By Nikhil Bedi and Kavita Nathaniel, Deloitte India
While the concept of forensic accounting has possibly prevailed for centuries in a veiled fashion, it would be fair to say that the profession as we know started taking shape in the first half of the twentieth century. An early case of the American gangster that emphasised the importance of forensic accounting as a skill was perhaps that of Alphonse Gabriel Capone. He was infamous for his involvement in innumerable crimes of varying severity and recognised as a societal threat. However, of all the crime he was credited with, it was tax evasion—evidenced by the meticulous work of forensic accountants who reconstructed his illicit undeclared income and corresponding tax liability—that led to his arrest.
Forensic accounting is applying specialised accounting knowledge to gather and present evidence for legal proceedings. A forensic accountant may adopt various investigative procedures to conclude the matter, and may also be required to testify as a witness of fact or an expert witness.
Forensic accounting like other professions has evolved over the years, not in the least on account of technology. On one hand, technology has equipped perpetrators with innovative means to commit fraud. On the other hand, it has enabled forensic accountants to stay efficient in the investigation process, broad-base the investigation, and leverage additional data sources to piece together fraud evidence.
Forensic accountants can now run intelligent analysis using technology and identify suspicious transactions or red flags from massive sets of electronic data in lesser time than manually analysing physical accounting records. The manner in which data is captured and structured in Enterprise Resource Planning (ERP) systems allows forensic accountants to extract and correlate disparate reports with considerably less effort. Audit logs and electronic timestamps allow easy identification of individuals responsible for processing or amending specific transactions and dates of such incidents.
Analysis of transactional documents is usually a critical part of any forensic accounting engagement. Traditionally, organisations maintained such documentation and provided the physical copy of it to the forensic accountants. In the past few decades, a shift to a paperless business environment has enabled reviewing the document in digital form.
Now, forensic accountants also rely on multiple data sources outside the books of account to validate suspected transactions and gather evidence. For instance, they work with eDiscovery experts who help in securing digital evidence from computer and mobile devices to gather corroborating evidence for suspected or identified malpractices in a legally tenable manner. In addition, the forensic accountants also work with intelligence experts to collect external information about individuals, organisations, and transactions from digitised records available pertaining to company ownership and filings, litigation proceedings, property records, regulatory compliance, media reports, etc.
The information collected from these sources is carefully considered and correlated to conclude on alleged/suspected malpractice, outline the modus operandi and perpetrators, and estimate the possible impact of identified fraud.
In the current COVID-19 pandemic scenario, other aspects of investigative procedures that the forensic accountants adopt are also taking a digital form. For instance, voluminous data available in digital form (earlier accessed at office premises) is now shared over secured data sharing platforms. Adoption of cloud storage for individual emails, data backups, and enterprise collection solutions allow for remote collection of Electronically Stored Information (ESI), such as emails and user files where physical imaging of computer devices is not a possibility. Informational interviews are conducted over video conferencing that also allows demonstrating system and transaction flow by way of screen-sharing and white-boarding. Investigative interviews (may be undertaken in a similar manner) remain a procedure that forensic accountants may choose to undertake in person: Due consideration is given to the possible challenges that may arise while questioning a respondent over a video call and a decision is typically taken on a case-to-case basis.
eDiscovery tools and case management systems are used to maintain centralised control and track cases along with detailed work procedures and evidence.
As businesses relook at their processes in light of the expected extended remote working scenario, there is a greater push to automate processes and digitise documentation, i.e., currently in a physical form. Since investigative procedures are largely dependent on the form and structure of underlying data, such a move will further enable forensic accountants and investigators to effectively run investigations in a digitised and remote environment. Given this procedural shift, forensic accountants need to remain mindful of the legal tenability of the evidence collected, including the manner of collection and follow defined protocols to ensure that defensibility of such evidence is not compromised.
The changing scenario under which business is conducted will also likely create new avenues for fraud. Thus, current day forensic teams are a smart blend of accountants, data scientists/engineers, forensic technology experts, intelligencers, and lawyers who are able to leverage such developments to build efficient and enhanced capabilities in procedures to conduct and conclude investigations.
– Nikhil Bedi is Partner / Leader Forensic, Financial Advisory, Deloitte India and Kavita Nathaniel is Director, Forensic, Financial Advisory, Deloitte India.