Forensic

Accounting &
Fraud Detection

An Introduction
CA (Dr) Durgesh Pandey
PhD, FCA, LLB, CFE (USA)

DKMS & Associates

Chartered Accountants
Ahmedabad, India
Facts about Fraud
As per ACFE survey 5% of Global
Revenue is lost to Fraud
Fraud is always intentional and
deliberate
Fraud is hidden

Efforts are put to hide Frauds in

almost all cases
Deliberate Act – Fraud

• Fraud is Breach of Trust not an Accident

• As Fraud is intentional act often involving
detailed planning and concealment
• Crooks anticipate the routine procedure
Evidence is often fabricated
• Exploits weakness in routine procedure or
internal control
 What is this subject
all about – Financial
Forensic as discipline
?

How do you leverage

& position after
successful completion
of this course ?

How do you stay

Financial Forensic relevant ?
 • Core Foundation Related to Fraud
What is this Examination and Financial Forensics

subject all • Familiarization to Concepts

about ? • Drawing parallels for finer understanding thru
practical examples, case studies and
experience sharing
Financial
Forensic as • Help identification of areas where fellow
members can leverage their existing
discipline engagement/ work profile
 ICAI – FAFD Course

Basics of Forensic Forensic Audit Case

Understanding Fraud , Use of MS Excel for
Accounting & Fraud studies - Applicable
Types, Tools and Forensic Audit and Data
Prevention/Detection standards, Reporting,
Techniques of Forensic Analytic tools like IDEA,
and Opportunities Interviews, Audit, Red
Auditing ACL etc
available Flags

Understanding Legal Fraud Prevention –

aspects- IPC, Money Ethics , Strategies,
Digital Forensics – Documentation in
Laundering, Fraud & Internal Control, ERM,
Computer / Mobile Forensic Audit
Cyber Laws, Internal Audit, Whistle
International Laws etc blower policies
 • Application of tools and technique to routine practice and
Internal Audits

How do you • Culturing clients and creating awareness for Forensic

leverage &
Audit as tool.
• Taking business of existing clients

position after • Matrimonial Cases

successful • Police Investigation
completion of • Any type of Investigative Assignment.
this course ?
• Stock Audits – Major Practice area to apply forensic
knowledge
 • Explore potential opportunities from existing
engagements

• Continuous engagement with ICAI in FAFD

Course
How do you • Development of Case studies
stay relevant • Development of Learning material

• Participation as Faculty/ Support faculty and

mentors to new members
Understanding Forensic Accounting
 Forensic
Accounting -
The Perspective
 Specialty practice area of accounting that describes
engagements that result from actual or anticipated
disputes or litigation.

Specialized knowledge and specific skills to discover the

evidence of economic transactions.

Forensic
Accounting Job demands reporting, where the accountability of an
event is established, and the report is considered as
evidence in the court of law or in the administrative
proceeding.
Accounting that is suitable for legal review, offering the
highest level of assurance, and including the now
generally accepted connotation of having been arrived
at in a scientific fashion.
Perception Vs Reality

More then what Often treated as

meets to Eye Negative concept

Applied in Positive
Associated with assurance
Frauds, but not engagement like
necessary Due Diligence &
Business Valuation
Lateral Thinking

A sundial has the fewest moving

parts of any timepiece. Which has
the most?
Sundial Vs Hourglass
Critical Thinking Exercise
• Anthony and Cleopatra are lying dead on the floor in a villa.
• Nearby on the floor is a broken bowl.
• There is no mark on either of their bodies. They were not
poisoned.

• With this information, determine how did they die ?

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
• Trouble with Sons
• A woman had two sons who were born on the same hour of the same
day of same month of the same year. But they were not twins, and they
were not adopted. How could this be so?
Critical Thinking Exercise
• This exercise requires the problem solver to guard against jumping to
conclusions.

• Fraud examiner or forensic accountant needs to think critically

• Direction of the investigation is often guided by assumptions.

• The difficult challenge is not the questioning of assumptions that

investigators had identified as assumptions; but the questioning of the
assumptions that investigators are making without realizing that they
have made them.

• It is important that investigators continually challenge their investigative

approach and outcomes to ensure that the investigation is moving toward
a resolution—one that stands up to the scrutiny of others.
 Background in
accounting

Background in
Information
Requisites of Systems

being a Background in
ICAI - FAFD
Forensic Legal aspects

Accountant Preference to
certifications
CPA - CFF

CFE
 PROFESSIONAL LAWS, COURTS AND DISPUTE PLANNING AND PREPARATION

Fundamentals
RESPONSIBILITIES AND RESOLUTION
PRACTICE MANAGEMENT

of Forensic
Knowledge
INFORMATION GATHERING DISCOVERY REPORTING, EXPERTS AND
AND PRESERVATION TESTIMONY
(DOCUMENTS,
INTERVIEWS/INTERROGATIONS
ELECTRONIC DATA)
Expected Traits of
Forensic Accountants
• Analytical characteristics is the foremost trait
expected to be possessed

