Forensic Accounting and Fraud PreventionBy,

CA K RAGHU, PAST PRESIDENT – INSTITUTE OF CHARTERED

ACCOUNTANTS OF INDIA

Introduction

• A specialized field of accountancy• Application of Financial Skills and investigative

mentality • Investigating fraud and analyzing financial

information to be used for tracking and collection of forensic evidence

• Focuses on Detection of Financial Frauds• Encompasses Accounting, Investigative

accounting, investigative audit and litigation support

• Mixture of Accounting, Finance, Law, Computerization, Ethics and Criminology

Need for Forensic Accounting

• Forensic Accounting ensures the integrity and transparency of Financial Statements.

• It helps in formulating and establishing a comprehensive corporate governance policy.

• It has been gaining huge importance due to the increasing number of frauds and scams which are taking place in the corporate world.

Major Scams and Frauds in the Recent Years

Scams and Frauds YearLosses Suffered / Amount involved in

FraudWaste Management

Scam199

8 $100 Million

Enron Scam 2001 $74 Billion

WorldCom Scam 2002 $180 Billion

Tyco Scam 2002 $150 Million

Freddie Mac Scam 2003 $100 Million

AIG Scam 2005 $3.9 Billion

Bernie Madoff Scam 2008 $65 Billion

Major Scams and Frauds which took place globally in the recent years :

Major Scams and Frauds in the Recent Years

Scams and Frauds YearLosses Suffered /

Amount involved in Fraud (Rs.)

Harshad Mehta Securities Market Scam 1991 5,000 Crores

Fodders Scam 1992 950 CroresThe UTI Scam 2001 4,800 Crores

UP Food Grains Scam 2003 35,000 CroresSatyam Scam 2008 10,000 Crores

The 2G Spectrum Distribution Scam 2008 1,75,000 Crores

Sahara India Pariwar Investor Fraud Scam 2010 25,000 Crores

Coalgate Scam 2012 1,85,600 CroresSarada group Financial

Scam 2013 20,000 – 30,000 Crores

Major Scams and Frauds in India in the recent years :

Types of Frauds

• Bank frauds • Corporate frauds • Insurance frauds• Health Care Frauds• Cyber frauds • Securities frauds• Consumer frauds

Cyber Frauds

• Cyber Attacks have been a major threat over the recent years due to Computerization of Business operations.

• Following are some of the Cyber threats :Malware Attacks such as Viruses, Worms and

TrojansPhishingDenial of Service(DOS) AttackPassword TheftSpoofingTampering etc.

Cyber Attacks in the Recent Years

• According to a recent survey report, 72% of the Indian Companies faced Cyber Attacks in 2015.

• Sony Pictures (Nov 2014) – Loss of several internal data centers

• Staples (Oct 2014) – Access to Information of about 1.16 Million Credit Cards

Factors influencing Cyber Attacks

• Failure in inclusion of Security and Controls in the Company design principles.

• Failure in understanding the root cause of the attacks / issues while resolving them.

• Lack of Technical Expertise on the Cyber Security within the Organization

• Ineffective Threat analytics

How to Mitigate Cyber Risks ?• Know potential attackers ? • Understand their objectives• Know what tactics they might use ?• Establish or/and Enhance risk – prioritized

controls.• Detect violations & anomalies through better

situational awareness across the environment.• Establish the ability to quickly return to

normal operations & repair damage to the business.

Who is responsible for Cyber Security

Internal Audit Responsible for regularly reviewing controls pertaining to Cyber Security

External Auditor / SpecialistCan be valuable source of information on cyber security and may well assist in assessing Cyber Security.

Cyber Security

Fraud Detection

• Use of Techniques such as : Statistical & Mathematical TechniquesDigital/ Electronic Techniques CAATData Mining

• Identification of Fraud Symptoms• Investigation of Symptoms

Data Mining / Big Data Analytics

• The Process of examining the large data sets containing a variety of data types.i.e.Big Data.

• It uncovers hidden patterns, unknown correlations, trends and other useful business information.

Big Data Analytics : Process

• Converts unstructured data into Structured data.

