Areas of Practice for

Forensic Auditors and

Fraud Detection
Experts

CA. Indresh Palan

ACA, FAFD(ICAI), UGC-NET, M.Com

Forensic Auditing and Fraud Detection

“The world has enough for everyone's need, but not enough for
everyone's greed.”

― MAHATMA GANDHI
Climb the Ladder and Reach the Sky!

Pace is Yours

OPPORTUNITIES

AHEAD
Why we need to learn Forensic
Accounting/Auditing?
 Economic crime remains a fundamental fact of life for every
segment of the global business community and is a persistent
threat to business and business processes

 Fraud is a major concern among companies, regulators,

shareholders, and law enforcement agencies across the globe

 Cybercrime continues to remain a tough challenge for

organizations. Over the years there has been a significant increase
in the number of cybercrime attacks prompting organizations to stay
alert, seek means to fight cybercrime threats
 Forensic Auditors

 Forensic Auditors are hired either

1. to look in to alleged or actual fraudulent activities
2. to assist in prevention of such activities.
3. In law matters accounting, auditing and investigative skills
used for forensic accounting.

 There are three main sections – litigation, investigation and

solution of the dispute.
 Forensic Auditors
 The professionals in these fields are called Forensic
Accountants

 Forensic Auditors use professional accounting, law,

finance and investigation related techniques to
evaluate the validity of any activity. Forensic
Accountants are the experienced auditors who
protect the accounts of an organization and stop
any type of fraud

 The first line of defense against any cyber threat is

increasing perception and awareness of cybercrimes
 What Does a Forensic
Accountant Do?
 Forensic accountants are trained to look beyond the
numbers and deal with the business realities of situations

 Analysis, interpretation, summarization and the

presentation of complex financial and business related
issues are prominent features of the profession

 A forensic accountant will also be familiar with legal

concepts and procedures

 Public practice or insurance companies, banks, police

forces and government agencies are major employers
of forensic accountants
 Accounting fraud
 Financial statements are a fundamental barometer of a
business
 Accounting fraud includes misleading or falsely prepared
financial statements can deceive banks, lessors, vendors, and
investors into risky or misguided decisions
 Due to the use of financial statements and financial data
throughout business operations, this kind of economic crime
impacts a variety of business processes
 Accounting fraud has consistently been one of the major crimes
reported in all the survey
Global Economic Crime Survey, 2014:
Key Highlights from the U.S.
 As per above report more than 1 in 3 organization impacted by
economic crime
 Economic crime continues to remain in the forefront of corporate
concern, posing a threat to fundamental business processes
 45% of organizations in the U.S. suffered from some type of fraud in
the past two years, more than the global average of 37%.
 57% of U.S. respondents indicated their organizations pursued
opportunities in markets with high levels of corruption risk within the
past 24 months, versus 38% of global respondents
Most internal frauds are now perpetrated by middle
management
Particulars 2011 2014
Number of Frauds by Middle Management
45% 54%

Number of frauds committed by Junior Staff 50% 31%

Detecting Fraud
Fraud at U.S. organizations initially detected by external measures 15% 32%
or by accident

Particulars External Actors Internal Actors

Economic crime is committed 45% 50%

Evolution of reported rate of economic crime
(GECS)
Year of survey release-Reported Global Fraud Rate

100
75
50 43 45 43
37 30 34 37
% of all respondents
25
0
About the survey 2001 2003 2005 2007 2009 2011 2014
5,128 respondents from 99
countries
Source: The 2001 through 2014 Global
Economic Crime Survey (PWC)
 Cybercrime survey report 2014, KPMG in India
Engineering 4%

Manufacturing 5%
12 4 5
Electronics 8%
8
14 FMCG 10%
10
Telecom & communications 12%
15 12
Financial services 20%
20
Automobile 15%

Information technology 14%

Source: Cybercrime survey report 2014,
KPMG in India Chemicals & pharmaceuticals 12%

