1

CHAPTER ONE

INTRODUCTION

• Introduction
1.1
• Statement of the Research Problem
1.2
• Aim and objective of the study
1.3
• Research Questions
1.4
• Hypotheses
1.5
• Scope of the Study
1.6
• Relevance of the Study
1.7
• Brief Background on India
1.8
• Structure of the Study
1.11
• Conclusion
1.12
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1.1 Introduction

In the year 1996, the Barings Bank Scandal in Singapore brought the
need for forensic accountant closer home. In the year 2000 the Enron
scandal brought to the fore the role of the Forensic Accountant. More
than 10000 computer tapes, 20 million sheets of paper, 500 back up discs
and enough data about 10 times the size of the library of Congress will
keep more than 300 Forensic accountants busy in the next 5 years (
September, 2004 M.Anandam & Co). The rise in financial scandals at the
beginning of the twenty-first century was associated with increased fraud
incidence and awareness, thereby questioning the role of auditor in fraud
prevention and detection (Bhasin, 2013). In the years 2000 onwards,
WorldCom, Xerox, Arthur Anderson, Satyam Computers were in line.
The Financial Statement Frauds and the white collar crime go unabated!!
Financial frauds can cause great damage to the credibility of the financial
structures of organized society. Enron and WorldCom were close
(September, 2004 M.Anandam & Co).

Fraud is an activity that takes place in a social setting and has severe
consequences for the economy, corporations, and individuals. It is an
opportunistic infection that bursts forth when greed meets the possibility
of deception. The fraud investigator is like the attending physician
looking and listening for the signs and symptoms that reveal an outbreak.
Fraud has been defined as a sequence of activities perpetrated to obtain
money, property or services, to avoid payment or services or to secure
personal or business advantages (Ratlift et al 1996). Fraud evokes a
visceral reaction in us. It is an abuse of our expectation of fair treatment
by fellow human beings. Beyond that, it is a blow to our self-image as
savvy managers capable of deterring or detecting a fraudulent scheme.
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Whether we react because of values or because of vanity, nobody likes to

be duped. Many elements of modern society are focused on maintaining
an environment of fair dealing. Laws are passed; agencies are established
to enforce them; police are hired; ethics and morals are taught in schools
and learned in businesses; and criminals are punished by the forfeiture of
their ill-gotten gains and personal liberty—all with a view to deterring,
detecting, and punishing fraud. The profession of auditing grew out of
society‘s need to ensure fair and correct dealings in commerce and
government (a guide to forensic accounting investigation, p1).

In today‘s global environment, with the many different type of business

entity, there is a wide range of external groups of people who are
interested in businesses‘ financial information. Financial reporting to
external users is generally backward looking, reporting on what has
happened in the past. Contrast this with the management of a business,
the internal user, who will require financial information in order to run
and control their business effectively and efficiently. In addition to
financial information about what has happened management will need
information which is forward-looking, concerning planning for the future.

In India, fraud in public and private sectors of the economy has been seen
as one of the major factors of the dwindling economy. According to
ET Bureau (24 January 2014) Corporate India largely sees fraud as an
inevitable cost of doing business, and not as a strategic risk — this was
the disturbing message from a brainstorming session this newspaper held
with KPMG, which surveys corporate fraud, among other things.
Regulators, on their part, feel that enforcement agencies are getting better
at detecting fraud and that the noose is tightening around errant
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companies, that our laws are adequate, if only we could summon the will
to enforce them, and fast.

Educational sector is a sector by which one can serve as the beginning

point in finding solution to any problem of this nature. In a recent study
(Efiong, 2012); it has been argued that education has a formative effect
on the mind, character and physical ability of individuals through the
dissemination of knowledge. Educational institutions should therefore
provide the avenue through which this knowledge can be disseminated
since they provide the standard for measurement of the potential for
dissemination of new concepts and indeed its future development.
Educational institutions can become an avenue for setting free a people
from ignorance (Efiong, 2012). This is because knowledge is easily
passed through students who are forming future values and ethos. There
is no gain saying the fact that students represent the future work force of
any country, and therefore should be empowered with adequate and
appropriate knowledge and skills for their expected tasks. It is argued in
the study that forensic accounting education and services would provide
the antidote for fraud prevalence in India.