• Following effectiveness are critical

• communication skills
• ability to simplify the complex
• ability to present opinions in a legal setting

• Ability to look beyond the analytical details and see

the big picture

• Marketplace expects forensic accountant to possess

certain
• Traits & characteristics
• core skills
• relevant credentials or certifications
 “It is an abuse of our expectation of fair
treatment by fellow human beings”
Basic Elements of Fraud

A False representation of Material Nature

Fraud
Definition Scienter - Intent or knowledge of wrongdoing

Reliance – person receiving representation

reasonable and justifiably relied on it
Damages – financial damages resulting from
all of above
Fraud Vs Hype
Consider the classic example of the purchase of a used Suzuki car.

“The salesperson is likely to make representations about the quality of

the car, its past history, and the quality of parts subject to wear and tear,
ranging from the transmission to the paint job.

The elements of fraud may or may not arise out of such statements. “

First, there is a distinction between hype and falsehood.

The salesperson hypes when he claims that the 2021 Suzuki “runs like
new.” However, were he to turn back the odometer, he would be making
a false representation.

Second, the false statement must be material. If the odometer reading is

accurate, the salesperson’s representation that the car runs like new or
was only driven infrequently is, strictly speaking, mere hype: the
purchaser need only look at the odometer to form a prudent view of the
extent of use and the car’s likely roadworthiness.
 A methodology for resolving fraud
allegations from inception to disposition,
including obtaining evidence, interviewing,
writing reports and testifying.

Requires that all fraud allegations be handled

Forensic in a uniform, legal fashion and that they be
resolved in a timely manner.
Accounting
Specific steps are employed in a logical
progression designed to narrow the focus of
the inquiry from the general to the specific,
eventually centering on a final conclusion.
 The totality of circumstances that
would lead a reasonable,
professionally trained, and prudent
individual to believe a fraud has
occurred, is occurring, and/or will
occur.
Predication All fraud examinations must be based
on proper predication; without it, a
fraud examination should not be
commenced.
Fraud Examination: Prevention and Deterrence

• Fraud prevention refers to creating and

maintaining environments where the risk of a
particular fraudulent activity is minimal and
opportunity is eliminated, given the inherent cost-
benefit trade-off. When fraud is prevented,
potential victims avoid the costs associated with
detection and investigation.
• Fraud deterrence refers to creating
environments in which people are discouraged
from committing fraud, although it is still
possible.
Fraud Examination:
Detection and
Investigation
• Fraud detection refers to the process of
discovering the presence or existence of
fraud.
• Fraud detection can be accomplished
through the use of well designed internal
controls, supervision and monitoring and the
active search for evidence of potential fraud.
• Fraud investigation takes place when
indicators of fraud, such as missing cash or
other evidence, suggest that a fraudulent act
has occurred and requires investigation to
determine the extent of the losses and the
identity of the perpetrator.
Differences between Auditing, Fraud Examination, and Financial Forensics
Issue Auditing Fraud Examination Financial Forensics

Timing Recurring Nonrecurring Nonrecurring

Audits occur on a regular, recurring Fraud examinations are conducted only with Financial forensic engagements are conducted only
basis. sufficient predication. after allegation of misconduct.

Scope Objective General Specific Specific

The examination of financial statements The purpose of the examination is to resolve The purpose of the examination is to resolve specific for
material misstatements. specific allegations. allegations.

Opinion Affix blame Determine financial impact

Relationship An audit is generally conducted for the The fraud examination’s goal is to determine The financial forensic professional’s goal is to
purpose of expressing an opinion on the whether fraud has occurred and who is likely determine whether the allegations are reasonable
financial statements and related responsible. based on the financial evidence and, if so, the
information. financial impact of the allegations.

Methodology Non adversarial but skeptical Adversarial Independent

Historically, the audit process Fraud examinations, because they involve A financial forensic professional calculates financial was
non-adversarial. Auditors use efforts to affix blame, are adversarial in nature. impact based on formulaic assumptions. professional
skepticism as a guide

Presumption Audit techniques Fraud examination techniques Financial forensic techniques

Audits are conducted primarily Gathering the required financial and nonfinancial Gathering the required financial and nonfinancial by
examining financial data evidence to affix culpability. evidence to examine the allegations independently
using GAAS. and determine their financial impact.

Professional Skepticism Proof Proof

Auditors are required to approach audits Fraud examiners approach the resolution of a Financial forensic professionals will attempt to gather with
professional skepticism, as outlined fraud by attempting to gather sufficient evidence sufficient evidence to support or refute the allegation in GAAS
to support or refute an allegation of fraud. and related damages.
 Feel Free tocontact
durgesh@[Link]
+91 98240 16129