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Forensic audit
A forensic audit is an examination of financial records to gather evidence of white-collar crimes such as fraud and embezzlement, often used in legal proceedings. The process involves several steps including accepting the investigation, planning, gathering evidence, analysis, and reporting findings, which may lead to court proceedings. Various types of fraud investigated include asset misappropriation, corruption, and financial statement fraud, with advanced techniques like data mining and computer-assisted audit tools employed to uncover illicit activities.
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Introduction to forensic audit, its purpose in detecting fraud, and its foundational role in legal proceedings.
Forensic auditors are specialized professionals retained by various organizations for fraud detection.
Steps in forensic auditing: accepting an investigation, planning, gathering evidence, analyzing, reporting, and possible court proceedings.
Investigations on asset misappropriation, including cash theft and fake invoicing, affecting cash flow.
Corruption investigation methods looking at bribery, extortion, and conflicts of interest.
Investigation into financial statement fraud focuses on intentional misrepresentation of financial records.
Details of the Satyam fraud case highlighting the number of fake invoices and manipulated financial statements.
Techniques in forensic auditing including general audit methods, statistical analysis, and identifying fraud.
Digital forensic techniques, including data mining and software tools used in forensic audits.
Overview of the relevance and application of forensic audits in current financial scenarios.
Details of the Nirav Modi case involving Rs 11,400 crore fraud and the role of forensic audits.
RBI guidelines on fraud classification and the necessity of forensic audits in multiple banking arrangements.
Conclusion on the need for skilled forensic auditors familiar with legal and accounting practices.
Closing remarks and contact information for further questions.
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Forensic audit
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- 2. WHAT IS FORENSICAUDIT ? • A forensic audit, refers to the application of accounting methods for detection and gathering evidence of frauds, embezzlement, or any other such white-collar crime. • It is an examination of a company’s financial records to derive evidence which can be used in a court of law or legal proceeding. • The failure of some formerly prominent public companies such as Enron, WorldCom, Xerox Corporation and Satyam Computer Services fueled the prominence of forensic auditing 2
- 3. FORENSIC AUDITORS • Theyare retained by banks, courts, business communities, police forces, lawyers, insurance companies, government regulatory bodies and organizations. 3 Highly specialized Effective listener Knowledge of techniques and law Scrutiny of the options
- 4. HOW IS FORENSICAUDIT INVESTIGATION CONDUCTED ? 4 Accepting the investigation Planning the investigation Gathering the evidence Perform the analysis Reporting Court Proceedings
- 5. Step 1 –Accepting the Investigation The firm must ascertain whether or not they have the necessary tools, skills and expertise to go forward with such an investigation. They need to do an assessment of their own training and knowledge of fraud detection and legal framework Step 2 – Planning the Investigation The auditor(s) must carefully ascertain the goal of the audit so being conducted, and to carefully determine the procedure to achieve it, through the use of effective tools and techniques. Planning also includes the identification of the best mode to gather evidence. 5
- 6. Step 3 –Gathering the evidence In forensic auditing specific procedures are carried out in order to produce evidence. The investigators can use the following techniques to gather evidence : • Testing controls which identifies the weaknesses, • Using analytical procedures to compare trends over time • Applying computer-assisted audit techniques, • Discussions and interviews with employees • Substantive techniques such as reconciliations, cash counts and reviews of documentation. 6
- 7. Step 4 –Perform the analysis The actual analysis performed may involve calculating economic damages, summarizing a large number of transactions, tracing of assets, present value considerations Step 5 – Reporting After investigating and gathering evidence, the investigating team is expected to give a report of the findings of the investigation, and also the summary of the evidence and conclusion about the loss suffered due to the fraud. Step 6 – Court Proceedings The last stage expands over those audits that lead to legal proceedings. The auditors are called to the Court, and also included in the advocacy process. 7