The research reveals that how forensic accounting and auditing can be
tool for fraud prevention and detection in India.

It begins by investigating the fact that is there any mechanism exists for
fraud prevention and detection in India and if it so then what are the
techniques which have been used for the mechanism and also examines
the perceived level of effectiveness of the various fraud prevention and
detection methods used in India. Furthermore, it determines if significant
difference exist in the actual usage of fraud prevention and detection
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methods and their perceived level of effectiveness. The purpose here is to

find out if forensic accounting techniques are commonly used in India.
Second, the research wants to identify the main factor that obstacle the
application of forensic accounting techniques for fraud prevention and
detection in India. This is in view of the fact that forensic accounting
methods are being used to prevent and detect fraud in developed
economies like the United Kingdom and United States of America
(Abbot, Park and Parker, 2000; Mehta and Mathur, 2007; Ghoh and
Banerjee, 2011).

Third, the research explored the intention of practitioners to use of

forensic accounting and forensic audit for the prevention of fraud.
Relationships are established between dependent and independent
variable and model are also developed in this section of the research.

In the fourth section study provides fresh data and evidence regarding the
present status of awareness of forensic accounting in the practitioners and
academics.
The facts and findings of the study conclude that forensic accounting is
the tool which will be proved as a best fit for the fraud detection and
prevention in the developing economy like India.

Although, there are some acts are existed like Prevention of Corruption
Act 1988, Prevention of Money Laundering Act, Benami Transactions
(Prohibition) Act 1988, Right to Information Act, Right to Public
Services Legislation and The Lokpal and Lokayuktas Act 2013 but there
is need of a sound mechanism which can enforce these act successfully.
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1.2 Statement of the research problem

It has been discussed in the study that financial fraud is the biggest enemy
of an economy. Fraud is existed in the every economy and human efforts.
If we taking the view on some headlines of daily newspapers then we
found that fraud has resulted the giant financial scams and scandals of
even large international corporations. Corporations like Satyam, Enron
and WorldCom have not been evaded to its effect. Fraudulent accounting
bought about absolute detrimental losses to such global operators as
Xerox, Kmart, GlobalCrossing, Adelphia Communications and a number
of others.

A number of financial experts agree that there is an inverse relationship

between economic development and fraud. A vast research work is
needed for the implementation of the forensic accounting and auditing in
India. There are many hindrances which hinder the use of forensic
accounting in the general course of accounting.

At educational level, students are taught how do you record the economic
transaction of company but students are not trained to detect and prevent
fraudulent practices in accounting transaction. Even professional students
are practicing on conventional way of accounting and auditing. They are
explained the audit as audit is conducted to provide an opinion whether
the financial statements (the information being verified) are stated in
accordance with specified criteria. Normally, the criteria are national and
international accounting standards, although auditors may conduct audits
of financial statements prepared using the cash basis or some other basis
of accounting appropriate for the organization. Students are not trained to
detect and prevent the fraud with the perception of that no economy is
evaded from the virus of fraud.
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Although many high level agencies are existed in India to prevent

fraudulent accounting practices like SEBI, SFIO but efforts made by
them are not sufficient. Awareness of forensic accounting is one of the
most effective methods to defuse the fraud practices.

Forensic accounting, being a very new branch of the accounting

profession all over the world is relatively much newer in India. It is even
doubtful if there is significant awareness of this branch of accounting
among practitioners, students and academics in India. It is not also very
clear if forensic accounting techniques are used in prevention and
detection of fraud in the Country. This study has shown empirically that
the services of forensic accountants are needed both in private and public
sector of India‘s economy especially for fraud and corruption related
cases.
Further motivation for this research was derived from the outcome of pre-
oral interviews that were conducted by the researcher. In a pre-survey
oral interview conducted by the researcher to help in developing the
research questions for the study, most interviewees agree that fraudulent
activities are prevalent in the Indian society. During the interview many
were agree that they have mechanisms to check and possibly detect fraud
in their establishment. On the questioning that it is effective or not, one of
the interviewees has answered:
It is not easy to give a one way answer to this question but at the
same time it is better than nothing and as we go on, it will be
improved upon.
Moreover, most of the answers have revolved around the external audit
and internal audit. For example on the questioning about effective
mechanism for fraud prevention two of the respondents said:
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Yes, we have some mechanisms to prevent and possibly detect

