India as a nation has traditionally struggled with having a well-structured financial market. This was also the reason for many scams which happened mainly because of the loopholes in the system. However, things have been changing in the last decade as the governments have looked proactive in bringing reforms to cut down the loopholes and make the system more streamlined. Notable reforms in such category are to bring standard for Forensic Accounting and Investigation to streamline the process of examining possible frauds. This will greatly help the companies providing finance and accounting outsourcing services.
FDI or foreign direct investment in India has grown tremendously in recent times. To promote the investments the government is bringing a lot of reforms to the economic sector. Riding on the wave of reforms, the Institute of Chartered Accountants of India has started developing the first-ever standards for Forensic Accounting and Investigation to tackle the inadequacy led by the lack of a uniform process for forensic accounting and investigation. This reformist move by the ICAI to possess a set standard has come at a time when instances of forensic accounting and investigation assignments linked with ascertaining facts in company’s or banking related frauds are on the rise. It is a no brainer that these standards will eliminate the flaws in the systems to prevent these frauds from happening.
In the following sections, we will understand in brief about what is foreign accounting and investigation and follow it up with the process of setting the standards and principles governing these standards. We will also understand in brief about the various knowhows of conducting an investigation as per the standards.
What is Forensic Accounting and Investigation?
Forensic accounting means the methods of studying and evaluating the evidence of an account of a company or entity by individuals who are proficient in finding any misfits in the data. This is usually done to expose or investigate any fraud that has happened in the company. Forensic accounting is also a measure of means to interpret and to assert the findings suitable for producing in a court during law proceedings. Forensic accounting relates to the world of monetary transaction and operational arrangements. Investigation means a critical and systematic examination of facts, records, documents, and records for a selected purpose. The purpose is usually to seek facts and figures to be presented before a Court to expose how the fraud was undertaken by the party in question.
There are companies out there with expert professionals who can carry out the investigation in a time bound and professional manner. However, to streamline the whole process of investigation the standards have been set which act as a guideline for the investigators to identify frauds. Earlier, confusions used to arise because of a lack of standards for the investigation of such cases which made the processing of cases time-consuming. Sometimes, due to this, the evidence was tempered leading to false results. With the new standards in place, all these issues have been avoided.
Governing Principles of FAIS
The Institute of Chartered Accountants of India has devised the following principles to govern the FAIS:
- Independence and Neutrality: This is an obvious principle that during the investigation, an investigator should take on the procedures with complete neutrality and independence of thought. He/she should be unbiased and approach the investigation objectively.
- Quality and Continuous Improvement: With each case, there must be an improvement in the way a case is approached, and the quality standards must be maintained.
- Integrity and Objectivity: Investigators must approach the given case with complete integrity and objectivity any inherited bias.
- Confidentiality: This is one of the most important aspects of the investigation. Because the parties in question are generally big businesses, any mismanagement on this part could seriously hurt the reputation of the business. Hence, the FAIS must be carried out by maintaining 100% confidentiality.
- Professional Care: The investigation must be carried out in a fully professional manner. Value to time must be given and unnecessary questioning or procedures should be avoided.
- Skills: The skills of the investigators’ matters and thus the most qualified individual should provide these services.
- Respecting Rights and Obligations: While investigating or accounting, a professional must mind the rights of the party and his/her own obligations to avoid any conflict.
- The Primacy of Truth: Finding the truth must be the top priority for the professional. It should be given precedence in any case.
- Segregating Facts from Opinion: A professional must have the ability to verify an opinion. The results must only contain data based on facts rather than opinion. Separating facts from opinion is the key.
How are these standards set?
The process to form these standards is as follows:
- Selection of topic and the necessary timelines.
- Creating a study group to draft standards for FAIS.
- After submission, the exposure draft is reviewed by the experts of the Digital Accounting and Assurance Board.
- Post the review, comments are invited on the viability of the exposure draft with a period of 30 days allotted for submission.
- Finalization of draft and submission to the Council of Institute of Chartered Accountants of India.
- The council deliberates on the final copy and approves the recommended Forensic Accounting and Investigation Standards.
A Brief Preface of FAIS
- The Forensic Accounting and Investigation Standards aims to be principle-based instead of rule-based, thus enabling enough space for professional’s judgement while applying such principles.
- The standards always assert that the spirit of the law should prevail over the letter of law.
- The standards lay down a minimum set of requirements that are ought to be followed by every ICAI members and is additionally recommended to other professionals as well.
Nature of Engagement as Per FAIS and Possible Objectives
- Investigation Services: The services related to investigating the accounts of the party in question to find any error or misfit which otherwise should not be there. This service is focused on finding evidence to be produced in the court proceedings.
Possible Objective– To look at facts and circumstances with a perspective to urge evidence that supports certain hypotheses about allegations and fraud to prove/disprove an alleged legal violation.
Nature of Service-
- Cyber fraud
- Criminal investigations
- Insurance claims
- Code of conduct violations
- Whistle-blower complaints
- Data breach/corruption
- Asset theft
- Litigation Support Services: These services are generally related to providing evidence in the court of law in form of testimony from a witness.
Possible Objective– To supply testimony during a court of law.
Nature of Service
- Criminal investigations
- Alternate Dispute Handling
- Expert witness
- Forensic Accounting Services: These services are the related determination of fraud and ascertaining of ways in which it was undertaken.
