Overview of Forensic

Investigation Process
• Adv (Dr.) Rajkumar Adukia
Chairman – Competent Insolvency Professionals Private
Limited
• International Motivational speaker and Growth Coach
• Author of 300 plus books

• Ph.D. ,B.Com (Hons.), M.Com, FCA, FCS, FCMA, LL.B, MBA,

MBF, IP, Diploma IFRS (UK), DLL&LW, DIPR, Dip in
Criminology,

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• info@insolvency.services
Meaning of forensic
• adjective
• 1.
• relating to or denoting the application of scientific methods
and techniques to the investigation of crime.
• "forensic evidence"
• 2.
• relating to courts of law.
• noun
• scientific tests or techniques used in connection with the
detection of crime.
• The word forensic has its origin from the
Latin word “forensis” which stands for a
forum. Forensic Science is basically used in
tandem with any discipline that has
associations with the legal system. In a
nutshell, forensic science is the application
of scientific methods and principles to
questions of law.
Black’s law dictionary-
meaning of word FRAUD
• All multifarious means which human
ingenuity can devise, and which are
resorted to by one individual to get an
advantage over another by false
suggestions or suppression of the truth. It
includes all surprise , trick, cunning or
dissembling , and any unfair way which
another is cheated.
Action under Indian laws
• Fraud is defined Section 17 of The Indian Contract 1872
• Section 447 of The companies Act 2013
• Section 25 of The Indian penal Code 1860
• Actions under
• 1. The Indian Contract 1872
• 2The companies Act 2013
• The Indian penal Code 1860
• The Prevention of Money Laundering Act 2002

• The Insolvency and Bankruptcy Code 2016

• The
• The Indian Evidence Act 1872
• The Prohibition of Benamy Property Transactions Act 1988
• The Presidency Insolvency Act 1909
• The Provincial Insolvency Act 1920
• Action against guarantors under IBC, SARFAESI
Reasons of fraud
Human behaviour of greed & deception
Gandhaiji said GOD has given for need and not for greed
Kautilya wrote in 2nd BC arthashastra 40 ways of doing fraud by
accounting means
Current fraud level is threaten to underpinnigs of economy
Steps in fraud investigation
• Five stages –L RSA UP
• 1. pre engagement – scope – fees – timeline etc , competency
• 2. understanding the lender’s agreement ,business – internal
control COSO, erm , public information , social media ,
litigations , independent directors , compliance of laws ,
internal audit reports , open source intelligence – COBIT
• Internal audit frequency- fraud prevention measures
• 3. forensic investigation plans - red flags , related party
transactions – digital forensics – data analytics- social
engineering
• 4 analytic studies – Excel , Idea , softwares – interviewing &
NOT interrogation
• 5 forensic investigation report – conclusive study – how to
recover loss , legal actions to be taken
• 6 litigation assistance – from whom to recover loss under
which laws , court evidences
Sources of red flags
• PROFESSIONAL SKEPTICISM- ENQUIRING ATTITUDE
• Knowledge of subject
• financial statements
• CARO

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• Secretarial audit report
• Notes to accounts
• Directors report
• Corporate governance report
• Stock audit reports
• Concurrent audit reports
10
Sources of red flags
• Legal professional , internal auditor, statutory auditor
• Frequency of their changes
• Professional fees paid to them
• Code of ethics
• Legal cases
• Non payment of statutory dues
Some methods of cooking in
accounting
1. Inflation of intangible assets
2. Purchase of personal assets by organisation money
3. Stock and inventory overstatement
4. Bogus sales represented by unrealizable debtors

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5. Age analysis of all debtors and advances relevant
6. Interest free loans given – normally bogus
7. Irregular tax payer and defaulter of TDS/ESI/PF – high risk
borrower
8. Too good profit and too big – compared to industry
standards

12
Some methods of cooking in
accounting
7 change of auditor frequently
8 poor audit fees
9 heavy legal expenses
10 large commission

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11 diversion of funds

13
Essentials of good results in
forensic exercise
• Coordination between bank and forensic auditor is required
• Both need to be bold if we want good result
• Sharing of information is required
• Should work hand to hand with forensic investigator
• Bank has more information about client
BUSINESS FRAUDS
Business fraud is exponentially more damaging than other risks:-

• Business fraud, particularly in computerized environment averages $

1000,000 per incident, while other and vendor/employee frauds
affecting business averages $ 145,000;
• Burglaries average $ 450 per incident;
• Armed robberies netted $ 250 per incident
Three Broad Categories of Frauds

• Corruption

• Asset Misappropriation

• Financial Statement Fraud

1. Corruption

• Conflicts of Interests

• Bribery

• Extortion
2. Asset Misappropriation

• Cash Theft

• Fraudulent Disbursement

• Inventory Frauds

• Misuse of Assets
3. Financial Statement Fraud

Material Misstatement in Financial Statements:-

 Delibrate Falsification of Accounting records.

 Omission of transactions/Balances/Disclosures etc.

 Misappropriation of Financial Reporting standards.

Principal Categories of Fraud

• Misre
Misrepresentation of Concealment of
Bribery
material facts material facts

Extortion Conflicts of Interest Forgery

Fraud Triangle-
Donald ray Cressey – criminologist

occupational fraud elements

Fraud Diamond theory
Wolfe and Hermanson in the CPA Journal in
December 2004
WHO IS DEFRAUDING WHOM?
WHY DO AUDITORS NOT ALWAYS DETECT FRAUD?

