FORENSIC ACCOUNTING AS FRAUD AND CORRUPTION DETECTION TOOL: AN EMPIRICAL STUDY

FORENSIC ACCOUNTING AS FRAUD AND CORRUPTION DETECTION TOOL: AN EMPIRICAL STUDY Dr. Partap Singh 1, Mr. Joginder Grewal 2, Mr. Virender Jaspal 3 1 Former Head, Deptt. of Management Studies (SDITM), Faculty Member NC College of Engineering Israna, Panipat, Haryana (India) 2 Faculty Member NC College of Engineering, Israna, Panipat, Haryana (India) 3 Research Scholar, Kurukshetra University Kureshtera (India) ABSTRACT Forensic accounting has come into limelight due to rapid increase in financial frauds and white-collar crimes. But, it is in initial stage in India. There is no formal body that provides formal education of the frauds in India. In India serious fraud office and IRDA have special focus on the frauds. However there is no specialized education provided by any of the universities in the country. White Collared crime is an ignored area in that sense. This paper examines the present status of application and role of forensic accounting in India and recommends steps that should be taken for the enhancement of the utilization of forensic accounting as an effective tool for combating fraud and corruption in India. Keywords: Forensic Accounting, Fraud, Auditing, White Collar Crimes, and I. INTRODUCTION The integration of accounting, auditing and investigative skills creates the specialty known as forensic accounting. In India Kautilya was the first person to mention the famous forty ways of embezzlement in his famous Kautilya arthashastra during the ancient Mauryan Times. The research is triggered in India with a great speed and Pradeep Akkunoor pioneers the topic and has done a good research about the contribution of Kautilya in Forensic accounting. Pradeep who heads Journal of Forensic accounting in India have called Kautilya back in to the 21st Century and have started the series of conversations between the computer and Kautilya. Birbal was the Scholar in the time of King Akbar. He used various tricks to investigate various crimes. Some of his stories give the fraud examiner a brief idea about the Litmus test of investigation. Gem of Indian Fraud Examiners, Chetan Dalal can be credited with actually applying the stories of the Birbal to the Investigation of the frauds. In various articles published in BCAS Journal he has explained how Birbal s trap and Birbal s Litmus test approaches are significantly used while investigating the accounting frauds. India is the most corrupt of the BRICs. China is modestly less corrupt than Russia, while Brazil is basically at lowest. India has another problem of frauds -- as high as 40 percent -- committed by vendors and suppliers in India, and significantly higher than the BRIC countries and the global average of 32 percent. In current present 233 P a g e

scenario, forensic accounting has established itself as dynamic and strategic tool in combating corruption, crime and frauds through investigations and resolving allegations of frauds and embezzlements in India. II. OBJECTIVES OF STUDY To examine the effectiveness of forensic accounting as a tool for fraud and corruption detection in India. To know the role of Forensic Accounting (techniques) in fraud & corruption examination. III. RESEARCH METHODOLOGY The information collected is from primary as well as secondary sources. The secondary data has been collected from websites, accounting journals and related books. A sample size of 50 respondents has been used to collect primary data.18 professional chartered accountants and cost and management accountants, 6 multinational corporations, 20 local organizations and 6 professors have been chosen for participation in this study. The respondents were asked to fill the questionnaires related to the area of this research. The percentile method has been used to make the study more informative, analytical, and useful for the users. IV. LITERATURE REVIEW Joshi 2003 recognized the origination of forensic accounting to Kautilya, the first economist to openly recognize the need for the forensic accountant whom he said, mentioned 40 ways of embezzlement centuries ago. He, however, stated that the term forensic accounting was coined by Peloubet in 1946. Coenen 2005 studied that forensic accounting, also called investigative accounting or fraud audit, is a merger of forensic science and accounting. He stated that forensic accounting involves the application of accounting concepts and techniques to legal problem. It demands reporting, where the accountability of the fraud is established and the report is considered as evidence in the court of law or in the administrative proceeding. Forensic science according to Crumbley(2003) may be define as application of the laws of nature to the laws of man. He refers to forensic scientists as examiners and interpreters of evidence and facts in legal cases that also offers expert opinions regarding their findings in court of law. The science in question here is accounting science, meaning that the examination and interpretation will be of economic information.. (Crumbley, 2006) He stated that forensic accounting involves the application of accounting concepts and techniques to legal problem. It demands reporting, where the accountability of the fraud is established and the report is considered as evidence in the court of law or in the administrative proceeding. Coenen(2005) identify the following as areas of specialty in forensic accounting: Investigating corporate fraud, Litigation services, Business valuation, Computer forensic. However, Zysman(2001) in a more elaborate form captured the assignment performed by forensic accountant as including: (i) Criminal investigation, which are usually on behalf of the police with the aim of presenting evidence in a professional and concise manner. Shareholders and partnership dispute that involve analysis of numerous year financial records for valuation and qualification of the issue in dispute ;(ii) Personal injury claim, where for example economic losses from motor accident or wrongful dismissal may need to be quantified. (iii) Business interruption and other type of insurance claim. These assignments involve a detailed review of the 234 P a g e

