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FORENSIC ACCOUNTING

By: Aditya Mahajan


Q1806 A17,
Regd:- 10812595
MBA (International)
Introduction
Ø RAPID CHANGES IN THE ACCOUNTING
PROFESSION

> Operations of Day to day task of
debiting and crediting.


> Reports on internets (Technology)


> Demand of Global Economy and
International market.

Over
Ø view
ØForensic accounting have been around for nearly 200 years
ØFound in 1824
ØFBI decided to use forensic accountants and employed
nearly 500 such agents during World War II.
ØFirst institutions to use the services IRS (International
Financial Statistics)
ØGAAP ( General Accepted Accounting Principles) and tax laws
became widespread and mandatory.
ØCompanies that manipulated accounting rules to boost their
earnings in a stock market gone wild.
ØThe year 2002 the annals of accounting history as
the Year of Truth
Ø when companies disclosed billions of dollars of financial
fraud.
ØSEC issued earnings restatements between the years 1997
and 2002.
ØThe FASB ( Financial Accounting Standard Board) and
the SEC ( Security and Exchange Commission ) scrambled to
find solutions to the problem of such ubiquitous financial
fraud.
Forensic
Accounting
ØForensic accounting is
hardly a new field in
accountancy.
ØForensic accountants as
preventative measures as the
demand for trustworthy
financial statements increases
in the wake of the recent
"Forensic accounting", provides an accounting
accounting
Ø
scandals.
 analysis that is suitable to the court which will
Ø
 form the basis for discussion, debate and
ultimately dispute resolution.

Forensic Accounting encompasses both Litigation


Assistance
Forensic Accountant
• Litigation Support • Investigation
v It deals primarily with Support
issues related to the v “Investigative
quantification of accounting", is
economic often associated
damages.  A with
typical litigation investigations of
support assignment criminal
would be matters.  A typical
calculating the investigative
economic loss accounting
resulting from a assignment would
breach of contract. be an
 investigation of
employee
Forensic Accounting
encompasses a wide range of
activities :
• Fraud Detection –
• The expert witness –
preparation of assisting clients
formal reports for in detecting
filing in Court and financial fraud by
giving evidence as employees and
an Expert others and
Computer Forensics – tracing
misappropriated
a ssistin g in e le ctro n ic
funds. This
d a ta re co ve ry a n d
section provides
e n fo rce m e n t o f IP
information for
rig h ts e tc
fraud-related
engagements
Forensic Activities
Process
1.Preparation (of the
investigator, not the
data)
2.Collection (the
data)
3.Examination
4.Analysis
5.Reporting
6.Comparison to
Physical Forensics
for Forensicdisputes
Shareholder/partnership accou
• Personal injury claims/accidents
• Business interruption/insurance claims
• Employee fraud
• Divorce/bankruptcy
• Professional negligence
• Financial statement fraud
• Retained by lawyers, law enforcement,
banks and companies
M oney
These assignments often involve a detailed analysis of
numerous years accounting records to quantify the issues in
dispute.  For example, a common issue that often arises is
the compensation and benefits received by each of the
disputing shareholders or partners.

Personal Injury Claims / Motor Vehicle Accidents

A Forensic Accountant is often asked to quantify the


economic losses resulting from a motor vehicle accident.  A
Forensic Accountant needs to be familiar with the legislation
in place which pertains to motor vehicle accidents.
Cases of medical malpractice and wrongful dismissal often
involve similar issues in calculating the resulting economic
Insurance policies differ significantly as to their terms and conditions.  
Accordingly, these assignments involve a detailed review of the policy to
investigate coverage issues and the appropriate method of calculating the
loss.
A Forensic Accountant is often asked to assist from either an insured or
insurer's perspective in the settlement of a case.
Examples of these types of assignments include; business interruptions,
property losses and employee dishonesty (fidelity) claims.

Business/Employee Fraud Investigations

Business investigations can involve funds tracing, asset identification and


recovery, forensic intelligence gathering and due diligence reviews.