• Root cause analysis- carpet bump

• Stale Procedures syndrome- fireflies_Charles darwin

• Reliance and trust- not enough professional scepticism-

Yudhistir/Duryodhan.

• Miss out the glaring reality in the information- salad oil scandal
Forensic Auditing
• Often associated with fraudulent activities.
• Also performed in non fraudulent cases.
• Forensic audit aims at legal determination of whether fraud has
actually ocuured.
• Investigating into financial records.
• Forensic Auditing and Accounting are same.
STATUTORY AUDITOR V/S FORENSIC INVESTIGATION

Basis Statutory Audit Forensic investigation

Objective Express opinion as to the Determine correctness of the
"True & Fair' presentation.accounts or whether any fraud
has actually taken place.
Techniques ‘Substantive’ & Analysis of past trends and
Compliance procedures. substantive or in depth
checking of selected
transactions.
Period For the Accounting No such limitation
period.
Scope Provides reasonable Findings used in court or to
assurance on Financial resolve a dispute.
Statements
Characteristics of Forensic
Auditor
• A Forensic Accountant should possess following characteristics:

• Curiosity
• Detail-oriented
• Creativity
• Skepticism
• Listening skills
Forensic Accounting

• ACFE definition of Forensic Accounting:

• “it is the use of professional accounting skills in matters involving
potential or actual civil or criminal litigation, including, but not
limited to, generally acceptable accounting and audit principles;
the determination of lost profits, income, assets, or damages;
evaluation of internal controls; fraud; and any other matter
involving accounting expertise in the legal system”
Branches of Forensic Audit
• Investigative Accounting- It deals with investigation of criminal
matters relating to theft, securities fraud, insurance fraud etc. it also
includes:
 Provisions of Suggestions
 Possible Couses of action

• Litigation Support-
 Accounting Assistance in litigation matters.
 Quantification of Economic damage.
1. Accepting the Investigation
• Forensic auditor must ensure whether their firm has:-

 Necessary Skills

 Experience to accept the work.

2. Planning the Investigation
• Objectives of the investigation includes:

 Identify type of fraud

 Identify Fraudsters
 Quantify the Loss
 Gather Evidence
 Provide advice to prevent the reoccurence.
3. Gathering Evidence
(Techniques)
• Testing Internal Controls
• Use analytical Procedures
• Apply CAAT
• Discussion and Interviews with the employees.
• Substantive techniques such as Reconcilations, cash counts and
stock reviwals
4. Reporting
Report Contains:

• Findings/Observations
• Summary of Advances
• Amount of Loss
• How fraudsters set up fraud scheme and which controls were
circumvented
5. Court Proceedings
• Members of investigation team are involved
• Evidence gathering is presented
• Simplify technical terms
• Forensic accountants do not testify that fraud has occurred but only
present evidence.
Work Opportunity: Agency Involved in
India
• Central Bureau of Investigation (CBI)
• Serious Investigation Bureau
• Insurance Sector (TRAI)
• Securities Exchange Board of India(SEBI)
• Military and Police Department
• State and Central Government
• Banks and Financial Institutions
A Forensic Audit Engagement

• Similar to typical audit engagement.

• Each forensic audit is unique.

• Guideline for auditors to start with but rarely followed.

• Auditors must assess specific risks and perform audit accordingly.

Sample Documentation

• Fraud Examination Checklist

• Fraud Examination Proposal
• Fraud Policy Review Opinion
• Forensic Audit Report
Satyam Computer Services Scandal

 7561 Fake Invoices

 Inflated Receivables
 Fake Fixed Deposits Recipts were printed.
 Bank guarantees were manipulated.
 Fake Bank Balance statements of ICICI bank, Citibank, HSBC and BNP
Paribas.
Facts and Figures of Satyam Fiasco!
S no. Particulars of Fraud Amount( Rs. In Crores)
1. Exports inflated (Fake Invoices) 4,500
2. Unremitted Currency 1,940
3. Books Inflated 27,167
4. Fake FD Interest ( as against Rs.7.42 Lakhs 375
actual)
5. Wealth erosion to 3 lakh shareholders in a 100
week
6. Very weak invoice management system NA
7. Accounting software loopholes – made NA
complex
8. Serious Internal control deficiency NA
LIST OF LARGE SCAMS IN RECENT TIMES

• Bellary Mines
• 2G Spectrum Scam
• Common Wealth Games Scam
• Uttar Pradesh NRHM Scam
• IPL Cricket Scam
• Madhu Koda Mining Scam
• Satyam Scandal
• Coalgate (Coal Scam)
• Harshad Mehta
• Adarsh Housing Society
• Bofors Scam
• Hawala Scam
• Mallya group
• Nirav modi group
• DHFL
• Yes bank
FRAUD’S ARE NOTHING NEW!!!!!

Forty Possible frauds were listed in “ The Arthashastra by Kautilya”

Typical Fraudster
Red Flags

• A red flag is a set of circumstances that are unusual in nature or

vary from the normal activity.
• It is a signal that something is out of the ordinary and may need
to be investigated further.
RED FLAGS- INDICATORS OF FRAUD

• Employees not taking vacations , periodic rotations, or transfers.

• Lack of physical security over assets/inventory.
• A remote operation not effectively monitored by the head office.
• A complex business structure.
• A company using several different auditing firms or changes
auditors often.
• No Segregation of Duties
• Sudden losses
• When you get “All is Well” feel! (Green Flags)
• Missing or altered documents
• Disorganised approach of the client
• Lifestyle seems excessive for income.
 
Benford’s Law - an introduction