fraud in our department. Basically, we have some internal control
mechanisms. We also have an internal audit department and
involve an external auditor at the end of every fiscal year. Well for
now, the combination of internal control and external audit has
been working for us (Respondent 1).

There is not any particular mechanism for now but we try to use
the ones that apply best to a particular situation. We have a system
of internal controls in addition to external auditing. We also try to
make sure that our staffs are motivated appropriately to
discourage them from perpetrating in fraudulent activities
(Respondent 2).

There is a general harmony on the need of forensic accountants in India.

However there are some hindrances to implementation. Some
respondents said that
“There is very low level of awareness of forensic accounting. It is a
very new branch of accounting so you should expect less from
here…..”

On the questioning to a respondent about awareness of forensic

accounting he has answered that
“Is it related to forensic branch of science?”

Some of the respondents are emphasized on strong law enforcement.

They said that there is weak law enforcement in India even it is so then it
is not equally regulated.
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With forensic accounting, it is anticipated that cases of fraud will be

reduced significantly in India in general and in the public service. This
research therefore seeks to explore forensic accounting techniques and
practices for fraud prevention and detection in India.

1.3 Aim and the objective of the study

Studies are conducted with a purpose and objectives. The purpose of a
study is generally regarded as the aim while objectives are what the
researcher intend to do in order to achieve the aim of the study.

1.3.1 Aim of the study

The aim of the study is to explore how forensic accounting, practices and
forensic audit would enhance fraud prevention and detection in India.
Secondary aim of the study is to proven that educational level is affecting
the effectiveness of use of techniques of fraud prevention and detection.

1.3.2 Objectives of the study

In order to achieve the aim of the study, particularly from the developing
economy, gaps arising from the gaps in found in various literatures the
following objectives are guiding the study
1. To recognize the mechanism of fraud prevention and detection, and
their level of effectiveness.
2. To identify the present mechanism of fraud prevention adopted by
practitioners and academics in India.
3. To explore the level of awareness of forensic accounting
techniques among practitioners and academics in India.
4. To examine practitioners‘ opinions and behavioral intention to use
forensic accounting techniques in fraud prevention and detection in
India.
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5. To identify the major factors that interrupts the application of

forensic accounting techniques in fraud prevention and detection in
India.

1.4 Research Questions

In response to the objectives of the study, the following research
questions were formulated in to meet the need of the study which is
forensic accounting education and practice for fraud prevention and
detection in India‘s public service, the main research questions are as
follows:
1. What are the common fraud prevention and detection mechanisms
and their level of effectiveness in India? Is there any significant
difference between them?
2. What are the major factors that hinder the application of forensic
accounting in fraud prevention and detection in India?
3. What are the practitioners‘ opinions and behavioral intention to the
use of forensic accounting techniques in fraud prevention and
detection in India?
4. What is the level of awareness of forensic accounting techniques
among accounting practitioners and academics in India?
5. How ready are Indian universities in taking up the forensic
accounting as integral part of their syllabi?

1.5 Hypotheses
The hypotheses are derived from objective and research questions of the
study. They are:
1. There is no significant difference between the actual use of fraud
prevention and detection mechanisms, and their perceived level of
effectiveness.
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2. Educational activities of Indian universities will positively

influence awareness in forensic accounting techniques.
3. Awareness of forensic accounting techniques will positively
influence the perceived benefits of using it in fraud prevention and
investigation in India.
4. Awareness of forensic accounting techniques will negatively
influence the perceived risks of using it in fraud prevention and
investigation in India.
5. The perceived benefits of using forensic accounting techniques will
positively influence the intention to use it as major fraud
prevention and investigation method in India.
6. The perceived risks of using forensic accounting techniques will
negatively influence the intention to use it as major fraud
prevention and investigation method in India.
7. The perceived severity of fraud will positively influence
practitioners‘ intention to use forensic accounting techniques in
fraud prevention and investigation in India.
8. There is a significant variation in the level of awareness of forensic
accounting techniques amongst accounting practitioners and
academics.
9. Indian universities are ready to take up forensic accounting
courses.

