Forensic Audit

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  1. Tushar Gupta

    Tushar Gupta New Member

    The concept of Financial Auditing may be defined as “a concentrated audit of all the transactions of the entity to find the correctness of such transactions and to report whether or not any financial benefit has been attained by way of presenting an unreal picture”.
    Forensic audit aims at legal determination of whether fraud has actually occurred. In the process, it also aims at naming the person(s) involved (with a view to take legal action).
    BACKGROUND
    Major accounting scandals involving Enron, Satyam, Lilliput kids wear, worldcom and Parmalat have been widely reported. In all these cases, the methods and purpose of manipulations in financial statements were peculiar to the motives of such manipulations.
    Companies order 2003, requires auditors to report, amongst other, “whether any fraud on or by the company has been noticed or reported during the year. If yes, the nature and the amount involved are to be indicated.”
    In this background, the techniques of Forensic Audit have gained importance.

    DETECTION TECHNIQUES
    Forensic audit should focus on significant transactions both as reflected in financial statements and off balance sheet items. The techniques mainly are ‘critical point auditing’ and ‘propriety auditing’.
    (A) CRITICAL POINT AUDITING:- It aims at filtering out the symptoms of fraud from regular and normal transactions in which they are mixed or concealed. For this purpose, financial statements, books, records etc are analyzed mainly into find out trend, unusual debits/credits in accounts, discrepancies, false credits to boost sale, inter account transfer and weakness in internal control.
    (B) PROPRIETY AUDIT:- It is conducted by supreme audit institutions. In conducting the propriety audit, “value for money audit” technique aims at lending assurance that economy, efficiency and efficacy have been achieved in the transaction for which expenditure has been incurred or revenue collected is usually applied.
    EXAMINATION METHODS

    CONDUCTING AN INVESTIGATION
    The process of conducting a forensic investigation is, in many ways, similar to the process of conducting an audit, but with some additional considerations. The various stages are below:-

    (1) Accepting the Investigation
    The forensic auditor must initially consider whether their firm has the necessary skills and experience to accept the work. Forensic investigations are specialist in nature, and the work requires detailed knowledge of fraud investigation techniques and legal framework.
    (2) Planning the Investigation
    The investigating team must carefully consider what they have been asked to achieve and plan their work accordingly. The objectives of the investigation will include:-
    • Identifying the type of fraud
    • For how long the fraud has been concealed
    • Indentifying the fraudster(s) involved
    • Quantifying the financial loss
    (3) Gathering Evidence
    In order to gather detailed evidence, the investigator must understand the specific type of fraud that has been carried out, and how the fraud has been conducted. The evidence should be sufficient and appt to ultimately prove the identity of the fraudster(s), the mechanics of the fraud scheme and the amount of financial loss.
    Evidences can be gathered using various techniques, such as:-
    • Testing controls to gather evidence which identifies the weaknesses, which allowed the fraud to be perpetrated.
    • Using analytical procedures to compare trends over time.
    • Provide comparatives between different segments of the business.
    • Discussions and interviews with employees.
    • Substantive techniques such as reconciliations, cash count and reviews of documents.
    (4) Reporting
    The client will expect a report containing the findings of the investigation, including a summary of evidences and a conclusion as to the amount of loss suffered as a result of fraud. The report will also discuss the motive of fraudster(s) and how they set up the scheme. The team will also recommend improvements to control within the organization any further fraud.
    (5) Court Proceedings
    The investigation is likely to lead to legal proceedings against the suspect, and members of the investigative team will probably be involved in any resultant court case. The evidences gathered during the investigation will be presented at court, and team members may be called to court to describe the evidence they have gathered and to even explain how the suspect was identified.

    ASPECTS TO BE COVERED
    Objective of forensic audit is to find whether or not a fraud has taken place. Forensic auditor shall have to examine voluminous and in totality, records and witnesses, if permitted by law. Proper documentation is vital in substantiating the findings. The outcome shall focus on the following, in case of frauds:
    • Proving the loss
    • Proving the responsibility of loss
    • Proving the motive
    • Establishing guilty knowledge
    • Identifying other beneficiaries

    BANKS OPT FOR FORENSIC AUDIT

    “Once bitten, twice shy”. That precisely explains why banks reeling under the weight of crushing bad loans increasingly turning to forensic audit of company balance sheet. This is to check any misuse of the loaned amount as they are turning suspicious of the rising near bankruptcy claims.

    EY, known as Ernst & Young, said its fraud investigation team has received at least seven such requests from public sector banks in the last one year, much higher by any yardstick.

    The reasons are no rocket science. With the economy wobbling, bad loans are rising to alarming proportions. So, the profitability has come under strain, especially for the state owned ones. And this is serving as a perfect alibi for promoters to divert money for their personal ends.

    In March 2013, finance minister P Chidambaram had talked about the syndrome of rich promoter and poor companies reaching a tipping point and expressed zero tolerance for the same. He had asked state owned banks to draw up a list of witful defaulters against whom the government can initiate action.

    “Forensic audits give real picture and some clarity. We’ll come to know whether the claims are genuine or the money is siphoned off,” said a senior banker with a public sector bank. “Till now, banks used to work on faith and trust, but today it is not difficult to cook up balance sheets”.

    Forensic auditors are roped in to see whether the companies really deserve any restructuring of loans. The corporate manage to give you all the right things.

    “They forge documents, give you great balance sheet and have chartered accountants to stamp it too,” said Vikram Babbar, Associate Director of the fraud investigation & dispute team with EY.

    CASE STUDIES

    UNITED BANK OF INDIA

    The Reserve Bank of India has initiated a forensic audit of United Bank of India’s book, concerned by the steep deterioration in asset quality. The state owned bank reported a net loss of Rs 489.5 crore in the quarter ended September as gross nonperforming assets surged to 7.5 percent from 5.6 percent in the preceding year.

    The regulator has sent a team of inspectors to the bank’s Kolkata headquarters to conduct audit and also appointed audit firm Deloitte to carry independent forensic audit.

    The development comes barely a couple of weeks after RBI Governor Raghuram Rajan and other seniors RBI officials called for a tough stance against rising bad loans. UBI’s financial performance has been worsening since December last year.

    Deloitte and RBI will examine if there are any hidden NPAs in the bank and if proper systems are in place to identify them. They will also see if there is any manual intervention by the employees in the process of NPA recognition.

    AXIS BANK
    “We have hired KPMG for forensic audit” Axis Bank Executive Director Somnath Sengupta told reporters, following a sting operation done by Cobrapost that alleged executives of the private lender had indulged in money laundering.

    Sengupta declined to give a timeline for conducting the probe, but asserted that prima facie there had been no wrongdoing on the banks part.

    The sting was done at 12 axis branches across the country and bank has taken actions against the same.

    According to Cobrapost, the banks executives had allegedly shown readiness in accepting unaccounted money into investment products, which point to non compliance of know your customer norms and also indicate a form of money laundering.

    Also ICICI BANK and HDFC BANK, Axis’ larger competitors in the private sector lending space and who also figure in the sting operation, too have appointed external agencies to look into the matter.

    CONCLUSION
    In summary, a forensic investigation is a very specialist type of engagement, which requires highly skilled team members who have experience not only in accounting and auditing techniques, but also of the relevant legal framework.
    In the backdrop of increase in frauds and the need for developing forensic audit skills, I believe that personnel having such skills would be in great demand and would be valuable assets to a bank for their fraud risk management activities.

    “We only trust in god, for rest we go for audit.”
     
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