Finance Business Internal Audit

A Brief on Forensic Accounting and Investigation Standards

With the lack of a standardized process for forensic accounting and investigation, the Institute of Chartered Accountants of India^[1] is developing the first-ever standards (Forensic Accounting and Investigation Standards). This move by the Institute of Chartered Accountants of India to have set standards comes at a time when instances of forensic accounting and investigation assignments related to ascertaining facts in corporate and banking frauds are rising.

Forensic Accounting and Investigation- Meaning

Forensic accounting means the discovery and evaluation of the evidence by a professional. Also, to interpret and to communicate findings suitable for a court of law. Forensic accounting relates to the area of financial transaction and operational arrangements.

Investigation means a systematic and critical examination of facts, documents and records for a specific purpose.

How are these standards set?

The process to set these standards is as follows:

• Selection of topic and timelines;
• Creation of study group to draft standards;
• The exposure draft is reviewed by the Digital Accounting and Assurance Board;
• Then comments are invited for exposure draft for a time period of 30 days;
• Finalization and submission to the  Council of Institute of Chartered Accountants of India;
• The council deliberates and approves the Forensic Accounting and Investigation Standards.

What are the principles governing the Forensic Accounting and Investigation Standards (FAIS)?

The principles governing the FAIS are as follows:

• Quality and continuous improvement;
• Independence and neutrality;
• Integrity and Objectivity;
• Professional care;
• Confidentiality;
• Skills;
• The primacy of truth;
• Respecting rights and obligations; and
• Segregating facts from opinion.

Preface to FAIS

• The standards are aimed to be principle-based rather than rule-based, thus providing enough space for professional judgement while applying such principles;
• The spirit of law should prevail over the letter of law; and
• The standards lay down a minimum set of requirements that should be followed by all ICAI members and is also recommended to other professionals.

Nature of Engagement and Possible Objectives

Forensic Accounting Services-

Possible Objective– To undertake discovery and identification of evidence and ascertainment of facts concerning the way in which transactions, funds, and balances have been dealt with.

Nature of Service-

• Financial Statement Manipulation;
• Fund diversion;
• Asset tracing;
• Anti-money laundering;
• Tax evasion;
• Valuation; and
• Suspicious Transactions under IBC.

Investigation Services-

Possible Objective– To examine facts and circumstances with a view to get evidence to support certain hypotheses about allegations and fraud to prove/disprove legal violation.

 Nature of Service-

• Criminal investigations;
• Cyber fraud;
• Insurance claims;
• Whistle-blower complaints;
• Code of conduct violations;
• Asset theft; and
• Data breach/corruption.

Litigation Support Services-

Possible Objective- To provide testimony in a court of law.

Nature of Service-

• Expert witness; and
• Alternate Dispute Handling.

Engaging with Agencies- Forensic Accounting and Investigation Standards 240

Points of Discussion

• Emphasis on the privacy of information- non-disclosure undertaking;
• Importance of engagement letter providing the scope and subsequent addendums in detail;
• Understanding of various laws  before engagement acceptance; and
• Indicative list of agencies- Law enforcement agencies, regulatory bodies, and adjudicating authorities.

Planning the Assignment- Forensic Accounting and Investigation Standards 310

The following definitions have been used in this standard-

• Engagement– It means the overall contractual arrangement between the professional and the client providing the terms of reference, scope of work, coverage, and expected deliverables.
• Assignment– It shall mean some part of engagement or a portion of overall engagement or a specific group of tasks that is to be undertaken by the professional.

This standard applies to all FAI assignment where only a part of the assignment is outsourced to the professional.

Planning of the Forensic Accounting and Investigation Standards Assignment shall follow the below mentioned process-

• Planning process;
• Knowledge of the relevant business and its environment;
• Risk Considerations;
• Discussion with the Stakeholders;
• Technology Deployment;
• Resource Allocation; and
• Methodology and Coverage.

Evidence and Documentation- Forensic Accounting and Investigation Standards 320

Evidence means information, written or oral or contained in the electronic form taken upon by professionals to arrive at a conclusion. It includes information collected from underlying entity records and processes, information obtained from other sources, analysis of data, testimony, hearsay information, and information from other sources to the extent admissible by court.

Documentation means the totality of all evidences collected with a written record of work procedures performed and conclusions reached and reported.

Points for Discussion

• Reliability of evidence;
• Relevance of evidence;
• Nature of documentation; and
• Ownership and custody of documentation.

Conducting Work Procedures- Forensic Accounting and Investigation Standards 330

The Forensic Accounting and Investigation Standards 330 provides for a phase-wise approach to execute Forensic Accounting and Investigation assignment.

In the first phase of preliminary review, the primary objective is to identify the irregularities and fraud risk factors associated with the assignment. In the second phase on detailed investigation, the primary objective is to establish the hypothesis and evidence credibility.

Below we have provided the indicative list of work procedures (Phase 1 and Phase 2)-

 Phase 1

• Identify the nature of evidence to confirm allegations;
• Collect data, information, facts, and documents relating to the subject matter;
• Look for fraud indicators (red flags) like any suspicious transactions etc.;
• Collect available evidence through regular masked audit procedures;
• Conduct discreet enquiries to corroborate evidence and identify those involved; and
• Perform basic financial analysis to quantify the extent of loss.

Phase 2

• Conduct physical verifications and other field procedures in order to verify the facts and information collected in phase 1;
• Identify individuals involved and their personal and specific role in subject matter; and
• Postulate hypotheses and gather evidences;
• Get clarification and written response from individuals, including third parties;
• Interview relevant stakeholders with facts or evidences and record their written statements; and
• Analyse evidence and get possible conclusions for reporting.

Conducting Interviews- Forensic Accounting and Investigation Standards 340

The objective of this standard on conducting interviews is to gather or elicit information and collect evidence to achieve engagement objectives. It may be noted that interviews shall be conducted only after due planning and preparation. The interviewer should develop a methodology which comprises of certain essential steps to conduct the interview in an effective manner. Confidentiality should be maintained regarding the details of the interview and its outcome.

Points for Discussion

• Planning and Preparation of interview;
• Interview methodology and Essential Steps; and
• Maintaining confidentiality of data.

Review and Supervision- Forensic Accounting and Investigation Standards 350

Review means the examination of the planning and work procedures, evidence collection, etc.

Supervision means the oversight of the activities done by the staff and overall guidance to the team for objectives attainment.

The main objective of this standard on Review and Supervision is to ensure that work procedures are performed well in line with the terms of engagement and applicable regulations. Also, to ensure that the process of gathering evidences, information, and data is comprehensive and reliable.

Points for Discussion

• Extent of Review and Supervision;
• Nature of Review and Supervision;
• Change in circumstances; and
• Matter for consideration.

Conclusion

According to the Institute of Chartered Accountants of India, the Forensic Accounting and Investigation Standards would be helpful to law enforcement agencies, corporate, banks, and other stakeholders to appreciate the common practices of performing Forensic Accounting and Investigation.

Read our article:All about Forensic Audit of a Company in India