Forensic Accounting- the ‘buzz’ word, as Financial Frauds rise

The ever-evolving nature of businesses, in addition to creation of new opportunities, has also given rise to newer risks and unheard of threats. It is recognized that each business is different and requires an individual, tailor-made approach while dealing with the set of risks and threats it contains.

The accounting scandals at Satyam and WorldCom in the last decade and at Kingfisher more recently shocked the business world and brought to light the great potential for deceit that can accompany corporate greed. These scandals and subsequent investigations infer that fraud is omnipresent and wherever there will be money, there will always be a possibility of fraud.


Varied definitions of fraud are given under The Companies Act, Indian Contracts Act etc. However, in the context of Forensics, Fraud is defined as ‘abuse of position, or false representation, or prejudicing someone’s rights for personal gain’.

Donald Cressey, a sociologist and criminologist developed a theory ‘The Fraud Triangle’ which as a model explains the factors that causes someone to commit occupational fraud as under:

a) Perceived pressure
b) Perceived opportunity
c) Rationalisation

He explains that wherever the above 3 are present together, the possibility of a fraud being committed will be very high as these factors contain everything that is required to give rise to a fraud.

Though many theories around the concept of fraud vulnerabilities and why frauds occur came about later, such a fraud diamond and fraud pentagon, the theory of fraud triangle remains the most popular.

One may classify frauds on the basis of the industry type as a) Bank frauds, b) Corporate frauds, c) Insurance frauds, d) Health care frauds, e) Cyber frauds, f) Securities frauds and g) Consumer frauds.

All these are different in nature and require different techniques to deal with. For eg. in case of a bank fraud, a customer may be seen as a potential target for fraudulent activities. This may include a credit/ debit card fraud or may be cheque fraud. Whereas, a corporate fraud may take the form of asset misappropriation or a fraud at the financial statements level.

Some recent trends and studies have shown that ‘Real Estate & Infrastructure’ sector is the most vulnerable to frauds, followed by ‘Financial Services’ and the others. This establishes that the nature of transactions in a particular sector and the inflow and outflow of funds is a major driver for a person to commit fraud.

How does one detect Red Flags?

Red flags are signs or warnings of any impending danger or inappropriate behavior. Red flags will not necessarily indicate that a fraud exists, but will indicate that caution needs to be exercised.

The incentives to commit a fraud mentioned earlier in this document can culminate into one of the patterns that will help give an indication that a fraud might be perpetrated. These patterns may be available on a day to day basis and can work as a useful tool for even the management to identify potential threat situations.

A weak internal control system or a control environment with loopholes may work as an incentive for a fraudster to explore. Though these red flags typically may be more relevant for an external expert to look for; the management will do well to keep an eye on these. An employee living out of his means, delay in submission of management reports, unexplained variances in ratios etc. may all be indications that a fraud might exist.

How can Forensic Accounting help?

Forensic Accounting helps safeguard the interest of the Company against encompassing risks and potential threats. Traditionally, the role of a forensic auditor came in when he was required to piece together the financial puzzle once a fraud had occurred. This scenario is now changing and forensic accountants are being engaged as a measure of abundant caution and to plug in the loopholes in the Internal Control system at an early stage. Forensic accounting can sometimes be referred to as forensic auditing.

It is also imperative to note that a Forensic auditor is different from a Financial auditor in his roles/ responsibilities, as well as approach. It is believed that a financial auditor would detect a fraud if one were exists during the financial auditor’s audit. The truth, however, is that the procedures for financial audits are designed to essentially detect material misstatements, not frauds. In forensic accounting, the core focus is to look for indications of fraud that are not subject to the scope of financial statement audit. In forensic accounting materiality is not a factor and does not affect the scope. The transactions are examined not for arithmetical accuracy instead for regulatory and propriety correctness. It is the integration of accounting and auditing skills with investigative techniques and professional skepticism.

Further, in theory, Forensic auditing is designed to look for six types of frauds as more often that not, all fraud cases will involve one of the following:

• Embezzlement
• Bribes
• Stealing
• Extortion
• Fictitious transactions
• Kickbacks, and
• Conflict of interest

Detecting a fraud is not a straightforward task. Fraud is generally concealed by the perpetrator and often occurs through collusion with parties within or outside the organisation. Normally, the documents supporting the omitted transactions are not kept in the Company’s records. The one committing a fraud will often create false documentation and make alterations to documents to an extent that will rationalize his approach and will make him believe that he has done enough to not be caught. In his quest to leave no stone unturned, he will alter the base documents, vouchers, invoices etc. to support the fictitious transactions.

In such an event, a forensic accountant is engaged for the purpose of financial investigation and the findings are used as evidence in court or to resolve disputes. A Forensic accountant by design, is trained to look beyond the numbers and deal with the business realities of situations using his accounting and auditing expertise along with perseverance and attention to detail and sound professional judgment.

While fraud detection techniques will not identify all frauds, the involvement of a discerning forensic auditor and use of established techniques will increase the likelihood that misstatements or defalcations will be discovered on a timely basis.

Knowing where to engage a skilled professional to resolve matters involving significant loss of money can be a critical decision. Often, the obvious loss is only the tip of an iceberg. Depending on how long a potential embezzlement may have occurred, enough funds could have been stolen to make a Company bankrupt or worse, paralyzed forever. Prompt action in employing a properly credentialed forensic accountant can save a lot more than one would pay for the professional service.

Puneet is a Partner with International Business Advisors (IBA). He is a Chartered Accountant with 13 years of post qualification experience. He has rich experience in the field of accounting and auditing, due diligences and risk advisory to various mid-sized and large companies (Indian as well as trans-nationals) across various sectors. For most of his professional career he has worked with Big4 consulting firms such as KPMG and Deloitte.

In addition to heading the Assurance and Risk Advisory practice, he also leads the newly set-up Forensic practice at IBA.

He regularly writes on various accounting and auditing matters. For any professional assistance, he can be reached on or at +91 98180 03353

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