Cybercrime survey report 2014, KPMG in India

 Cybercrime

 In a digital age, internet users and governments face increased risks of

becoming the targets of cyber attacks

 As cyber criminals continue to develop and advance their techniques

 Criminals focusing less on theft of financial information and more on

business espionage and accessing government information

 To fight fast-spreading cybercrime, businesses and governments must

collaborate globally to develop an effective model that can control the threat
Threat perception of Cybercrime in India
 Cybercrime is not strictly speaking a technology problem. It is a strategy
problem, a human problem and a process problem. After all, organisations are
not being attacked by computers, but by the people
 Cybercrime has seen an increase in frequency in India at Individual and
corporate level
 Distinctly, about 51 per cent perceive themselves to be an easy target for
cyber attacks due to the nature of their business. Out of these 51 per cent,
about 68 percent respondents claim that they monitor their cybercrime threats
on a daily basis
The first line of defense against any cyber threat is increasing
perception and awareness of cybercrimes
Impact of cybercrime in India
Impact of cybercrime in India
80
60 45 48 43 48
40 27 30
18 16
20
0 Damages/Loss
 THE DAMAGE
Whether financial or collateral, the stakes and the costs are very high

 Economic loss is not the only concern that companies face when
combating fraud

• Damage to employee morale, corporate and brand reputation, and

business relations as some of the most severe nonfinancial impacts of

economic crime Access to money

• Access to customer confidential information

• Disruption of production and business processes

• Loss of Mental Peace

• Harassment
People commit Fraud

Why?
FRAUD-TRIANGLE

.
The Fraud Triangle
 Motive
 gambling addiction,
 a mistress,
 living beyond their means,
 desire to inflict damage, etc.
 Rationalization
 “I believe I’m underpaid,”
 “I believe I’m overworked,”
 “My company earns too much.” etc.
 Opportunity
 Opportunity usually results as a flaw in the company’s internal
control system. This internal control flaw provides the
chance to steal company assets.
 One bookkeeper receiving customer payments and paying
vendors, therefore it would be much easier to cover up the
fraud by “cooking the books.”
Profile of cyber attackers
Internal sources External sources

Disgruntled employees Cyber terrorists (focussed on

defacement)

Managed services personnel Professional hackers/hacking crime

syndicates)

Malicious personnel (focussed on Novice hackers

industrial/
commercial espionage)

Many of the incidents are not publicly known and have not been
reported by the media
The Financial Services (FS) sector: Overall key findings

 Root cause of most cyber attacks is monetary/ financial gain

 45% of Financial Services organisations have suffered economic

crime compared to only 34% across all other industries

 1 in 5 internally perpetrated frauds still involve senior

management, though the majority of such fraud tends to be
committed by junior staff or middle management.

 The sector remains a key target for criminals, and asset mis-
appropriation is still the primary type of reported economic crime

 Cybercrime, bribery and corruption appear to be increasingly

common in the sector

PwC’s seventh Global Economic Crime Survey

The Financial Services (FS) sector: Overall key findings:

 Money laundering remains a hot topic in the FS sector, where it

is almost five times more likely to occur than in other industries

 Almost 30% believed that the most severe impact is reputational

 Whistleblowing mechanisms appear to be more prevalent than before, however doubts

remain over their effectiveness

PwC’s seventh Global Economic Crime Survey

 Top 5 types of economic crime experienced by
the FS sector
67%
80% 67%
38%
60% 39% 24%
40% 26%
20% 24% 16%
21%
0% 20%

2014-FS
2011-FS
.

Financial Forensic Engagements

Financial forensic engagements may fall into several
categories
 Economic damages calculations
 Post-acquisition disputes such as breaches of warranties
 Bankruptcy, insolvency, and reorganization
 Securities fraud-stock fraud and investment fraud
 Business valuation
 Computer forensics/e-discovery.
 Tax fraud
 Religious fraud
 419 fraud
Financial forensic engagements may fall into several
categories
 Banking fraud
 Benefit fraud, committing fraud to get government benefits
 Counterfeiting of currency, documents or valuable goods
 Creation of false companies
 False advertising
 False billing
 Forgery of documents or signatures
 Health fraud
 Identity theft
 Lottery fraud
Financial forensic engagements may fall into several
categories
Forensic accountants are also engaged in marital and family law of analyzing
lifestyle for spousal support purposes determining income available for child
support and equitable distribution

Forensic accountants, investigative accountants or expert accountants may be

involved in recovering proceeds of crime and in relation to confiscation
proceedings concerning actual or assumed proceeds of crime or money
laundering

The List is endless.....

