvingfinancialissuesinamannerthatmeetsstandards
requiredbycourtsoflaw.
‒Forensicaccountantsapplyspecialskillsinaccounting,auditing,finance,
quantitativemethods,certainareasofthelaw,researchandinvestigative
skillstocollect,analyzeandevaluateevidentialmatterandtointerpretand
communicatefindings.
•Forensic Accounting by Hopwood, Leiner, and Young
•Anotherbookdefinition:
Forensicaccountingcanbedescribedasaspecializedfieldof
accountancywhichinvestigatesfraudandanalyzefinancialinformation
tobeusedinlegalproceedings.
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16. Define –Forensic Accounting
•Officialdefinition(asperFAIS):
Forensic Accounting is discovery and evaluation of evidence by a professional
to interpret and communicate findings suitable for a Court of law.
TheoverridingobjectiveofForensicAccountingistodiscoverfactsand
evidence,especiallyintheareaoffinancialtransactionsandoperational
arrangements,tohelptheProfessionalreportfindings,toreachaconclusion
(butnottoexpressanopinion)andsupportalegalcaseinaCourtoflaw.
•Simpledefinition:
ForensicAccountingisthescrutinyofaccountingevidencewiththeobjectiveof
presentingitinlegalproceedings.
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17. Define –Fraud (Legal)
Definition of fraud as per Section 447 (1) Companies Act 2013
(i) “Fraud” in relation to affairs of a company or anybody corporate, includes
•any act, omission, concealment of any fact or abuse of position
•committed by any person or any other person with the connivance in any
manner,
•with intent to deceive, to gain undue advantage from, or to injure
•the interests of, the company or its shareholders or its creditors or any other
person,
•whether or not there is any wrongful gain or wrongful loss.
(ii) “wrongful gain” means the gain by unlawful means of property to which the
person gaining is not legally entitled;
(iii) “wrongful loss” means the loss by unlawful means of property to which the
person losing is legally entitled.
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18. Define –Fraud
•Technicaldefinition:
‒Fraudisadeliberateact(orfailuretoact)withtheintentionofobtainingan
unauthorizedbenefit,eitherforoneselforfortheinstitution,byusing
deceptionorfalsesuggestionsorsuppressionoftruthorotherunethical
means,whicharebelievedandrelieduponbyothers.
•FAISdefinition:
Fraudisanyintentionalordeliberateacttodepriveanotherofpropertyor
moneythroughdeceptionorotherunfairmeans.
•Simpledefinition:
Fraudisanintentionalactthroughunfairmeanswithamotiveforsomegainor
benefit.
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19. Define –Investigation
•Dictionarydefinition:
‒anofficialexaminationofthefactsaboutasituation,crime,etc.
‒adetailedassessmentofrecordsandenquiryintothesituationofthe
businessorforaparticularreason
•FAISdefinition:
‒Acriticalexaminationofevidences,documents,factsandwitnessstatements
withrespecttoanallegedlegal,ethicalorcontractualviolation.
‒Theexaminationwouldinvolveanevaluationofthefactsforallegedviolation
withanexpectationthatthemattermightbebroughttoaCourtoflawora
regulatorybody.
•Simpledefinition:
Investigationinvolvestheapplicationofforensicaccountingandsimilar
techniquestoconfirmthepresenceorabsenceofafraudorirregularities.
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20. Forensic Audit?
•An AUDIT is NOT the same as
–Forensic Accounting, or
–A Fraud Investigation
•Hence FORENSIC AUDIT is a MISNOMER (Misleading Term)!
•Audits generally culminate with the expression of an Independent
Opinion, which is not the case with Forensic Accounting and
Investigations,
•These culminate with the reporting of Evidence Discovered. And, at
most, Conclusionsof any analysis work on evidence discovered.
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21. Broad Comparison
21
STATUTORY
AUDIT
•LEGAL MANDATE
•CHARTERED
ACCOUNTANT ONLY
•EXPRESSION OF AN
INDEPENDENT OPINION
•ON FINANCIAL
STATEMENTS
•AS PER AUDITING
STANDARDS
INTERNAL
AUDIT
FORENSICS INVESTIGATION
•MAY NOT BE A LEGAL
MANDATE
•NON-CAs
•PROVIDE ASURANCE
•BEYOND FINANCIALS
•NO MANDATORY
STANDARDS
•MAY INVOLVE AGENCIES
•FACT/EXPERT WITNESS
•PRIMARILY FRAUD
RELATED
•NO OPINION ON
GUILT/INNOCENCE
•NO MANDATORY
STANDARDS
(TILL NOW)
•TO SUPPORT A LEGAL
CASE
•NON-CAs
•NO STANDARD
EXPRESSION OF ANY
OPINION
•PRIMARILY FINANCIALS
•NO MANDATORY
STANDARDS
(TILL NOW)

