Wednesday, December 18, 2019

Forensic audit a new normal for fraud-hit India Inc.


What is forensic audit?

A forensic audit is an examination and evaluation of a firm’s or individual’s financial records to derive evidence that can be used in legal proceedings. A forensic audit may be conducted to prosecute a party for fraud, embezzlement, or another criminal behavior.
                          
                    With the rise in the money laundering and other cases, RBI has made forensic audit mandatory for large advances and restructuring of accounts. A lot of companies are reaching the audit firms to seek extra comfort through extended procedures. The forensic auditors requires analysis financial transactions and other information’s related to the investment for use in court of laws. And the reports produced by them are typically presented in the court of laws as financial evidence against the frauds.

In the last two years, EY India has taken up seven to eight “large engagement” to set up forensic frame work within the company. “This action was taken because of the suggestions or the complaints received from the people towards preventing the frauds,” said Yogen Vaidya, Partner, Forensic & integrity services, EY India. There are some specific steps that the auditors and companies are taking for risk mitigation: upgrading control mechanism, using ‘heat map’ to find areas of concerns, process mining to spot deviations, extensive back ground checks, setting up whistle- blower hotlines, all these kinds of actions taken by the different audit firms used to fight the frauds.

Companies engage forensic auditors to answer specific questions. Banker ask questions about trail of money, whereas government may ask restated financial statements. Hence there is no standard format for forensic audit report. Forensic auditors must provide the requested information and provide sufficient evidence to be presented in courts.

Cutting across sectors, infrastructure to oil and gas to mining, companies are looking for audit services that go beyond what’s normal and commonplace. Checking the background information of the senior executives or other personalities would help them to understand whether they are fits into the culture and management of the company. While multinationals were already doing it, increasingly many Indian promoter driven companies as well as IT and ITeS firms are going for checks beyond managerial levels.

The famous multinational service network Deloitte launched a product to mine and study end to end processes, thus pointing at deviations. The idea was to combat fraud through use of technology. By the introduction of the Insolvency and Bankruptcy code (IBC) demand for forensic audit has gone up among independent directors, banks and resolution professionals.

To summarize, a forensic audit is a detailed engagement that requires the expertise of not only accounting and auditing procedures but also expert knowledge regarding the legal framework. A forensic auditor is required to have an understanding of various frauds that can be carried out and of how evidence need to be collected.

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