Possible Objective– To undertake discovery and identification of evidence and ascertainment of facts concerning the way during which transactions, funds, and balances are addressed.
Nature of Service-
- Financial Statement Manipulation
- Asset tracing
- Fund diversion
- Tax evasion
- Anti-money laundering
- Suspicious Transactions under IBC
- Asset Valuation
Engaging with Agencies as per Forensic Accounting and Investigation Standards 240
Main Points of dialogue:
- Emphasis on maintaining the privacy of information- non-disclosure undertaking.
- Understanding of different laws before acceptance of engagement.
- Importance of engagement letter stating the scope and subsequent addendums in detail.
- An indicative list of agencies: regulatory bodies, enforcement agencies, and adjudicating authorities.
Forensic Accounting and Investigation Standards 310: Planning the Assignment
The following definitions are utilized in this standard:
Assignment– It means some a part of an engagement or a selected group of tasks that are to be undertaken by the professional during the procedure.
Engagement– It means the general contractual arrangement between the professional and therefore the client providing the terms of reference, coverage, the scope of labour, and expected deliverables.
This standard applies to all or any FAI assignment where a portion of the overall assignment is outsourced to the FAI professional.
The Procedure of Planning FAIS Assignment:
The planning process involves the following basic steps.
- Starting the Planning process by accessing the information on understanding the relevant business and its environment.
- Risk Considerations for the assignment.
- Discussion with the Stakeholders in the engagement.
- Technology Deployment for ascertaining process in less time.
- Allocation of necessary resources for the procedure.
- Formulating Methodology and Coverage for FAI process.
Evidence and Documentation: FAI Standards 320
Evidence means a basic set of information, which can be written, oral or contained within the electronic form and can help the professionals to reach a conclusion. It includes information collected from underlying records of the entity and the related processes, information obtained from other resources, analysis of data or information, testimony, hearsay information, and knowledge from other sources to the extent allowed by the Court.
Documentation means the compilation of all evidence collected with a written account of all work-related procedures performed and conclusions reached or reported.
Points of Discussion
- Reliability of evidence.
- Nature of documentation.
- Relevance of evidence.
- Ownership and custody of documentation.
Conducting Work Procedures- FAI Standards 330
The Forensic Accounting and Investigation Standards 330 give a phase-wise approach to execute Forensic Accounting and Investigation assignment. The phase wise approach breaks down the task in easy-to-follow steps and makes the job easy for an investigator.
In the first phase of the preliminary review, the first objective is to spot the irregularities and fraud risk factors related to the assignment. Within the second phase after a detailed investigation, the first objective is to determine the validity of the hypothesis and establish the credibility of the evidence.
Below we have given the indicative list of work procedures to be followed in Phase 1 and Phase 2:
- Identify the character of evidence to verify allegations on the party.
- Collect data, facts, information, and documents concerning the matter in concern.
- Look for common fraud indicators (red flags) like repeated suspicious transactions etc.
- Collect all the available evidence through regular masked audit proceedings.
- Conduct discreet enquiries to corroborate the evidence and identify the involvement of the people.
- Perform basic financial analysis of the data to quantify the extent of loss in fraud.
- Conduct physical verifications through other field procedures to verify the facts and related data collected in phase 1.
- Identify individuals involved in the fraud through collected evidence and their role (personal and specific) in subject matter; and
- Postulate hypotheses and gather further evidence.
- Ask for clarification and written response from involved individuals (including third parties) as per evidence.
- Interview relevant stakeholders with researched facts or evidence and collect their written statements; and
- Analyse evidence and obtain possible conclusions for reporting.
Forensic Accounting and Investigation Standards 340: Conducting Interviews
The objective of this standard on conducting interviews is to collect or elicit information or to collect evidence to realize the objectives of the engagement. It is going to be noted that interviews shall be conducted only after due planning and preparation. The interviewer should develop a strategy comprising certain essential steps to conduct the interview in an efficient manner. Confidentiality must be maintained regarding the discussions to be done in the interview and its outcome.
Points of Discussion
- Planning and Preparation of interview.
- Maintaining confidentiality of knowledge.
- Interview methodology and Essential Steps.
Forensic Accounting and Investigation Standards 350: Review and Supervision
Review means the examination of different design and work procedures, evidence collection, etc. Supervision means to keep an oversight on the activities done by the staff and giving guidance to the team for objectives attainment.
The main objective of this standard 350 on Review and Supervision is to ensure that employment procedures are performed well in line with the terms of engagement and applicable regulations. Also, to make sure that the method of gathering evidence, information, and data is comprehensive and reliable.
Points of Discussion
- The extent of review and supervision.
- Change in circumstances.
- Nature of Review and Supervision.
- Matter for consideration.
As per the Institute of Chartered Accountants of India (ICAI), the Forensic Accounting and Investigation Standards (FAIS) would be helpful for all enforcement agencies, banks, corporate, regulatory bodies, and other stakeholders to understand the common practices of performing Forensic Accounting and Investigation.
These standards have been greatly welcomed by the various stakeholders and the companies involved in providing accounting and bookkeeping services to big corporates. Earlier these companies did not have well-researched principles to guide them through the FAI process but now they can use these standards to give a basic roadmap to their professionals on how to conduct the FAI procedures.