22. FORENSIC ACCOUNTING
FUNDAMENTALS
ROLES AND RESPONSIBLITES
(Who is supposed to do what?)
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23. Comparison –Statutory Audit
23
STATUTORY
AUDIT
•LEGAL MANDATE
•CHARTERED
ACCOUNTANT ONLY
•EXPRESSION OF AN
INDEPENDENT OPINION
•ON FINANCIAL
STATEMENTS
•AS PER AUDITING
STANDARDS
OBJECTIVE: TRUE AND FAIR PICTURE
FOCUS: VERY GENERAL -A REVIEW OF THE BOOKS OF ACCOUNT
APPROACH: TEST OF TRANSACTION CONTROLS AND SUBSTANTIVE TESTS OF BALANCES
TARGET: IDENTIFY MATERIAL MIS-STATEMENTS IN FINANCIAL STATEMENTS
SKILLS: TESTING & CHECKING, INQUIRY & OBSERVATION
PRESUMPTION: PROFESSIONAL SKEPTICISM
OUTCOME: AUDIT REPORT QUALIFICATION –SUBJECT TO/EXCEPT FOR

24. Comparison –Internal Audit
24
INTERNAL
AUDIT
•MAY NOT BE A LEGAL
MANDATE
•NON-CAs
•PROVIDE ASURANCE
•BEYOND FINANCIALS
•NO MANDATORY
STANDARDS
OBJECTIVE: STRENGTHEN INTERNAL CONTROLS
FOCUS: GENERAL -A REVIEW OF SYSTEM & PROCESSES
APPROACH: BROAD BASED TESTING FOR COMPLIANCE
TARGET: IDENTIFY ROOT CAUSE OF CONTROL BREAKDOWN/VIOLATION
SKILLS: TESTING & CHECKING, INQUIRY & OBSERVATION + PROCESS EVALUATION
PRESUMPTION: HONEST MISTAKE (INNOCENT) UNLESS PROVEN OTHERWISE
OUTCOME: SUMMARY OF FINDINGS –WITH FRAUD INDICATORS (RED FLAGS)

25. Comparison –Forensics
25
FORENSICS
•TO SUPPORT A LEGAL
CASE
•NON-CAs
•NO STANDARD
EXPRESSION OF ANY
OPINION
•PRIMARILY FINANCIALS
•NO MANDATORY
STANDARDS
(TILL NOW)
OBJECTIVE: DISCOVER FACTS AND EVIDENCE
FOCUS: NARROW -VALIDATE TRANSACTIONS AND BALANCES
APPROACH: FOCUSED TESTING TO CONFIRM SUSPICION / ALLEGATION
TARGET: IDENTIFY / CONFIRM NATURE OF VIOLATION
SKILLS: SCRUTINY & ANALYSIS, FACT-FINDING, INTERVIEWS
PRESUMPTION: NEUTRALITY
OUTCOME: PRESENT EVIDENCE TO A COURT OF LAW –THEY WILL DECIDE !

26. Comparison –Investigation
26
INVESTIGATION
•MAY INVOLVE AGENCIES
•FACT/EXPERT WITNESS
•PRIMARILY FRAUD
RELATED
•NO OPINION ON
GUILT/INNOCENCE
•NO MANDATORY
STANDARDS
(TILL NOW)
OBJECTIVE: DISCOVER POTENTIAL FRAUD (AND CULPRIT)
FOCUS: VERY SPECIFIC -VERIFY FRAUDULENT “INTENT”
APPROACH: FORMULATE AND TEST HYPOTHESIS
TARGET: CONFIRM THE MODUS-OPERANDI
SKILLS: PROBING & ADMISSION SEEKING INTERVIEWS (INTERROGATING)
PRESUMPTION: PROBABILITY OF FRAUD / IRREGULARITY (PREDICATION)
OUTCOME: SUMMARY OF FINDINGS & CONCLUSIONS –NO OPINION ON
GUILT/INNOCENCE