policy to investigate coverage issues and the appropriate methods of calculating the loss. (iv) Business/employee fraud investigations which can involve fraud tracing, asset identification and recovery, forensic intelligence gathering and due diligence review. (v) Matrimonial dispute involving the tracing, locating and evaluation of asset. (vi) Business economic losses, where contract disputed, construction claims, expropriation, product liability claim and trade mark are the issues. (vii) Professional negligence, to ascertain the breach and quantify the loss involved, and (viii) Mediation and arbitration, as a form of alternative dispute resolution. Zysman (2005) outlined the following steps in executing Forensic Accounting engagement: (i) meet with the client to obtain an understanding of the important facts, players and issues at hand; (ii) Perform a conflict check as soon as the relevant parties are established;(iii) Perform an initial investigation to allow subsequent planning to be based upon a more complete understanding of the issues; (iv) Develop an action plan that take into account the knowledge gained by meeting with the client and carrying out the initial investigation and which will set out the objectives to be achieved and the methodology to be utilized to accomplish them; (v)obtain the relevant evidence: This may involve locating documents, economic information, asset, a person or company, another expert or proof of the occurrence of an event. Williams (2005) define corrupt practice as any immoral, illegal and unethical act and include cheating, lie, defraud etc. Khan (2005) put corruption as the misuse of entrusted power for private benefit. The forms, he said, include; bribes, cronyism and nepotism, political donations, kickbacks and artificial pricing and fraud of all kinds. Fraud also has been classified into three to include; asset misappropriation, corruption and fraudulent statements. They involve theft or misuse of asset, improper use of influence in a transaction for own benefit and falsification of financial statement, respectively. Idowu-Fearon, (2005) identified the following as conditions that makes the perpetration of corrupt practices easy: (i) Concentration of power in decision makers who are not directly accountable to the people as often seen in non-democratic regimes; (ii)lack of Government transparency in decision-making; (iii) Costly political campaigns; (iv) Large amount of public capital in a project ; (v) Self interested close cliques; (vi)weak legal profession ; (vii) Poorly paid government officials; (viii) Apathetic, uninterested or gullible populace that fail to give adequate attention to political processes. Adefila, Kasum and Olaniyi, (2006), assertion is that fraud and corrupt practices is globally endemic. However, the rate at which public office holder in developing economies perpetrate financial malpractice is dangerously alarming. Leaders of third world nations, especially, embezzles public fund not minding whatever consequences their activities may have on the citizens of the country and their image in the international community, when their nefarious act become known to the world. Kasum, 2009 defined Forensic accounting as the integration of accounting, auditing, and investigative skills. Simply put, forensic accounting is accounting that is suitable for legal review offering the highest level of assurance and including the now generally accepted connotation of having been arrived at in a scientific fashion. 2010). Smith & Crumbley (2009) defined forensic accounting by distinguishing forensic accounting from fraud auditing. They argue that a fraud auditor is an accountant with a specialized skilled in auditing while a forensic accountant may take on fraud auditing engagements and may in fact be a fraud auditor, but he or she will also use other accounting, consulting, and legal skills in broader engagements. The AICPA defines forensic 235 P a g e

