Forensic Audit and Case Studies


Large corporate frauds is no more a new phenomenon for the finance world. In 2009, when India witnessed the Satyam, Forensic Audit profession was in nascent stage. But with the changing time forensic auditing has evolved.

What is Forensic Audit ?

Forensic audit requires analysis of financial transactions and compilation of the information for use in court of laws. Forensic Auditors are appointed to identify the financial statement frauds. They produce the forensic audit reports. Typically, these reports are presented in the court of laws as financial evidence. Though many people use forensic audit as substitute of forensic accounting, there is a significant difference.

Securities Exchange Board of India (SEBI) often hires forensic auditors to review the financial records of the listed companies. CBI, Serious Fraud Investigation Office (SFIO) also empanel the forensic auditors. There are different types of frauds investigated by the forensic auditors for these agencies. In the large scale crackdown on shell companies, auditors were asked to provide their observations on the financial health of the company.

Court cases requiring financial evidences may include identification of conflict of interest, commercial litigation, business valuation, insolvency and fraud.

Companies engage forensic auditors to answer specific questions. Bankers ask questions about trail of money, whereas government may ask restated financial statements. Also, the Forensic Auditors comment on the generally accepted accounting practices.

Unlike financial audits, there is no standard format for forensic audit report. Forensic Audits are extended versions of the internal audit. These investigative audits provide the answers to the specific questions. They provide sufficient evidence to be presented in courts.

Certified Forensic Accounting Professionals (CFAP) is one of the oldest professional courses in India. This course provides guidance in investigation of fraud cases. They are specialist in the forensic audits.

Curious case of IL&FS

Companies commit financial statement frauds to announce improved financial performance. IL&FS, which expressed its inability to pay off the debts, indulged into complicated scheme of financial statement fraud. Subsidiaries booked losses, but holding company ensured bonuses to top management. IL&FS failed to disclose the financial losses to the investors. This was a result of creative accounting.

Mathematical equations like J-score can help to identify the creative accounting, were not considered by the rating agencies.

Forensic auditors came to limelight after the government nominated board took over troubled IL&FS. Observations made by forensic auditors were significant for further action against guilty individuals. Enforcement agencies arrested the individuals responsible for the IL&FS mess.

Auditors were also made party to the scam. In addition to the audit, they were also performing assurance services for the client.

Duty of forensic auditors is not restricted to quantification of personal gains to culprit. They are required to produce comprehensive trail of the funds to and from the business accounts of the culprits.

Certifications for Forensic Audit Profession

Forensic auditor requires knowledge of specific areas of investigative accounting and auditing techniques. These include court procedures, legal research and the ability to recognize criminal activity. A forensic accountant must understand more than just fraud. She also must understand insurance claims, insider trading, and legal contracts.

Indiaforensic Center of Studies is a notable certification provider in the forensic audit space. The aspirants chose the certifications based on their area of expertise. Such as the aspirants from accounting firms may opt for Certified Forensic Accounting Professional course.

On the other hand, Chartered Accountants or the certified public accountants may go for specialization in Stock Market Forensics. Members of select institute of certified professionals can get waivers in writing all papers.

Certifications play a vital role in developing investigative skills. Expert professionals with accounting skills find these certifications helpful investigating the financial statement frauds.

Forensic Audit Procedures

Forensic Auditors go much beyond the financial reporting standards and internal control lapses. They try to understand the intent. Fraudulent intent is very important to prove the fraud in the courts of laws. There are four primary stages of any forensic accounting engagement

  1. Plan the investigation – It is necessary to understand the exact question of the client. The forensic auditor plan his investigation to achieve audit objectives. Objectives could be assessing exact amount of frauds, executives involved in manipulating company financials etc
  2. Collecting Evidence – Forensic Auditors collect the accurate evidence of financial manipulations. Evidences should substantiate the financial damage assessments based on accounting records.
  3. Reporting – Since there is no template, forensic audit reports differ in format but have the same objectives. A good forensic audit report clearly documents the findings of the investigation and refers the evidences collected during the process.
  4. Court Proceedings – Forensic Auditor are expert witnesses. In the court proceedings he needs to explain the importance of evidences. They should simplify the complex accounting issues.

To Summarise, forensic audit is an exciting career path for those who are looking to go beyond obvious.

Apurva Joshi is independent director on the board of Quickheal Technologies and Minda Rinder P Limited. She is the author of Students Handbook on Forensic Accounting - one of the first textbooks on the subject of forensic accounting. She was featured as Outstanding Entrepreneur in the Book "Arise Awake".