Forensic Audits: Role of Chartered Accountants in Detection and Reporting
This article explains what forensic audits are and why they are important to find financial fraud. It shows how CAs help by investigating records, collecting evidence, and supporting legal cases.
As the business operations complexity has been growing the instances of financial fraud has also increased which keeps the forensic audit in the forefront. To safeguard the integrity of the finance, Chartered Accountants (CAs) play a pivotal role in forensic auditing. Unlike normal auditing these strive into deep investigation to uncover the fraud, irregularities and...
As the business operations complexity has been growing the instances of financial fraud has also increased which keeps the forensic audit in the forefront. To safeguard the integrity of the finance, Chartered Accountants (CAs) play a pivotal role in forensic auditing. Unlike normal auditing these strive into deep investigation to uncover the fraud, irregularities and misreporting.
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What is a Forensic Audit?
Analyzing and reviewing a company’s or a person’s financial record for extracting facts and evidence which can be used before the court of law or legal proceeding is termed as forensic auditing.
It is a specialization within accounting and most of the large accounting firms have a forensic accounting department. This type of audit covers a wide range of investigative activities and is often conducted to prosecute a party for fraud, embezzlement or other financial crimes.
How Does Forensic Audit Work?
The process to the forensic audit is similar to the regular financial audit but with the additional step of a court appearance.There are steps which both forensic auditing and financial auditing have in common starting from the planning stage till the last step of reporting.
In order to meet the objectives, the forensic auditor and the team will plan the investigation accordingly. The auditors should understand how the fraud was carried out.The most important part is finding out the person or persons involved which helps in building a strong case.
After the auditing,the auditor needs to collect the evidence which should be sufficient in proving the fraudulent activities .
The report must be in written form so that the client can carry on with legal proceedings if they wish.The report must include the summary of the evidence collected, explanation of how the fraud was carried out and if any suggestions to prevent such frauds in future.
If the client prefers for a trial ,the auditor must be present in the court for testifying as the main expert witness. He needs to give the clarification on evidence collected and how the team found out the suspects involved in the case.
Role of CAs in Forensic Auditing
Chartered Accountants trained in forensic audit play a vital role in identifying and reporting financial fraud. They have a strong foundation in accounting and auditing which helps them easily to identify unusual patterns or mistakes in financial records.With extra training they learn how to dig deeper using tools like data analysis, collecting evidence and also interviewing people who might be involved in the fraud.
Forensic audits often connect the CAs with legal action, this helps them carry the investigation in the right way. The CAs are skilled in presenting their findings. They can explain the complex financial issues in a simpler way whether it's related to internal reports,court cases or dispute resolution.
Forensic Auditing Skills CA Requires
Even though CAs are skilled professionals, forensic auditing requires them to build on their core expertise with additional skills. First, a strong investigative skill is required. They need to know how to dig deep into the financial data, spot irregularities ,conduct interviews and gather evidence.
Data analyzing is another required skill.Forensic audits often involve huge financial data, the CAs must be able to identify the patterns, red flags and inconsistencies. Good knowledge on legal terms and procedures is equally important.They should know the laws related to fraud,financial crime.
Having a specialised certification in forensic accountancy adds credibility. The Institute of Chartered Accountant of India(ICAI) has made certain mandatory qualifications for forensic auditors like the ICAImembership and completion of the Forensic Standards Course.
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A keen eye for detail helps spot hidden errors and critical thinking is needed to make sense of complex financial data.Strong communication skills are required to present the findings both orally and in writing. The CAs should maintain professional skepticism to question the assumptions and to ensure the integrity of their conclusions.
Techniques Used In Forensic Audits
Various methods and methodologies are used by forensic auditors.
- Computer Assisted Audit Techniques(CAAT)- This is a computer tool that helps auditors check and analyze data directly from the client’s system. This helps the auditors to do their work without needing the client at each and every step.
- Data Analytics- This helps in understanding the unusual patterns and irregularities in the further investigation.
- Data Mining Techniques- Computers automatically search through huge data sets to find hidden or surprising patterns and information.
- Generalized Audit Software-Type of CAAT that helps auditors extract,search,organize and analyze data.
Challenges Faced In Forensic Audits
One of the major issues is hidden evidence. People involved in the fraud try hard to cover their tracks making the auditors difficult in finding proof. These Audits are expensive. This requires a lot of time, effort and skilled professionals making the process resource heavy. Auditors need to be very careful in dealing with confidential information and follow legal rules throughout the investigation. As the fraudulent methods continue to evolve and the techniques are getting advanced, the auditors need to constantly update their skills and tools to keep up.
Case Studies
1.Punjab National Bank Scam
PNB was exposed to one of the biggest banking scams on February 14,2018,India has ever witnessed which involved a fraud of around Rs.11,000 crore. The scam was led by diamond businessman Nirav Modi along with his uncle Mehul Choksi. They were helped by two PNB employees Deputy Manager Gokulnath Shetty and clerk Manoj Kharat, from the Mumbai branch.
The fraud was carried out using Letters of Undertaking (LOUs), which are bank guarantees used to get short term credit from overseas banks. The LOUs were issued without proper approval or following any of the required banking procedures in this case.
Nirav Modi’s companies took loans from foreign banks like Axis Bank and Allahabad Bank using these unauthorized LOUs from 2011 to 2017. The biggest weakness was that PNB’s SWIFT system, used for sending financial messages, was not connected to its core banking system. Because of this gap, the fraudulent LOUs were never recorded in the bank’s official system.
Forensic auditors played a key role in identifying this gap. They found that the employees were using the SWIFT system to issue fake LOUs while keeping them hidden from the bank’s records. The scam was finally exposed in January 2018 when Modi’s company asked for fresh credit and the officer demanded collateral. When the company refused and said they had never given collateral before, it raised doubts and led to the discovery of the scam.
2.Satyam Scam
The Satyam scam came to light after the Chairman, Ramalinga Raju, bought 100 percent stake in Maytas Properties and Maytas Infra, two companies owned by his sons. He said this move was to benefit investors, but the shares soon crashed, revealing serious problems.
The World Bank banned Satyam for manipulating data and corrupt practices. Independent directors resigned, which showed how deep the fraud was. Eventually, Raju and others were sentenced to jail and fined Rs. 5.5 crore, and the company was taken over by Tech Mahindra.
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Forensic auditing uncovered several key issues in the scam. It found that the company manipulated its accounts by showing fake fixed deposits and recording interest income on them to inflate profits. As a result, Satyam paid Rs. 187 crore in taxes on money it did not actually have.
The company also suffered from weak corporate governance, as independent directors failed to question or stop the fraud. The audit committee did not detect or report the financial irregularities either.
Banks also failed in their duty by giving short-term loans to Satyam despite its claim of having large cash reserves, without asking important questions. Finally, credit rating agencies gave good ratings to the company without properly checking its true financial condition.
A forensic audit helps in investigating financial fraud and collecting evidence that can be used in court. It is useful in matters like embezzlement,fake financial reports or other illegal money activities. Forensic auditors help in explaining complex financial details and supporting legal action. It improves accuracy,builds trust and helps find and fix problems. They also help recover money or assets that may have been misused.
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