accounting as services that involve the application of specialized knowledge and investigative skills possessed by CPAs. Forensic accounting services utilize the practitioner s specialized accounting, auditing, economic, tax. In the views of Singleton & Singleton (2010) forensic accounting comprehensively entails fraud investigation, prevention of fraud and analyzing antifraud controls in addition to gathering non-financial information. Hopwood, Leiner, & Young (2008) define forensic accounting as the application of investigative and analytical skills for the purpose of resolving financial issues in a manner that meets standards required by courts of law. They however contend that while forensic accounting may not make explicit reference to fraud, fraud investigations are integral part of forensic accounting. V. DATA ANALYSIS AND INTERPRETATION Table 1: Showing Break-up of Respondents & Awareness about Forensic Accounting S.no. Respondents Total Response (%) No Yes No Response (%) 1 Chartered Accountants, Cost and 18 16(89%) 2(11%) - 6 5(83%) 1(17%) - 20 2(10%) 18(90%) - 4 Professor 6 1(17%) 5(83%) - Total 50(100%) 24(48%) 26(52%) - Table 1 reveals that a significant majority of chartered accountants and CMA (around 96 percent),multinational (83 percent) and local organization (10 percent), and Professor(17 percent) that is, overall 48 percent of all the respondents have knowledge about forensic accounting. On the other hand, only 11 percent of Chartered Accountants (CA) and Cost and, 17 percent of Multinational and 90 percent of Local, Professor (83 percent) and have no idea about forensic accounting. 236 P a g e

Table 2: Showing Application of Forensic Accounting in Investigation of Fraudulent/ Dishonest Acts in their S.no. Respondents Total Response (%) No Yes No Response (%) 1 Chartered Accountants, Cost and 18 14(80%) 4(20%) - 6 2(34%) 1(66%) - 20 1(5%) 19(90%) - 4 Professor 6 0(00%) 6(100%) - Total 50(100%) 17(34%) 35(66%) - Table 2 reveals that an great majority of 'Chartered Accountants' and 'Cost and Management Accountants' (around 80 percent) and Multinational (34 percent) use forensic accounting to investigate fraudulent/ dishonest acts in their organization. In this respect, only a small proportion of Local (5 percent) use forensic accounting and professor don t use it. Table 3 Showing Application of Forensic Accounting as a Fraud Detection & Corruption Tool S.no. Respondents Total Response (%) No Response Yes No (%) 1 Chartered Accountants, Cost and 18 18(100%) - - 5 5(83%) - 1(17%) 20 2(10%) - 18(90%) 4 Professor 6 1(17%) - 5(83%) Total 50(100%) 26(52%) 24(48%) Table 3 reveals that all of Chartered Accountants (100 percent), Multinational (83 percent), and only 10 percent of local organizations assume that forensic accounting is strongly used as a fraud detection and corruption tool. There is no respondent who oppose it. Those respondents who have no idea about forensic 237 P a g e

accounting, they only marked 'No Response. So, it may be concluded that forensic accounting is strong fraud & corruption detection tool. Table 4: Showing Impact of Forensic Accounting on Internal Control Systems S.no. Respondents Total Response (%) No Response Yes No (%) 1 Chartered Accountants, Cost and 18 17(94%) - - 5 4(80%) - 1(20%) 20 2(10%) - 4(90%) 4 Professor 6 1(16%) - 5(84%) Total 50(100%) 24(48%) 26(52%) Table 4 indicates that larger part of Chartered Accountants (94 percent) and Multinational (84 percent) believe that forensic accounting has considerable impact on internal control system. On the other hand, the other bigger portion of local organization an professor didn't make any comment as they have no sound knowledge about forensic accounting. Table 5: Showing Impact of Forensic Accounting on External Audit S.no. Respondents Total Response (%) No Response Yes No (%) 1 Chartered Accountants, Cost and 18 17(94%) - 2(11%) 5 4(80%) - 1(20%) 20 4(20%) - 16(80%) 4 Professor 6 1(16%) - 5(84%) Total 50(100%) 26(52%) 24(48%) Table 5 reveals that 52 percent out of 50 respondents believe forensic accounting has impact on external audit. A larger part of Chartered Accountants (94 percent) and Multinational (80 percent) believe that forensic accounting has considerable impact on external audit. On the other hand, the other bigger portion of 238 P a g e