 Detecting fraud

Methods of fraud detection

fall into one of three
categories

Corporate Controls Corporate Culture

Beyond Corporate
Control
 RED FLAGS

The most common behavioral red flags displayed by

perpetrators Living beyond one’s means or
Experiencing financial difficulties
 SARADHA SCAM RED FLAGS
 Saradha installment plans with tenure varying from 12 to 60 months where
minimum investment is Rs100 and ranging from Rs.10,000 to 1,00,000
 Opened as many as 200 new companies to create more cross-holdings
 Investors had options to either opt for land/flat or get the refund where returns
varied from 12 to 24%
 The land/flat allotted to the investors are not pre-determined or identified.
Investors had no control on the scheme and the property
 Like all Ponzi schemes, Saradha Group promised astronomical returns in
fanciful but credible investments
 As much as 25–40% of the deposit was returned to these agents as
commissions and lucrative gifts to quickly build up a wide agent pyramid
 To keep ahead of regulators, the group used a nexus of companies to launder
money
 Why do so many FRAUDS keep
happening ?

 Human Greed for High Returns

 Lack of proper Investment Avenues (especially small investors)
 General awareness missing in general public
 Inaction of Law enforcing authorities / Laws without teeth, fraudsters daring
the system to catch them.
 Low conviction rate even when the frauds are detected.
Whether it is bank fraud, insurance fraud, ecommerce fraud, or any
other type of fraud, two points are very clear

• The first is the importance of detecting

fraud as quickly as possible so that
First criminals can be stopped before too much
damage

• As business processes become faster and

more automated, the time margins for
Second detecting fraud are becoming narrower and
increasing the call for real time solutions.
What Forensic Auditors JOB?
 A major responsibility of Forensic Accountant is to investigate fraud and collect
evidence for civil and criminal trials

 In the vast majority of cases, the evidence is in digital format residing in the
computerized system

 As a result essential knowledge and skills for forensic accounts include

systematic approaches to acquiring, cataloging, and presenting computerized
and digital data in a manner sufficient to meet the rigorous standards that
courts require for admissibility in evidentiary proceedings

 Digital data exits in many different types of systems, and especially in

accounting information systems in business environments.

 Forensic Accountants are in unique position to investigate frauds in

computerized accounting systems.
 37

Career Path for Forensic Auditors

Forensic Accounting Services Defined

 Forensic accounting services include dispute resolution, litigation

support, bankruptcy support, and fraud and special investigations,
among many other services.
 Forensic accounting services utilize the practitioner’s specialized
accounting, auditing, economic, tax, and other skills to perform a
number of consulting activities.
 The provision of forensic accounting services often requires the
practitioner to serve as an expert or fact witness, depending on the
assignment.
Career Path for Forensic Auditors
Financial forensic engagements may fall into several
categories-
 Economic damages calculations, whether suffered
through tort or breach of contract
 Post-acquisition disputes such as breaches of
warranties
 Bankruptcy, insolvency, and reorganization
 Securities fraud
 Due Diligence
 Business valuation and
 Computer forensics/e-discovery
Career opportunities for Forensic Auditors
Potential places of employment within the country:-
 The Financial Intelligence Unit (FIU),
 Serious Fraud Investigation Office (SFIO),
 Economic Offence Wing (EOW)
 The Department of Defences,
 Law enforcement
 Banking Sectors
 Insurance Corporations
 Private practice

INTERNATIONAL Opportunity

 the FBI and the CIA)

 the Government Accountability Office (GAO)
 World Bank
 International Monetary Fund and
 Enforcement Agencies
 Major corporations
 Small and mid-size businesses
 The nonprofit sector
 Banking, brokerage, insurance and other financial-services industries
 Private practice List goes on…………………
Career opportunities for Forensic Auditors
 Fraud Preventive approach will create more job
opportunities
Thank You

CA Indresh Palan
9702043750
indresh.palan@gmail.com