ca. indresh palan aca, fafd(icai), ugc-net, m.com forensic auditing and fraud detection areas of...
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CA. Indresh PalanACA, FAFD(ICAI), UGC-NET, M.Com
Forensic Auditing and Fraud Detection
Areas of Practice for Forensic Auditors and
Fraud Detection Experts
“The world has enough for everyone's need, but not enough for everyone's greed.”
― MAHATMA GANDHI
Climb the Ladder and Reach the Sky!
Pace is Yours
OPPORTUNITIES
AHEAD
Why we need to learn Forensic
Accounting/Auditing?
Economic crime remains a fundamental fact of life for every segment of the global business community and is a persistent threat to business and business processes
Fraud is a major concern among companies, regulators, shareholders, and law enforcement agencies across the globe
Cybercrime continues to remain a tough challenge for organizations. Over the years there has been a significant increase in the number of cybercrime attacks prompting organizations to stay alert, seek means to fight cybercrime threats
Forensic Auditors
Forensic Auditors are hired either 1. to look in to alleged or actual fraudulent activities 2. to assist in prevention of such activities.3. In law matters accounting, auditing and investigative skills
used for forensic accounting.
There are three main sections – litigation, investigation and solution of the dispute.
Forensic Auditors
The professionals in these fields are called Forensic Accountants
Forensic Auditors use professional accounting, law, finance and investigation related techniques to evaluate the validity of any activity. Forensic Accountants are the experienced auditors who protect the accounts of an organization and stop any type of fraud
The first line of defense against any cyber threat is increasing perception and awareness of cybercrimes
What Does a Forensic Accountant Do?
Forensic accountants are trained to look beyond the numbers and deal with the business realities of situations
Analysis, interpretation, summarization and the presentation of complex financial and business related issues are prominent features of the profession
A forensic accountant will also be familiar with legal concepts and procedures
Public practice or insurance companies, banks, police forces and government agencies are major employers of forensic accountants
Accounting fraud Financial statements are a fundamental barometer of a
business Accounting fraud includes misleading or falsely prepared
financial statements can deceive banks, lessors, vendors, and investors into risky or misguided decisions
Due to the use of financial statements and financial data throughout business operations, this kind of economic crime impacts a variety of business processes
Accounting fraud has consistently been one of the major crimes reported in all the survey
Global Economic Crime Survey, 2014: Key Highlights from the U.S.
As per above report more than 1 in 3 organization impacted by economic crime
Economic crime continues to remain in the forefront of corporate concern, posing a threat to fundamental business processes
45% of organizations in the U.S. suffered from some type of fraud in the past two years, more than the global average of 37%.
57% of U.S. respondents indicated their organizations pursued opportunities in markets with high levels of corruption risk within the past 24 months, versus 38% of global respondents
Most internal frauds are now perpetrated by middle managementParticulars 2011 201
4
Number of Frauds by Middle Management 45% 54%
Number of frauds committed by Junior Staff 50% 31%Detecting FraudFraud at U.S. organizations initially detected by external measures or by accident
15% 32%
Particulars External Actors Internal Actors
Economic crime is committed 45% 50%
Evolution of reported rate of economic crime (GECS)
20012003200520072009201120140
255075
100
43 37 45 4330 34 37
Year of survey release-Reported Global Fraud Rate
% of all respondents
Source: The 2001 through 2014 Global Economic Crime Survey (PWC)
About the survey5,128 respondents from 99 countries
Cybercrime survey report 2014, KPMG in India
4 58
10
12
20
15
14
12
Engineering 4%
Manufacturing 5%
Electronics 8%
FMCG 10%
Telecom & communications 12%
Financial services 20%
Automobile 15%
Information technology 14%
Chemicals & pharmaceuticals 12%Source: Cybercrime survey report 2014, KPMG in India
Cybercrime survey report 2014, KPMG in India
Cybercrime
In a digital age, internet users and governments face increased risks of becoming the targets of cyber attacks
As cyber criminals continue to develop and advance their techniques
Criminals focusing less on theft of financial information and more on business espionage and accessing government information
To fight fast-spreading cybercrime, businesses and governments must collaborate globally to develop an effective model that can control the threat
Threat perception of Cybercrime in India Cybercrime is not strictly speaking a technology problem. It is a strategy
problem, a human problem and a process problem. After all, organisations are not being attacked by computers, but by the people
Cybercrime has seen an increase in frequency in India at Individual and corporate level
Distinctly, about 51 per cent perceive themselves to be an easy target for cyber attacks due to the nature of their business. Out of these 51 per cent, about 68 percent respondents claim that they monitor their cybercrime threats on a daily basis
The first line of defense against any cyber threat is increasing perception and awareness of cybercrimes
Impact of cybercrime in India
0
40
8045 48 43
2748
1830
16
Impact of cybercrime in India
Damages/Loss
THE DAMAGE
Whether financial or collateral, the stakes and the costs are very high Economic loss is not the only concern that companies face when
combating fraud
• Damage to employee morale, corporate and brand reputation, and
business relations as some of the most severe nonfinancial impacts
of economic crime Access to money
• Access to customer confidential information
• Disruption of production and business processes
• Loss of Mental Peace
• Harassment
People commit Fraud
Why?
FRAUD-TRIANGLE
.
The Fraud Triangle
Motive gambling addiction, a mistress, living beyond their means, desire to inflict damage, etc. Rationalization “I believe I’m underpaid,” “I believe I’m overworked,” “My company earns too much.” etc. Opportunity Opportunity usually results as a flaw in the company’s internal
control system. This internal control flaw provides the chance to steal company assets.
One bookkeeper receiving customer payments and paying vendors, therefore it would be much easier to cover up the fraud by “cooking the books.”
