Forensic accountants look beyond the numbers of financial statements and read between the lines to find out any manipulation in data
There has been a steady increase in the number of frauds witnessed by India Inc, and more often than not, they are financial in nature by creating deliberate alteration of financial statements to mislead stakeholders and provide them an incorrect picture of the company's performance, financial position, cash flow and liquidity status.
Several companies, once hailed for their standing in the business world, like ICICI Bank, Yes Bank, DHFL, Vodafone India, IL&FS, Punjab National Bank, have become examples of corporate frauds. Such frauds on the back of failed corporate governance mechanisms pose a threat to all stakeholders like retail investors, government, institutions, vendors and so on. In this context, the importance of forensic accounting is increasing by the day, to stabilise the four 'pillars' of modern corporate regulatory system — accountability, transparency, fairness and disclosure.
Forensic accounting, as a discipline, has come a long way from being used by government agencies like FBI, CBI and tax authorities. It is now a rapidly growing area of accounting concerned with the detection and prevention of financial fraud and white-collar criminal activities. Now the financial detectives and individual experts are required to unearth any fraudulent activities or misappropriation in corporate world. Forensic accountants are in great demand due to their auditing, accounting, legal and investigative skills. Litigation is one of the major components of forensic accounting that uses the analytical skills of forensic accountants in two broad ways — one, to share their expert opinion based on results of the investigation and two, appearance for a possible courtroom testimony. Forensic accountant's investigative skills are required for collecting, analyzing and evaluating financial evidence, as well as the ability to interpret and communicate findings. Over the last few decades, there have been numerous financial frauds and scandals, which were milestones with historical significance. Enron, WorldCom and Satyam Computers are just few examples. Forensic accountants look beyond the numbers of financial statements and read in-between lines to find out any manipulation in data.
To become a financial detective, several skills are required. Critical thinking abilities are important to conduct an in-depth analysis of financial statements to unearth fraudulent accounting information. Thoroughness about various laws, legislations, regulations and codes is essential. And since the analysis is required in business setting, knowledge about different business methods and an extensive knowledge and experience of auditing procedures and accounting practices. Since forensic accountants have to scrutinize piles of data, they should have the ability to work with large volume of data and documentation. In addition to well-honed computer skills, forensic accountants should have a fair understanding of psychology.
Forensic accounting is the need of the hour in the developing nations as compared to developed countries as corruption, which has an impact of nation's economy, its citizens and standard of living, is widely prevalent in these nations.
Major scandals involving the role of auditors, not only in India but worldwide, have raised a question on their credibility. During the Enron scandal, Arthur Anderson, one of the Big Five auditors worldwide lost its credibility. So much so that the number reduced to Big Four, after the disgraceful fall of Arthur Anderson and it became the first accounting firm to be convicted of criminal charges. Similarly, trust in PwC was shaken after the Satyam fiasco in India.
This scandal also led to the subsequent arrest of two of its auditors. These are not the only times when the big auditors have found themselves in trouble. In fact, at some point of time, each of the big five auditors have been ordered to settle huge lawsuits filed by shareholders to compensate for the loss caused by the financial statement frauds.
The government should take steps to check the fraudulent financial activities in companies in India. It could follow a three-pronged strategy -developing internal control mechanism, ensuring proper compliance, and strengthening the corporate governance mechanism. Strong internal control mechanisms act as a deterrence to company staff to indulge in fraudulent activities.
And finally, a strong corporate governance mechanism which is established on the pillars of fairness, transparency, accountability, responsibility, commitment and morality is the need of the hour. Several measures of internal control and corporate governance should be made mandatory for corporates and proper compliance should be monitored by the government to stop financial frauds.
(The writer is Associate Professor at Amity University, Noida. The views expressed are personal.)
