The Hindu Business Line : Accountant on the fraud trail

UNDETECTED white collared larceny robs stakeholders of their wealth. The need today is for accountants with specialised skills in dealing with corporate corruption, even while reinvigorating ethical notions with specific emphasis on issues pertaining to conflict of interests. The plaid performance of professional accountants too raises a host of basic questions from a corporate governance point of view as the perception of a `professional and ethically conscious accountant' assumes importance.

Corrupt corporate governance practices affect a nation's wealth in the medium to long term and ruin reputations in the short to medium term. While waste, fraud and abuse of the financial system are all-pervasive, they would inevitably destroy trust, faith, conviction and belief so very necessary for the functioning of free capitalist societies.

As we are in the threshold of incremental growth, it would be a significant step towards fostering good corporate governance to have a system wherein independent forensic accountants are statutorily appointed to conduct forensic audit. As a first step, such auditors should be barred from indulging in financial services and/or any other nefarious deal making, usually and generally an integral part of any touts' job domain.

In the WTO era, the core issues centring around the factor equalisation paradigm would be of essence. While this would usher in huge opportunity to entrepreneurs across the globe, it would also result in a wide range of corporate malpractices. And it is here, in keeping with the supreme objective of protecting stakeholder interests, that there would be a need for systematic forensic audit, albeit of an independent and autonomous commissioning.

The entire gamut of corporate issues — ranging from estimation of asset values to the damages caused by an incumbent management's acts of negligence, commission and omission — must be within the purview of the independent forensic accountant. In fact, a core and central aspect of their job ought to revolve around fact finding in order to scrutinise issues pertaining to covert and surreptitious fraud and larceny and in the collection of irrefutable evidence to substantiate the assertions.

Ultimately, it would provide for the larger issue of preventing such events and the independent forensic accounting engagement ought to be necessarily characterised by a variety of adroit techniques that more often than not have to be custom-developed to the requirements of the specific industry or business.

The basic steps that ought to characterise forensic accounting methodology revolve around the need for dealing cogently with corruption issues. An effective forensic accountant, in order to provide for efficaciousness in terms of stakeholder value creation, should be able to go all the way by adhering to the following techniques:

The tracking down system: Evaluation of asset losses involves gathering of crucial facts to substantiate asset losses. For deciphering nefarious transactions and identifying financial misstatements, it is crucial that a flowchart of payments/expenditure is made out, and it necessarily has to be juxtaposed to the benefits derived by the entity.

Development of the forensic paradigm: An analysis of all transactions and a thorough evaluation of questionable transaction should be made to rule out any foul play.

A critical investigation should be launched to probe peculiarities of any kind, and the accounting systems in place have to be continually monitored to track down furtive transactions.

All issues pertaining to account balances and interrelationships between accounts, billings, invoicing or claims, pricing, deals with vendors et al should be cogently handled, and any concomitant variances in terms of current expectations and past dealings should be comprehensively probed.

This has to be done using the cost-benefit methodology based on a holistic paradigm, such as the contemporary SWISS model, pointer analysis or any similar managerial and forensic accounting tool.

Identification: The thrust must be on the identification of fraudulent issues and a forensic report should be adroitly maintained as part of the larger system of providing for early detection of corrupt activities.

Evolution of adroit dissuasive and riposte techniques: Forensic auditing should be stealthily done, with focus on development of zealous dissuasive and riposte techniques. It is important to keep a tab on motivational levels. Forensic accounting should not create unreasonable fear among those being scrutinised.

Internal controls: Design scenarios of potential fraud losses based on identified weaknesses in internal controls and to base it on the cardinal doctrine of covert and efficacious surveillance.

Development of the `matters in controversy' paradigm: The evolution of adroit recovery methods for past misdemeanours and the fruition of evolving adept accounting techniques to prevent such misdemeanours in future is a cardinal requirement even while studying `fraud losses' thoroughly from a preventive perspective.

The preparation of forensic ledger: The independent accountant's primary duty rests in the erudite preparation of the forensic ledger as a prologue to identify questionable transactions. He must notify the authorities of material irregularities, and should thereafter purport pragmatic advice.

There should be a system of compulsory notification in cases of material and corroborated irregularities.

The forensic accountant should recognise the `conditions observable' and pay heed to information obtained from prior audits, and then an objective analysis should be embarked on to determine whether the financial position is in reality free of material discrepancies.

In a hypothetical case, wherein the forensic accountant is inclined to conclude that policies or procedures are ineffectual, the response action should necessarily envisage and involve heightened professional adroitness of a deft kind.

The methodology ought to have an accountant to carry out a thorough examination with an attitude of healthy disbelief which seeks corroboration of elementary issues on all pertinent matters, particularly when the issues centre around persons who could have personal reasons for a professed course of conduct that could as a ploy be merely a diverting tactic to camouflage their corrupt practices.

The independent methodology: The paradigm, as elucidated, necessarily entails the successful implementation of the aforementioned and all "the professionals" on an accounting engagement, especially the senior personnel, should conduct their business in all perspicacity; the corporate governance framework must necessarily have a deft surveillance and observation mechanism to rein in `the professionals/executives/promoters who have hitherto acted in connivance", and hence, it is important that representatives of the various stakeholder groups play an active role.

Professionalism at its very best is an essential prerequisite at present, and adherence to organisational objectives is crucial.

The forensic accountant's contribution in terms of fostering healthier corporate governance should be objectively judged.

Independent forensic accounting and financial governance are key aspects for sustaining value creation, and superior governance would result in superior development. Emphasis should be on developing a profusion of quality forensic accounting tools as is pertinent to the relevant industry, and that would result in value addition across the board.

The stakeholders would only stand to benefit and the corporations themselves would inevitably be on a growth trajectory, and a healthy one at that.

Finally, the lawmakers must usher in legislation to exterminate corporate corruption. This can bring down white-collared crime down even while resurrecting the proverbial ethical corporation.

(The authors are on the faculty of Alagappa University, Karaikudi.)

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