27. Points to Remember
•BeabsolutelyclearontheDomainofFunction(A/F/I).
•BeabsolutelyclearontheRoleassignedvs.Role
assumed.
•Onecannotdriftfromonedomaintotheotherina
sub-consciousmanner.
•EngagewithStakeholderstoensuretheyarealigned
totheroleandtheexpectedoutcomefromthatrole.
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28. FORENSIC ACCOUNTING
FUNDAMENTALS
OVERVIEW OF FAIS
(Understanding the Concepts)
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29. Forensic Accounting and
Investigation Standards (FAIS)
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30. FAIS Overview: Current Status
30
OVER-ARCHING
DOCUMENTS
Preface
Frame-
work
Basic
Principles
100
KEY
CONCEPTS
110
Nature of
Assignment
120
Fraud Risk
130
Laws &
Regulations
140
Applying
Hypotheses
200
ENGAGEMENT
MANAGEMENT
210
Engagement
Objectives
220 Engagement
Acceptance and
Appointment
230
Using the Work of
an Expert
240
Engaging with
Agencies
250
Communication
with Stakeholders
300
EXECUTING
ASSIGNMENTS
310 Planning the
Assignment
320 Evidence and
Documentation
330 Conducting
Work Procedures
340 Conducting
Interviews
350 Review and
Supervision
360 Testifying
before Competent
Authorities
400
SPECIALISED
AREAS
410
Applying Data
Analysis
420
Evidence Discovery
in Digital Domain
430
Loans and
Borrowings
440
Related and
Connected Parties
500
REPORTING
510
Reporting
Results
600
QUALITY
610
Quality
Control
(3) (4) (5) (6) (4) (1)(1)
Completed
Ready
(16)
(7)
WIP (1)
TOTAL
(24)

31. FAIS Overview
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✓The Standards outline the
principles (outcome) of each
subject matter
✓They provide for WHAT is
expected of the Professional,
but not the HOW
✓Details of HOW will come later
in the form of Guidance Notes:
✓Implementation Guide
✓Technical Guide
PRINCIPLE BASED
✓ALL ICAI MEMBERS *
✓ALL FAI ENGAGMENTS
ANY LIMITATION ON THE APPLICABILITY OF THE STANDARD IS
MADE CLEAR IN THE STANDARD ITSELF
^ Recommendatory till March 2023. Guidance Notes are always
recommendatory in nature.
* NOTE:
✓Currently, anyone can conduct FAI assignments
✓Although ICAI cannot impose it’s Standards on non-members;
however, over time, the Government may choose to make these
mandatory on everyone conducting certain assignments
(e.g., Listed Companies or Frauds over a certain amount)
MANDATORY^ NATURE

32. Over-Arching Documents
32
PREFACE:
•Introduces the Standards
•Outlines the Process of Standard Setting
FRAMEWORK:
•Sets the Structure of the FAIS
•Defines certain key terms
•Establishes a Fixed Format of 6 Sections
BASIC PRINCIPLES:
•5 Attribute Principles
•5 Conduct Principles

33. Framework & Definitions
33
ForensicAccountingisdiscoveryandevaluationofevidenceby
aprofessionaltointerpretandcommunicatefindingssuitablefora
Courtoflaw.
Investigationisthesystematicandcriticalexaminationoffacts,
recordsanddocumentsforaspecificpurpose.
FIXED FORMAT FOR A STANDARD
KEY DEFINITIONS
1.Introduction&Scope:BriefbackgroundandscopeoftheStandardandits
applicability.
2.Objective:PurposeofissuingtheStandardandwhyitisrequiredandessential.
3.Requirements:Thedesiredoutcomeandwhatiscriticaltoachievetheobjectiveof
theStandard.
4.ExplanatoryComments:ExplanationofcertainpartsoftheRequirementswhich
requireclarityandelaboration,includingdefiningkeywordsorterms.
5.DocumentationofWorkProcedures:Indicativelistofthenatureofdocumentation
whichmaybeexpectedtodemonstrateconformancetotheStandards.
6.EffectiveDate:DatefromwhichtheStandardistobeappliedandmademandatory.

34. Basic Principles
34
1.Independence
2.IntegrityandObjectivity
3.DueProfessionalCare
4.Confidentiality
5.SkillsandCompetence
6.ContextualisationofSituation
7.PrimacyofTruth
8.RespectingRightsandObligations
9.Separatingfactsfromopinions
10.QualityandContinuousImprovement.
ATTRIBUTES
PERFORMANCE
Credibility of the Professional
Credibility of the Engagement

35. New Concepts & Requirements
3535
340: CONDUCTING
INTERVIEWS
410: DATA ANALYSIS
420: EVIDENCE
DISCOVERY IN
DIGITAL DOMAIN
510: REPORTING
RESULTS
120: FRAUD RISK
140: APPLYING
HYPOSTHESES
240: ENGAGING
WITH AGENCIES
330: WORK
PROCEDURES

36. Conclusions
•ForensicAccountingisarelativelynewdomainandverycloselyrelated
toFraudsandIrregularities.
•Itisameanstoconductaninvestigationtoconfirmthepresenceor
absenceoffinancialFraudsandIrregularities.
•Itcannotbeconfusedwithotherfinancialexaminationslikeauditandit
requiresspecialskillsandtechniquestoconducttheseassignments.
•Assignmentsinthisdomainarenowexpectedtocomplywiththenew
FinancialAccountingandInvestigationStandards(FAIS).
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