- 8. TYPES OF INVESTIGATIONSUNDER FORENSIC AUDIT Asset Misappropriation • This includes misappropriation of cash, raising fake invoices, payments made to non-existing suppliers or employees • It happens when people who are entrusted to manage the assets of an organization, steal from it. • The direct hit is on the cash flow of the organization. 8
- 9. TYPES OF INVESTIGATIONSUNDER FORENSIC AUDIT Corruption Corruption is a major obstacle at corporate levels, and also to socio- economic development. It can surface in various forms such as - • Bribery • Extortion • Conflict of interest 9
- 10. TYPES OF INVESTIGATIONSUNDER FORENSIC AUDIT Financial Statement Fraud (FSF) • Financial statement fraud is the deliberate misrepresentation, misstatement or omission of data for the purpose of misleading the reader and creating a false impression of an organization’s financial strength. • The common practice is deferring revenues or expense in a different time period to give the appearance of consistent earnings or growth. 10
- 11. SATYAM CASE 11 • 7561fake invoices • Inflated receivables • Fake Fixed Deposit Receipts were printed • Bank guarantees were manipulated • Fake bank balance statements of BNP Paribas, HSBC, ICICI Bank and Citibank
- 12. FORENSIC AUDIT TECHNIQUES GeneralAudit Techniques Testing defenses - A good forensic audit technique is to attempt to circumvent these defenses yourself. This technique requires you to put yourself in the shoes of the suspect and think accordingly. Statistical and Mathematical Techniques • Trend Analysis - Careful review of the historical norms • Ratio Analysis – Analysis of ratios report on the fraud health by identifying the possible symptoms of the fraud. 12
- 13. FORENSIC AUDIT TECHNIQUES Technologybased/ digital forensic techniques Every transaction leaves a digital footprint in the computer driven society. Many digital enabled forensic tools are available to assist the auditor such as – cross drive analysis, live analysis, Encase, MD5, Tracking log files, PC system log, Steganography, Free log tools. Computer aided audit tools (CAATs) It is the practice of using computers to automate the IT audit processes. The CAAT tool supports the forensic accounting in which larger amount can be diverted to the analytical form and it also prompts where the tool detects the fraud.. 13
- 14. FORENSIC AUDIT TECHNIQUES DataMining Data mining is an analysis process used to examine data sets or metadata to identify patterns, anomalies, and trends to answer business queries and provide predictive value for future events. It incorporates algorithms to explore, analyze, classify, relate, and partition data sets 14
- 15. FORENSIC AUDIT TECHNIQUES 15 Softwareand tools Generalized audit software is a category of CAAT to undertake data extraction, summarization and analytical skills. Currently the latest version of generalized audit software includes the audit command language, interactive data extraction and analysis (IDEA) and Panaudit . Due to the shortcomings of generalized audit software, common software tools have become more popular over the time period. Spreadsheets like Ms Excel, Lotus etc, RDBMS like MsAccess etc and report writers like Crystal reports etc are few examples of CST.
- 16. FORENSIC AUDIT IN THECURRENT SCENARIO 16
- 17. 17 FORENSIC AUDIT INTHE NIRAV MODI CASE A staggering 30 banks will be a part of the forensic audit, besides Punjab National Bank, to trace and track the chain of money movement It eventually ended up as a gigantic Rs 11,400 crore Indian banking fraud. Its outcome will be used as evidence in court to prosecute the key perpetrator Nirav Modi and his firms and Mehul Choksi, promoter, Gitanjali Group.
- 18. 18 RBI GUIDELINES As perRBI’s master direction on frauds, revised in July 2017, In case an account is classified as a fraud and falls under multiple banking arrangements, the account should be red flagged by all banks, initiate a forensic audit and lodge complaints with the CBI and law enforcement agencies. This process should be completed within six months.
- 19. CONCLUSION A forensic investigationis a very specialist type of engagement, which requires highly skilled team members who have experience not only of accounting and auditing techniques, but also of the relevant legal framework. The investigation is likely to ultimately lead to legal proceedings against one or several suspects 19
- 20. Thank you ! FORANY QUESTIONS You can find me at [email protected] 20