1.6 Scope of the study

This study was conducted on academics and practitioners of accounting
profession in India. There are three classes of universities in India as
Central Universities, State universities and private universities. Although
open university and deemed university also a type of constituted
universities but research was based on practical behavior and privilege of
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forensic accounting, so it was mandatory to choose state and central

universities as strata of the research. Mainly state universities are selected
for the sample of academics. The choice of state universities was based
on the fact that they are generally perceived to be better resourced than
their state and private counterparts. The resource advantage could
therefore affect their curriculum content in terms of teaching forensic
accounting. Since there is no state in the country with more than one
Central university, the states where the sampled universities were selected
also served as samples from where practitioners were selected. This was
to allow for quick and easy collection of data. The practitioners were
those auditors and accountants at leadership positions in their
departments, ministries and units. Private practitioners‘ chartered
accountants are main sources of data collection for this study.

1.7 Relevance of the study

The initial concept was generated in researcher‘s mind after the Satyam
Computers scam revealed. This financial scam depicts that despite of
there is sound law enforcement and better mechanisms of presentation of
record, in Satyam Scandal investors have lost approximately US$ 1.47
Billion.

While most countries have been able to reduce the occurrence of financial
fraud in both the private and public sectors, it is increasing in India.
First of all study is considered on the assumption that the existing fraud
prevention and detection mechanisms is not efficient. On the other hand it
has suggested that the use of the forensic accounting techniques, which
one of the most effective methods in combating the fraud practices.
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Secondly, study is emphasized on the inclusion of forensic accounting

studies in the syllabus of Indian universities in their undergraduate or post
graduate curriculum. The study has revealed the urgent need for forensic
accounting education by creating awareness on the use of forensic
accounting techniques. On the basis of fact revealed in the study the
University Grant Commission (UGC) now has information in it hands
through which it could insist on central and state universities to include
forensic accounting education in their curriculum before such universities
are accredited.

Thirdly, the public service, private organizations and policy makers now
have information on the state of forensic accounting in India for their
decision making Their level of awareness on forensic accounting,
together with perceived benefit, perceived risks and perceived severity of
fraud will enhance their intention to use forensic accounting techniques in
their organizations.

Thus forensic accounting can be used as a tool in the prevention and

detection of fraud in India.

1.8 A brief background of India

This section is sub-divided into three sections- Origin, location, people
and politics; economy and fraud in the Indian environment. They seek to
give an overview of India as it relate to the purpose of this study.

1.8.1 Origin, location, people and politics

India, officially the Republic of India is a country in South Asia. It is the
seventh-largest country by area, the second-most populous country with
over 1.2 billion people, and the most populous democracy in the world.
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Bounded by the Indian Ocean on the south, the Arabian Sea on the south-
west, and the Bay of Bengal on the south-east, it shares land borders with
Pakistan to the west; China, Nepal, and Bhutan to the north-east; and
Burma and Bangladesh to the east. In the Indian Ocean, India is in the
vicinity of Sri Lanka and the Maldives; in addition, India's Andaman and
Nicobar Islands share a maritime border with Thailand and Indonesia.

The Indian economy is the world's tenth-largest by nominal GDP and

third-largest by purchasing power parity. Following market-based
economic reforms in 1991, India became one of the fastest-growing
major economies; it is considered a newly industrialised country.
However, it continues to face the challenges of poverty, corruption,
malnutrition, inadequate public healthcare, and terrorism. A nuclear
weapons state and a regional power, it has the third-largest standing army
in the world and ranks ninth in military expenditure among nations. India
is a federal constitutional republic governed under a parliamentary system
consisting of 29 states and 7 union territories. India is a pluralistic,
multilingual, and a multi-ethnic society. It is also home to a diversity of
wildlife in a variety of protected habitats.

