Needed, bloodhounds

In ancient India, Kautilya demystified fraud, decoding its DNA by explaining forty ways of embezzlements. In the world of crimes, Sherlock Holmes walked in as the most competent first bloodhound forensic expert.

Unlike the conventional financial auditor, the forensic auditor is not expected to be a simple watchdog of bookkeeping; instead, he must be a rigorously trained, no-nonsense branded bloodhound.

He must be sceptical, not influenced by any preconceived notions; open wide his eyes, ears and nose, sniffing out for something fishy with his well-developed financial sixth sense.

He cannot be a typical accountant, gets captivated by the beauty of the arithmetically tallying finesse of the accounting entries; instead he must profess looking beyond the numbers for red flags, striving hard to hound for conclusive evidences to unearth frauds.

Forensic accountant

Forensic Accountant combines expertise in accounting, auditing, investigation, computer skills, familiarity in using computer-aided techniques, internal and external controls, risk assessment, business practices, and law enforcing system to investigate white-collar crimes.

He is an investigative auditor, specialised in adducing expert evidence suitable for use in a court of law for settlement of disputes by litigation.

Many of them need to work in close collaboration with law enforcement personnel and lawyers during investigations and appear before the court as expert witnesses during trials.

Some of them specialise in insurance claims, personal injury claims, fraud, construction or royalty audits, marital disputes and even tracking terrorism and links to money laundering. They help answering the how, where, what, why and who of a fraud, applying modern computer-aided technological methodologies to establish anomalies leading to economic offences, in a court of law.

DECODING THE DNA OF FRAUDS

In the wake of corporate governance failures and fraudulent financial deals eroding public trust, credibility of the system and investor confidence, forensic accounting has emerged as a sunrise area of accountancy discipline.

Demand for forensic accountants and auditors has been increasing internationally since the the 9/11 terrorist attacks in the US, followed by innumerable scams, bankruptcies and global meltdown.

In India also, there has been a plethora of stock market scams, economic crimes, money laundering, banking scandals, failure of non-banking financial companies and the phenomenon of vanishing companies and plantation companies, cyber frauds, BPO frauds and varied kinds of corruption.

However, the conviction rate in economic offences is very low due to ineffective law enforcement, primarily caused by weak litigation support in prosecution process. In the absence of accounting expertise, prosecutors often fail to provide strong evidence to put the fraudsters behind the bars. Need for experts, competent to handle timely, proper investigation of complex financial manipulations and unearth the modus operandi and thereby help prosecute fraudsters, has been multiplying.

The objectives are crystal-clear detection, effective investigation and follow-up, prevention and deterrence of frauds and white-collar crimes. The Government of India has therefore established the Serious Fraud Investigation Office (SFIO), under the Ministry of Corporate Affairs.

Special audit

Sections 235 and 237of the Companies Act, 1956 empower the Central government to direct special audit to investigate the affairs of a company and to launch prosecution for violation of the provisions

The books of accounts and other documents can be inspected by the officers of the Directorate of Inspection and the Registrars of Companies. Section 424(5) of the Act empowers the National Company Law Tribunal to examine whether the company is a sick industrial unit.

SEBI Act, 1992 enables the government to control unfair trading activities of the wheeler-dealers in volatile stock markets.

Regulation 11 C of the SEBI Act, 1992 empowers it to direct any person to investigate the affairs of the intermediaries or brokers associated with illegal transactions in securities market. The Insurance Act, 1938 vide Section 33 empowers IRDA to direct to investigate the affairs of any insurer.

Section 3 of the Prevention of Money-Laundering Act, 2002 defines the offence of money laundering as involvement of a person in any process or activity connected with the proceeds of crime and projecting it as untainted property.

The Companies (Auditor's Report) Order, 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.

Accounting Standard 24 (Discontinuing Operations) and Auditing and Assurance Standard 16 (Going Concern) require the auditor to report fraud

Engagement of Forensic Accountants in investigation of frauds may not only facilitate prompt settlement of the cases to its logical end, but also help curbincreasing incidence of white-collar crimes.

At present, there is no specific legislation specifying criteria, principles or guidelines in clear terms in regard to admissibility of scientific testimony and expert's opinion in Indian courts. This may require appropriate amendment to Section 45 of the Indian Evidence Act.

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