Profile of cyber attackers
Internal sources External sources
Disgruntled employees Cyber terrorists (focussed on defacement)
Managed services personnel Professional hackers/hacking crime syndicates)
Malicious personnel (focussed on industrial/commercial espionage)
Novice hackers
Many of the incidents are not publicly known and have not been reported by the media
The Financial Services (FS) sector: Overall key findings
Root cause of most cyber attacks is monetary/ financial gain
45% of Financial Services organisations have suffered economic crime compared to only 34% across all other industries
1 in 5 internally perpetrated frauds still involve senior management, though the majority of such fraud tends to be committed by junior staff or middle management.
The sector remains a key target for criminals, and asset mis- appropriation is still the primary type of reported economic crime
Cybercrime, bribery and corruption appear to be increasingly common in the sector
PwC’s seventh Global Economic Crime Survey
The Financial Services (FS) sector: Overall key findings:
Money laundering remains a hot topic in the FS sector, where it is almost five times more likely to occur than in other industries
Almost 30% believed that the most severe impact is reputational
Whistleblowing mechanisms appear to be more prevalent than before, however doubts remain over their effectiveness
PwC’s seventh Global Economic Crime Survey
Top 5 types of economic crime experienced by the FS sector
0%
50%
100% 67%
39%24% 21% 20%
67%
38%24% 26%
16%
2014-FS2011-FS
.
Financial Forensic Engagements
Financial forensic engagements may fall into several categories
Economic damages calculations Post-acquisition disputes such as breaches of warranties Bankruptcy, insolvency, and reorganization Securities fraud-stock fraud and investment fraud Business valuation Computer forensics/e-discovery. Tax fraud Religious fraud 419 fraud
Financial forensic engagements may fall into several categories
Banking fraud Benefit fraud, committing fraud to get government
benefits Counterfeiting of currency, documents or valuable goods Creation of false companies False advertising False billing Forgery of documents or signatures Health fraud Identity theft Lottery fraud
Financial forensic engagements may fall into several categories
Forensic accountants are also engaged in marital and family law of analyzing lifestyle for spousal support purposes determining income available for child support and equitable distribution
Forensic accountants, investigative accountants or expert accountants may be involved in recovering proceeds of crime and in relation to confiscation proceedings concerning actual or assumed proceeds of crime or money laundering
The List is endless.....
Detecting fraud
Methods of fraud detection fall into one of
three categories
Corporate Culture
Corporate Controls
Beyond Corporate Control
RED FLAGS
The most common behavioral red flags displayed by perpetrators Living beyond one’s means or Experiencing financial difficulties
SARADHA SCAM RED FLAGS
Saradha installment plans with tenure varying from 12 to 60 months where minimum investment is Rs100 and ranging from Rs.10,000 to 1,00,000
Opened as many as 200 new companies to create more cross-holdings Investors had options to either opt for land/flat or get the refund where returns
varied from 12 to 24% The land/flat allotted to the investors are not pre-determined or identified.
Investors had no control on the scheme and the property Like all Ponzi schemes, Saradha Group promised astronomical returns in
fanciful but credible investments As much as 25–40% of the deposit was returned to these agents as
commissions and lucrative gifts to quickly build up a wide agent pyramid To keep ahead of regulators, the group used a nexus of companies to launder
money
Why do so many FRAUDS keep happening ?
Human Greed for High Returns Lack of proper Investment Avenues (especially small investors) General awareness missing in general public Inaction of Law enforcing authorities / Laws without teeth, fraudsters daring
the system to catch them. Low conviction rate even when the frauds are detected.
Whether it is bank fraud, insurance fraud, ecommerce fraud, or any other type of fraud, two points are very clear
First• The first is the importance of detecting fraud
as quickly as possible so that criminals can be stopped before too much damage
• As business processes become faster and more automated, the time margins for detecting fraud are becoming narrower and increasing the call for real time solutions.
What Forensic Auditors JOB?
A major responsibility of Forensic Accountant is to investigate fraud and collect evidence for civil and criminal trials
In the vast majority of cases, the evidence is in digital format residing in the computerized system
As a result essential knowledge and skills for forensic accounts include systematic approaches to acquiring, cataloging, and presenting computerized and digital data in a manner sufficient to meet the rigorous standards that courts require for admissibility in evidentiary proceedings
Digital data exits in many different types of systems, and especially in accounting information systems in business environments.
Forensic Accountants are in unique position to investigate frauds in computerized accounting systems.
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Career Path for Forensic Auditors
Forensic Accounting Services Defined
Forensic accounting services include dispute resolution, litigation support, bankruptcy support, and fraud and special investigations, among many other services.
Forensic accounting services utilize the practitioner’s specialized accounting, auditing, economic, tax, and other skills to perform a number of consulting activities.
The provision of forensic accounting services often requires the practitioner to serve as an expert or fact witness, depending on the assignment.
Career Path for Forensic AuditorsFinancial forensic engagements may fall into several categories- Economic damages calculations, whether suffered
through tort or breach of contract Post-acquisition disputes such as breaches of
warranties Bankruptcy, insolvency, and reorganization Securities fraud Due Diligence Business valuation and Computer forensics/e-discovery
Career opportunities for Forensic Auditors
Potential places of employment within the country:- The Financial Intelligence Unit (FIU), Serious Fraud Investigation Office (SFIO), Economic Offence Wing (EOW) The Department of Defences, Law enforcement Banking Sectors Insurance Corporations Private practice
INTERNATIONAL Opportunity
the FBI and the CIA) the Government Accountability Office (GAO) World Bank International Monetary Fund and Enforcement Agencies Major corporations Small and mid-size businesses The nonprofit sector Banking, brokerage, insurance and other financial-services industries Private practice List goes on…………………
Career opportunities for Forensic Auditors
Fraud Preventive approach will create more job opportunities