1.8.2 Expansion of fraud in Indian environment

As stated earlier that no economy in the world which is not infected with
the virus of fraud whether it is developing economy or developed
economy. India is deeply soaked in and characterized by fraud. At the
early stage of development of India fraud loft its branches in the Indian
economy. The following table reveals some facts which depict the
prevalence of the fraud from the early years in India.
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Prevalence of fraud in India

Table 1.1
S. Year Description Key Estimated
No. Recorded Player Financial
Loss
1. 1948 Jeep scandal was the first major V.K. 80 Lakh
scandal of Independent India. Mr. Krishna
V.K. Krishna, Indian high Menon
commissioner to Britain, was signed a
contract for purchase of 4603 Jeeps
against protocol. About all the money
was paid but only 155 Jeeps was
landed
2. 1958 In 1957, Haridas Mundhra got the Haridas 12.4
government owned Life Insurance Mundhra million
Corporation (LIC) to invest Rs. 12.4
million. The Life Insurance
Corporation of India, under the
Centre‘s pressure, bought shares
worth Rs 1.2 crore in firms owned by
Haridas Mundhra to bail him out of a
crunch. The case compelled T.T.
Krishnamachari to resign as finance
minister.
3. 1960 Shipping magnate Jayant Dharma Jayant 220
Teja took loans worth Rs 22 crore to Dharma million
establish the Jayanti Shipping Teja
Company. In 1960, the authorities
 16

discovered that he was actually

siphoning off money to his own
account, after which Teja fled the
country.
4. 1986 The scandal relates to illegal payment 83200
in a US$1.3 billion deal between the million
Swedish arms manufacturer Bofors
with the government of India for the
sale of 410 field howitzer guns, and a
supply contract almost twice that
amount. It was the biggest arms deal
ever in Sweden, and money marked
for development projects was diverted
to secure this contract at any cost. The
investigations revealed flouting of
rules and bypassing of institutions.
5. 1992 It was alleged that Mehta engaged in a Harshad 50 billion
massive stock manipulation scheme Mehta
financed by worthless bank receipts,
which his firm brokered in ―ready
forward‖ transactions between banks
6. 2001 Parekh is alleged to have been Ketan 320
involved in circular trading Parekh million
throughout the time period and with a
variety of companies, including
Global Trust Bank and Madhavpura
Mercantile Cooperative Bank.
7. 2009 The Satyam Computer Services Ramalinga 78000
 17

scandal was a corporate scandal that Raju million

occurred in India in 2009 where
chairman Ramalinga Raju confessed
that the company‘s accounts had been
falsified. The Global corporate
community was shocked and
17candalized when the chairman of
Satyam, Ramalinga Raju resigned on
7 January 2009 and confessed that he
had manipulated the accounts by
US$1.47-Billion.
8. 2010 The Commonwealth games scam as it Suresh 7,00,000
is known involved large scale Kalmadi million
misappropriation of money during the
preparatory phase and conduct of the
2010 Commonwealth games held in
New Delhi. The total value of the
scam is estimated to be 70,000 crore.

In 1948, Jeep Scandal was the first major corruption case of independent
India. Mr. V.K. Krishna Menon was the main player of the case. Fraud
has been described as the worst enemy of our businesses both in the past
and in the present (Hamilton and Gabriel, 2012). There is rarely a week
that passes without the report of fraud or other fraudulent activities being
reported in the Indian Newspapers. Comprehensive fraud statistics are
difficult to come by because government agencies and companies tend to
keep records of only those frauds that affect their area of interest.
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India, despite some improvement, remains a challenging fraud

environment. It possesses the highest number of companies affected by
fraud of any region or country (68%) and its average loss to fraud (1.2%
of revenue) is significantly higher than the global average (0.9%).
According to Global Fraud Report 2012, eight of the 10 fraud covered in
the survey were more widespread in India than they were globally, in
particular: internal financial fraud (22% of Indian companies were
affected compared to 12% overall) and vendor or procurement fraud
(20% compared to 12%).