Employee fraud investigations often involve procedures to determine the


existence, nature and extent of fraud and may concern the identification
of a perpetrator.  These investigations often entail interviews of personnel
who had access to the funds and a detailed review of the documentary
Matrimonial disputes from a Forensic Accounting point-of-view
often involve the tracing, locating and evaluation of
assets.  The assets to be evaluated and valued may be
businesses, property or other assets.

Business Economic Losses

Examples of assignments involving business economic losses


include; contract disputes, construction claims, expropriations,
product liability claims, trademark and patent infringements
and losses stemming from a breach of a non-competition
agreement.
Professional Negligence

These investigations are often approached from two different but


complimentary perspectives, these being:
•Technical - has a breach of Generally Accepted Accounting Principles
or Generally Accepted Auditing Standards or other standards of
practice occurred; and
•Loss Quantification.
If the professional in question is an accountant then a Forensic
Accountant could be involved with both perspectives.  If the matter
involves some other profession a Forensic Accountant will normally be
retained to perform only a loss quantification.
SIC ACCOUNTING TECHNI
ORENSIC ACCOUNTIN
TECHNIQUES
1.Indirect Method
2.Direct Method
• The Direct Method, • Indirect Method
also known as the is commonly
Transaction employed when
Method, is similar the conventional
to traditional Direct Method is
auditing not productive.
procedures. In The most widely
this method, the used techniques
appraiser under the
commonly Indirect Method
examines:  are the: 
•  Cancelled checks & • Cash T Method 
invoices  • Source &
•  Contracts & Application of
agreements  Funds Method 
Cash T Method 
•Simplest indirect method
•Used to determine understated income
•Compar es all cash r eceived to all cash spent  
• If cash spent exceeds cash received from taxable & nontaxable sources than excess may
represent unreported income
•Don’t forget to adjust for loan proceeds & use of savings
•Frequently used to analyze Retail/Wholesale Businesses & its owners

Source & Application of Funds Method
• Employed when large sums are spent on lifestyle instead of purchasing assets or investments
• Similar technique to Cash “T” Method
• Used often because of ease of presentation
•People (including Judges & Jury) understand cash coming in & out

Source & Application of Funds Format
Sources of Funds:
Funds Applied: Decrease in assets
Increase in assets Increase in liabilities
Decrease in liabilities Plus Income received
Plus Expenses paid
Equals Total Funds Applied
Equals Total Source of Funds
Net Worth Method
•Balance Sheet approach to estimating income
•Net worth calculated at beginning & end of period
•Difference in beginning & ending net worth compared to reported income
•Don’t forget nontaxable income & other reconciling items
•Un-reconciled differences represent underreported income

Bank Deposit Method
• Analyzes funds deposited during the year by reconstructing gross taxable receipts
• An appropriate method when income is deposited in banks & most of expenses are
paid in cash

Bank Deposit Method / Gross Receipts Formula

Total Bank Deposits


Less: Nontaxable deposits
Equals: Net Taxable receipts
Add: Business/Personal expenses, Capital purchases, Cash accumulated
Less: Nontaxable cash used
Equals: Corrected Gross Receipts
The application of these and other methods are frequently determined by industry. In
fact, a useful resource for industry specific methods is the Market Segment
Specialization Program, published by the Internal Revenue Service.
Forensic Accountant
A Forensic Accountant is often retained to analyze, interpret,
summarize and present complex financial and business related
issues in a manner which is both understandable and properly
supported.
Forensic Accountants can be engaged in public practice or
employed by insurance companies, banks, police forces,
government
Who retainsagencies and other
a Forensic organizations.
Accountant?
Forensic Accountants are often retained by the
following groups:
•Lawyers;
•Police Forces;
•Insurance Companies;
•Government Regulatory Bodies and Agencies;
•Banks;
•Courts; and
“Auditor should be watchdog ”.
It’s a good quote that every
auditor should know. This quote
makes the definition of Forensic
accountants even more simple.”
Growing cyber crimes, failure of
regulators to track the security
scams,

Satyam scandal
Conclusion:……………………….
The importance of the forensic
accountant’s role in the detection of
fraud is continuously growing. Armed with
combination of skills, these financial
detectives are today important assets
to modern legal teams. In the backdrop
of increasing levels of frauds, the
demand for forensic accountants is bound
to substantially increase in the future.
?