Forensic Accounting & Fraud Prevention
Introduction
- Fraud is intentional deception made for personal gain or to damage another individual. Defrauding people or entities of money or valuables is a common purpose of fraud.
- The term ‘forensic ‘has usually attracted an unfortunate connotation with the morbid world of forensic medicine. Forensic accounting shares only one thread common with forensic pathology. That common denominator is the pursuit of evidence that will stand the rigorous scrutiny that the rules of evidence and procedure demand for its admission as evidence before the courts.
- Forensic Audit can be broadly classified into two categories:-
- Encompassing litigation support &
- Investigative accounting.
- Other support services that traditionally come within the sphere of investigative services revolve – including corporate intelligence and fraud investigation services.
Use of Forensic Auditing:
The services rendered by the forensic auditors are in great demand in the following areas:- Fraud detection where employees commit Fraud
- Criminal Investigation: Matters relating to financial implications the services of the forensic accountants are availed of.
- Cases relating to professional negligence
- Arbitration Service
- Settlement of Insurance Claims
- Dispute Settlements
- Objectivity & Credibility: An external party would be far more independent and objective than an internal auditor or company accountant as well as an established firm of forensic accountants would also have credibility stemming from the firm’s reputation, network and track record.
- Accounting expertise and industry knowledge
- Provision of valuable manpower resources
- Perceived pressure
- Perceived opportunity
- Rationalization
- Financial stability is threatened by economic, industry, or entity operating conditions.
- Excessive pressure exists for management to meet debt requirements
- Personal net worth is materially threatened
- A history of violations of laws is known
- Little communication and support of the entity’s core values is evident.
- Management has a practice of making overly aggressive or unrealistic forecasts.
- Personal financial obligations create pressure to misappropriate assets.
- Adverse relationship between management and employees motivate employees to misappropriate assets.
- Disregard for the need to monitor or reduce risk of misappropriating assets exists.
- There is a disregard for internal controls.
- There is presence of large amounts of cash on hand or inventory items.
- There is an inadequate internal control over assets.
- Fraudulent Statements
- Corruption
- Asset Misappropriation
- Frauds that are done quickly and easily within the company
- Are internal in nature, which means that they are perpetuated by employees
- Include things like check fraud , revenue skimming , and false invoicing
- Accepting the investigation:
- Forensic Auditors must ensure whether their firm has necessary skills and experience to accept the work.
- Ideally statutory Auditors should not accept forensic auditing assignments of the same concern.
- Planning or Objectives of the investigation:
- Identity type of fraud & Fraudsters
- Quantify the loss
- Gather Evidence
- Provide advice to prevent the reoccurrence
- Gathering Evidence or Technique :
- Testing internal controls
- Use analytical procedures
- Apply CAAT
- Discussion and interviews with employees
- Substantive techniques such as Reconciliation, Cash counts and Review of stocks.
- Reporting: Report contains-
- Findings/ observation
- Summary of evidences
- Amount of loss
- How fraudsters set up fraud scheme and which controls were circumvented
- Recommend improvements of control
- Court Proceedings:
- Members of investigation team are involved
- Evidence gathering is presented
- Simplify technical teams
- Public Document Reviews and Background investigations – Public Databases, MCA Website, Corporate Records, internet etc.
- Interviews of Knowledgeable Persons
- Confidential Sources- Hotlines, E-mail, Letters, Current & Former Vendor, Customers & Employees.
- Laboratory analysis of Physical and Electronic Evidence- physical examination, fingerprint analysis, forgeries, ink sampling , document dating, Computer Forensics
- Hard disk Imaging
- E-mail analysis
- Search for erased files
- Analyze use & possible misuse
- Computer software to analyze data
- Physical and Electronic Surveillance
- Undercover operations
- Analysis of Financial Transactions
- General Audit Techniques
- Testing Defenses
- Statistical & Mathematical Techniques
- Trend Analysis
- Ratio Analysis
- Technology Based / Digital Forensics Techniques:
- Cross- drive analysis
- Live analysis
- Deleted files
- Stochastic forensics
- Steganography
- EnCase
- MD5
- Tracking Log Files
- PC System Log
- Free Log Tools
- Computer Assisted Auditing Techniques (CAATs) / Computer Assisted Audit Techniques & Tools(CAATT)
- Testing details of transactions and balances
- Identifying inconsistencies or significant fluctuations
- Testing general as well as application control of computer systems
- Sampling programs to extract data for audit testing, and
- Redoing calculations performed by accounting systems.
- Generalized Audit Software’s (GAS) or
- Common Software Tools (CST)
- Check Missings
- Check Duplicates
- Round numbers
- Repetitive Odd-Numbers
- Classification
- Stratification
- Single Transactions
- Isolated Outliers
- Data Mining Techniques
- Classification- Arranges the data into predefined groups with the help of algorithms.
- Clustering- Is like classification but the groups are not predefined, so the algorithm will try to group similar items together
- Regression- Attempts to find a function which models the data with the least error. A common method is to use Genetic programming