The number of firms affected by corruption dropped in the last year from
31% to 20%. Nevertheless, this is still well above the average (11%) and
corruption remains a leading fraud concern; half of Indian companies still
report themselves moderately or highly vulnerable.
India in the past 2013 had a multi-faceted fraud problem, with seven
different frauds affecting more than 15% of companies. In particular, over
the last 12 months the country had an above average incidence of theft of
physical assets (33% of companies were affected compared to 28% for
the survey as a whole), corruption (24% compared to 14%), and internal
financial fraud (22% compared to 16%). It also had a slightly above
average incidence of information theft (24% compared to 22%).

Comparative Data for fraud for the year 2011-12 and 2012-13
Table 1.2
2012-13 2011-12

Prevalence: 69% 68%

Companies affected by
fraud
Areas of frequent Loss: Theft of physical assets or Theft of physical
 19

Percentage of firms stock (33%) Information assets or stock (27%)

reporting loss to this type theft, loss or attack (24%) Information theft,
of fraud Corruption and bribery loss or attack (23%)
(24%) Internal financial Internal financial
fraud or theft (22%) fraud or theft (22%)
Vendor, supplier or Corruption and
procurement fraud (20%) bribery (20%)
Management conflict of Vendor, supplier or
interest (16%) Regulatory procurement fraud
or compliance breach (20%)
(16%)
Increase in Exposure: 71% 67%
Companies where
exposure to fraud has
increased
Biggest Drivers of IT Complexity (33%) IT Complexity
Increased Exposure: (37%)
Most widespread factor
leading to greater fraud
exposure and percentage
of firms affected
Loss: 1.4% 1.2%
Average percentage of
revenue lost to fraud
Source:- www.fraud.kroll.com/region-overview/india/

1.9 Structure of the study

The study is divided in to seven chapters. The quick view of the study is
presented in figure 1.1.
 20

Chapter 1
Geraral Introduction

Chapter 2
About fraud and forensic accounting

Chapter 3
Review of Literature

Chapter 4
Research Methodology

Chapter 5
Procedure for Data Collection and Analysis

Chapter 6
Results, Analysis of Data and Tests of Hypothesis

Chapter 7
Findings and Suggestions
 21

First chapter is to introduction of the study. It presents the objective of the

study, scope of the study, hypothesis of the study, relevance and aims of
the study. Second chapter is about fraud and forensic accounting which
tells what fraud, what is forensic accounting, what is the concept of
forensic accounting, what are the types of frauds and what is fraud
triangle?
It presents the basic view of the study. Chapter third is about the literature
which is reviewed for this study. Review of literature provides a system
to be followed for the research. Fourth chapter contains the material about
research methodology. Research methodology is concerned with
hypothesis of study, sampling structure, sample size etc. Fifth chapter is
all about process of data collection and analyze of data. This chapter
describes the methods which are adopted for the collection of data in the
study. This chapter also elaborate analyze of the data which proved as a
base for the conclusion of the study. Chapter 6 is the testing of
hypothesis. It is the verification of prelims path which was adopted at
initial stage of the study. This chapter is about to check whether
hypothesis is accepted or rejected and conclude the result on the basis
thereof. Chapter 7 is followed by the results of chapter 6. This chapter
describes the result of chapter 6 in elaborative form. Chapter 7 also
regards with the fields or loop holes are remain opened for the researcher
for further study.
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1.10 Conclusion

General introduction chapter is all about the outlines of the study. Main
object of this chapter is unleashing the reasons of prevalence of fraud in
Indian economy. Chapter describes the brief definitions of forensic
accounting. Chapter presents the statement of the research problem,
where the researcher has articulated the issue of fraud in India as against
what is obtained elsewhere to justify the need for the application of
forensic accounting methods for its solution. The main focus of the
research in the form of aims and objectives were also presented in this
chapter. General introduction chapter is also containing the outlines
which tell the perceived level of forensic accounting and auditing
practices in India. Chapter formed up the structure of main research
question of the study. Furthermore, relevance of the study is made in
Indian context. Organization of the study is telling about chapterization
scheme in smart art way.