FORENSIC ACCOUNTING f
By: Aditya Mahajan Q1806 A17, Regd:- 10812595 MBA (International)
Introduction
Ø RAPID CHANGES IN THE ACCOUNTING PROFESSION > Operations of Day to day task of debiting and crediting.
> Reports on internets (Technology)
> Demand of Global Economy and International market.
view
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Accounting
ØFo Fore rens nsic ic ac acco coun unti ting ng is
hardly a new field in accountancy. Fore rens nsic ic ac acco coun unta tant nts s as ØFo prev pr even enta tati tive ve me meas asur ures es as th the e dema de mand nd fo for r tr trust ustwo wort rthy hy financ fin ancial ial sta statem tement ents s inc increa reases ses in the wake of the recent Ø"Forensic accounting", provides an accounting accoun acc ountin ting g sca scandal ndals s. Ø
analysis that is suitable to the court which will form the basis for discussion, debate and ultimately dispute resolution. Forensic Accounting encompasses both Litigation
Assistance Forensic Accountant • Litigation Support v It deals primarily with issues related to the quantification of economic damages. A typical litigation support assignment would be calculating the economic loss resulting from a breach of contract.
• Investigation Support v “Investigative accounting", is often associated with investigations of criminal matters. A typical investigative accounting assignment would be an investigation investigat ion of
encompasses a wide range of activities : • Fraud Detection –
• The expert witness – preparation of formal reports for filing in Court and giving evidence as an Expert
Computer Forensics – a ssistin g in e le c tro n ic data recovery and e n fo rce m e n t o f IP rig h ts e tc
assisting clients in detecting financial fraud by employees and others and tracing misappropriated funds. This section provides information for fraud-related engagements
Process 1.Preparation (of the investigator, not the data) 2.Collection (the data) 3.Examination 4.Analysis 5.Reporting 6.Comparison to h l
for Forensic acco Shareholder/p Shareholder/partnership artnership disputes • Personal injury claims/accidents • Business interruption/insurance claims • Employee fraud • Divorce/bankruptcy • Professional negligence • Financial statement fraud • Retained by lawyers, law enforcement, banks and companies
M oney
These assignments often involve a detailed analysis of numerous years accounting records to quantify the issues in dispute. For example, a common issue that often arises is the compensation and benefits received by each of the disputing shareholders or partners.
Personal Injury Claims / Motor Vehicle Accidents A Forensic Accountant is often asked to quantify the economic losses resulting from a motor vehicle accident. A Forensic Accountant needs to be familiar with the legislation in place which pertains to motor vehicle accidents. Cases of medical malpractice and wrongful dismissal often involve similar issues in calculating the resulting economic
Insurance policies differ significantly as to their terms and conditions. Accordingly, these assignments involve a detailed review of the policy to investigate coverage issues and the appropriate method of calculating the loss. A Forensic Accountant is often asked to assist from either an insured or insurer's perspective in the settlement of a case. Examples of these types of assignments include; business interruptions, property losses and employee dishonesty (fidelity) claims. Business/Employee Business/Employe e Fraud Investigations
Business investigations can involve funds tracing, asset identification and recovery, forensic intelligence gathering and due diligence reviews. Employee fraud investigations often involve procedures to determine the existence, nature and extent of fraud and may concern the identification of a perpetrator. perpetrator. These investigations investigations often entail entail interviews of personnel who had access to the funds and a detailed detail ed review of the documentary
Matrimonial disputes from a Forensic Accounting point-of-view often involve the tracing, locating and evaluation of of assets. The assets to be evaluated and and valued valued may be businesses, property or other assets. Business Economic Losses
Examples of assignments involving business economic losses include; contract disputes, construction claims, expropriations, product liability claims, trademark and patent infringements and losses stemming from a breach of a non-competition agreement.
Professional Negligence These investigations are often approached from two t wo different but complimentary perspectives, these being: •Technical - has a breach of Generally Accepted Accounting Principles or Generally Accepted Auditing Standards or other standards of practice occurred; and •Loss Quantification. If the professional in question is an accountant then a Forensic Accountant could could be involved involved with both both perspectives. perspectives. If the matter involves some other profession a Forensic Accountant will normally be retained to perform only a loss quantification.
IC ACCOUNTING TECHN
RENSIC ACCOUNTI TECHNIQUES 1.Indirect Method 1.Indirect 2.Direct 2. Direct Method
• The Direct Method, also known as the Transaction Method, is similar to traditional auditing procedures. In this method, the appraiser commonly examines:
• Indirect Method is commonly employed when the conventional Direct Method is not productive. The most widely used techniques under the Indirect Method are the:
• Cancelled checks & invoices
• Cash T Method
• Contracts & agreements
• Source & Application of Funds Method
Cash T Method •Simplest indirect method •Used to determine understated income
• • If cash spent exceeds cash cas h received from taxable & nontaxable sources than excess may represent unreported income •Don’t forget to adjust for loan proceeds & use of savings •Frequently used to analyze Retail/Wholesale Businesses & i ts owners •
Source & Application of Funds Method • Employed when large sums are spent on lifestyle instead ins tead of purchasing assets or investments • Similar technique to Cash “T” Method • Used often because of ease of presentation •People (including Judges & Jury) understand cash coming in & out •
Source & Application of Funds Format Funds Applied : Increase in assets Decrease in liabilities Plus Expenses paid Equals Total Funds Applied
Sources of Funds: Decrease in assets Increase in liabilities Plus Income received Equals Total Source of Funds
Net Worth Method •Balance Sheet approach to estimating income • Net worth calculated at beginning & end of period •Difference in beginning & ending net worth compared to reported income forget nontaxable income & other reconciling items •Don’t forget •Un-reconciled differences represent underreported income •
Bank Deposit Method • Analyzes funds deposited during the year by reconstructing gross taxable receipts • An appropriate method when income is deposited in banks & most of expenses are paid in cash •
Bank Deposit Method / Gross Receipts Formula Total Bank Deposits Less: Nontaxable deposits Equals: Net Taxable receipts Add: Business/Personal expenses, Capital purchases, Cash accumulated Less: Nontaxable cash used Equals: Corrected Gross Receipts The application of these and other methods are frequently determined by industry i ndustry.. In fact, a useful resource for industry i ndustry specific methods is the Market Segment Specialization Program, published by the Internal Revenue Service.
orens c ccoun an A Forensic Accountant is often retained to analyze, interpret, summarize and present complex financial and business related issues in a manner which is both understandable and properly supported. Forensic Accountants can be engaged in public practice or employed by insurance companies, banks, police forces, government agencies and other organizations. Who retains a Forensic Accountant? Forensic Accountants are often retained by the following groups: •Lawyers; •Police Forces; •Insurance Companies; •Government Regulatory Bodies and Agencies; •Banks; •Courts; and
Au itor s ou e watc og . It’s a good quote that every auditor should know. This quote makes the definition of Forensic accountants even more simple.”
Growing cyber crimes, failure of regulators to track the security scams,
Satyam scandal
………………………. The importance of the forensic accountant’s role in the detection of fraud is continuously growing. Armed with combination of skills, these financial detectives are today important assets to modern legal teams. In the backdrop of increasing levels of frauds, the demand for forensic accountants is bound to substantially increase in the future.
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