• Based on such Structured data, conclusions are drawn.

• Suitable tools for big data analysis includes Time series Analysis, Data fusion and integration, Simulations etc.

Information

Data

Data

Data

An Eye on Frauds and Scams

Satyam Scam • Fraud that disturbed the IT Industry and the whole

nation• Loss caused to Investors was about Rs.14,162 crores• Ramalinga Raju, one of the Promoters and his family

members secured illegal gains to the tune of about Rs.2,743 crores

• Fraud was perpetrated by inflating the revenue of the company through false invoices and showing corresponding gains by forging the bank statements with the connivance of the Statutory and Internal Auditors of the Company

• The Annual Financial Statements with inflated revenue were published for several years which led to higher prices of the Scrip in the Market

• Attempts were made to conceal the fraud by acquiring the companies of Kith and Kin

Satyam Scam

• CID revealed that actual no. of employees were only 40,000 and 53,000 as reported earlier

• Mr. Raju had been allegedly withdrawing Rs.200 Million every month for paying these 13,000 non-existent employees

• Inflated figures for Cash and Bank balances of Rs.5,040 Crores

• Operating profits were artificially boosted from Rs.61 Crores to Rs.649 Crores

• Showed an interest earning of Rs.376 Crores that was fictitious

Reebok Scam• Fraud of Reebok India came into light in

March 2012 • Amount involved in the Fraud was about

Rs.870 Crore• Subhinder Singh Prem, former Managing

director and Vishnu Bhagat, former Chief Operating Officer were key members involved in the fraudulent activity

• Over invoicing to the tune of Rs.147 Crores

• Raising fake invoices to the tune of Rs.98 Crores to claim promotions, bonus and incentives

Reebok Scam

• Running False Franchisee referral programme, receipts from were about Rs.114 Crores

• Maintaining four secret warehouses where company goods were diverted

• To finance the operations they also took loans from banks by using fake invoices and raised deposits from high net-worth individuals

• Goods were being siphoned to Ghost companies and distributors across the country, claiming them to be defective pieces

• Case was filed at Gurgaon Police Station and investigated by Serious Fraud Investigation Organization (SFIO)

Global Trust Bank Scam

• Wrong Financial disclosures in the Financial Statements of 3 FYs – 2000 – 01, 2001 – 02 and 2002 – 03

• RBI declared a 3 month moratorium on July 24, 2004

• Throughout its decade-long existence, the top management of the bank concentrated exclusively on generating returns to its key shareholders

• Also Involved in the stock market scam of 2001, in which the lead artist was the stockbroker Ketan Parekh

Global Trust Bank Scam• Lent heavily to players in the capital

market and when the market crashed the bank's balance sheet suffered a gaping hole because share prices had dropped dramatically

• In 2001, when attempting a merger with UTI Bank, lent more than Rs.800 crores and much of them were proved injudicious

• For 2001-02, the Net Worth was claimed to be Rs.400 Crores which on inspection by RBI was found to be negative

• Ramesh Gelli, the Chairman of the Bank colluded with Ketan Parekh to push up the Share Price

Ramesh Gelli

Forensic Accounting: Scope of CAs’

• Increasing no. of Frauds in the recent years.

• Lack of Sufficient Expertise or time needed with Law Enforcement agencies.

• Insertion of Various Provisions in connection with Fraud in the Companies Act, 2013.

• Assisting in the Fraud Prevention and mitigating Cyber Risks.

Conclusion

• Financial Frauds have been increasing over the last 2 decades.

• They have caused huge losses to the Governments and General Public.

• Need of the Hour is to Fraud Prevention than Fraud Detection.

• Finance Professionals have a significant role to play in the Fraud Prevention.

K.Raghu & Co.Chartered Accountants.“K R Pinnacle”,No.281,II Floor,7th Main, B.T.M Layout, 2nd Stage, Bangalore - 560 076.Ph: +91 80 26680897 / +91 80 26680941 - Mob: +919341219091E-mail: kraghu@kraghu.com – Website:  www.kraghu.com