local organization (80 percent) and professor (84 percent) didn't make any comment as they have no sound knowledge about forensic accounting. Table 6: Showing Investigation About Forensic Accounting as only Most Appropriated tool to Detect Suspicious or Fraudulent Transactions. S.no. Respondents Total Response (%) No Response Yes No (%) 1 Chartered Accountants, Cost and 18 13(71%) 1(6%) 4(23%) 5 3(60%) 1(20%) 1(20%) 20 2(10%) - 18(90%) 4 Professor 6 - - 6(100%) Total 50(100%) 19(38%) 31(62%) Table 6 shows that Chartered Accountants, Cost and Management Accountants (71%); Multinational (60%) and only 10 percent of Local believe Forensic Accounting is only most appropriate tool to detect suspicious or fraudulent transactions. Only 6 percent CMA and 20 percent Multinational out of 50 didn't believe that. They think only forensic accounting is not solely sufficient; but there is need of additional skill and knowledge. On the other hand, the other bigger portion of local organization (90 percent) and professor (100 percent) didn't make any comment as they have no sound knowledge about forensic accounting. Table 7: Showing Risk Assessment Process Under Forensic Accounting Specifically Coverage of Risk of Fraud. S.no. Respondents Total Response (%) No Response Yes No (%) 1 Chartered Accountants, Cost and 18 7(40%) 3(17%) 8(43%) 5 2(40%) 1(20%) 1(20%) 20 2(10%) 2(10) 16(80%) 4 Professor 6 - - 6(100%) Total 50(100%) 11(22%) 6(12%) 33(66%) 239 P a g e

Table 7 shows that Chartered Accountants, Cost and Management Accountants (40 percent); Multinational (40 percent %) and only two percent (10%) of Local believe risk assessment processes under forensic accounting specifically cover risk of fraud. 17 percent of charted accountants cost and management accountant feel forensic accounting couldn't cover risk fully. Thus, 22 percent of respondents out of 50 believe forensic accounting could cover risk of fraud by the risk assessment process. Only 12 percent of 50 respondents argue forensic accounting could not cover risk fully while around 66 percent are unable to give their clear-cut answers due to lack of sound practical knowledge. VI. FINDINGS Forensic accounting is new on an average to the people. There is need of extra knowledge about forensic accounting It is not used in investigation of fraudulent/ dishonest acts in their organization by more than average respondents except charted accountant and costs management accountants. However, the use of forensic accounting to investigate fraudulent/ dishonest acts in their organization is increasing. Forensic accounting is strong fraud detection tool. Forensic accounting has considerable impact on internal control system Forensic accounting has considerable impact on external audit. Majority of respondents accept that forensic accounting could not cover risk fully. Only forensic accounting is not solely most suitable tool; but there is need of additional skill and knowledge to make it solely sufficient. Formally forensic accounting has not long been in practice in India except in a very few multinational corporations VII. CONCLUSION RECOMMENDATIONS Forensic accounting is the application of a specialized knowledge and specific skills. Forensic accounting is new on an average to the people in India. There is need of extra knowledge about forensic accounting. The unethical aspects of creative accounting are rampant in India, the practice of forensic accounting (i.e., investigative accounting done by forensic accounting consultants to solve problems in courts) needs to be introduced and recognized. Besides this, it can also be recommended that some courses, related to this issue should be launched by universities to make the accounting students expert for detecting fraud and corruption. More and more workshops, seminars, and symposium can be arranged to make people in corporate sector more familiar with this issue. The practice and development of forensic accounting are relatively very much lower in developing countries like India than those in developed countries. As a matter of fact, there is no effective tool to measure, detect and prevent fraud and corruption in India; so, forensic accounting now appears as a one of the strategic and dynamic tool for the management of all types of corruption. 240 P a g e

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