What is 'Forensic Accounting'

Forensic accounting utilizes accounting, auditing and investigative skills to conduct an

examination into a company's financial statements. Forensic accounting provides an
accounting analysis suitable for court. Forensic accountants are trained to look beyond the
numbers and deal with the business reality of a situation. They are frequently used in fraud
cases. The Association of Certified Fraud Examiners (ACFE) is on e of the primer organization
in Forensic Accounting, formed in 1988.

Forensic accountants analyse, interpret and summarize complex financial and business matters.
They may be employed by insurance companies, banks, police forces, government agencies or
public accounting firms. Forensic accountants compile financial evidence, develop computer
applications to manage the information collected and communicate their findings in the form
of reports or presentations.

Forensic accountants often look for evidence of any criminal activity in company’s financial
records. This could include anything from securities fraud and overvaluation of inventory to
money laundering and improper capitalization of expenses

Types:

Proactive Fraud Auditing

Reactive Fraud Auditing

Steps:

Collect Information

Analyze Fraud

Prepare report

Go for Litigation Process

Some Indications:

1. Decline in Profits

Situation
A client was experiencing an unexplainable decline in profits. The Chief Financial Officer was
suspected of embezzling corporate funds, so the client hired forensic accountant and
investigative team to look into the situation.
Solution
By analyzing the company's financial statements and records and uncovered a large fraud
scheme. From available documents and records, and from interviews with key employees, a
fraud report revealed that the CFO's fraudulent activities. The primary suspect was interviewed
and confessed. The client is assisted in filing an employee dishonesty claim, and further
assisted law enforcement in the prosecution process.

Results
- Chief financial officer gave a written confession and was then fired. The case was turned over
to law enforcement and charges were filed by the local prosecutor.

- New chief financial officer was hired.

- Company is experiencing increased profits.

2. Inventory Losses

Situation
A large recreational wholesaler was experiencing significant inventory losses, a high number
of customer complaints and a loss in revenue in the warehouse department. They decided to
bring in an independent forensic team.

Solution
After meeting with the company's executives, the team of forensic investigators determined the
company needed to proceed with some investigative work. Covert surveillance is conducted of
the warehouse department, onsite interviews of warehouse employees, and analyzed the
financial statements for key account variances.

Results
- Obtained key confessions from the warehouse supervisor and two warehouse employees.

- Installed proper internal controls designed to safeguard the assets of the company.

- Inventory variances have greatly improved.

- Proper controls are in place, giving owners peace of mind.

Satyam Scam was the big corporate scam that occurred in India in 2009 and is also regarded
as “Debacle of the Indian Financial System”. After studying about the Satyam Scam in detail,
this is best what one can explain about it. Read to know in detail about Satyam Scam.

IT Company name Satyam Computers was started by Ramalinga Raju and his brother in law
in 1987. Raju was Harvard Graduate and an impressive personality. Satyam was Hyderabad
based company. In 1991-92 Satyam computers was listed on BSE (Bombay Stock Exchange)
and in 2001 it was listed on NYSE (New York Stock Exchange). Satyam Computers was one
of the fastest growing company of India and hence Satyam Computers as well as Ramalinga
Raju received many awards during its growth years.

During the same period the Real Estate was on Boom and hence Raju was attracted towards
real estate market. The property rates in Hyderabad was growing rapidly so Raju aggressively
started buying the land properties in Hyderabad and nearby areas. Due to aggressive buying of
properties Raju was in short of funds (money) hence to generate more funds he started to
manipulate the financial statements of Satyam Computers. For example, If Satyam had the
actual profit of Rs60 crores then in financial statements Raju used to show the profit of Rs600
crores so as to show that Satyam is growing very rapidly.

Due to this fake rapid growth and fake strong financials the price of share of Satyam was
growing rapidly. Raju and his brother was selling the shares of Satyam on this high price so as
to raise the money to buy properties. Raju opened 365 new companies to buy the properties.
He used to buy the properties under the name of his family members, relatives, friends etc.
Raju used to make his farm workers (whose monthly income was not more than Rs5000) the
Directors of his newly opened companies and used to buy the properties under their name.

Raju plan was that the rates of the properties will grow in multiples after some time, after that
he will sell those properties and from the money earned, he will balanced the gap that he has
created in financial statements of Satyam.

Because of manipulating the financial statements of Satyam as well as showing the fake rapid
growth for years, the price of share of Satyam was growing very rapidly. Taking advantage of
this, the promoters of Satyam used to sell those shares on high price to earn profit. In 1999 the
promoters of Satyam hold 24% of shares, while in 2008 it was reduced to 2%. As the days were
passing the gap between the actual figures and fake figures was increasing resulting into a huge
amount.

Due to recession in 2008, the rates of properties decreased drastically and Raju’s plan of selling
properties at high rates failed. Raju was in great trouble and to escape from this he made a new
plan. According to this new plan, Satyam will buy the two companies that is Maytas properties
and Maytas Infra (both companies of Raju’s family members). They will buy the companies
on paper but in real there will be no cash transactions so as to balance the fake figures and
actual figures in accounts of Satyam. Satyam’s board of directors approved the plan 16th Dec
2008 and without taking the permission of Share Holders, Raju sanctioned the deal. But
investors of Satyam were not happy and due to this price of stock of Satyam decreased. One
investor from U.S filed Lawsuit on Satyam due to which the price of Satyam was decreased by
almost 55% on NYSE.

Due to increasing pressure of investors on Raju, he cancelled the plan of buying Maytas Infra
and Maytas properties. This was last chance for Raju to fill the gap between actual and fake
figures of Satyam and stop this scam for revealing, but seeing it failed, on 7th Jan 2009 he
confessed to SEBI that he was manipulating the financial statements of Satyam and on 9th Jan
2009 Raju and his brother were arrested.

After this scam, government appointed new Board of Directors on Satyam. In April 2009 Tech
Mahindra purchased the 51% shares of Satyam Computers and named it Mahindra Satyam.
Finally in June 2013, Mahindra Satyam merged in Tech Mahindra.

According to CBI, Raju was doing money laundering. He used to send the money in European
Countries and then re-route them back in India. ED (Enforcement Directorate) filed the case of
money laundering on Raju, his 166 companies and 47 other people and sealed the properties
of Raju and his Family. SEBI filed the case of Insider Trading on Raju and ordered him to
return the profit of Rs1850 crores that he earned from Insider Trading with 12% interest and
banned him for 14 years to deal in securities market. Finally on 10th April 2015 CBI Court
sentenced 7 years of imprisonment to Raju, his brother and many other people associated in
scam.

Before this scam was revealed, Satyam was recognised as 4th largest IT Company of INDIA
and usually tagged as “IT Crown Jewel of INDIA”. Satyam’s stocks were included in Sensex
and Nifty but were removed on 9th Jan 2009.

After scam was revealed, Satyam’s stock decreased from Rs170 to Rs6.50 due to which its
investors suffered the loss of almost Rs14162 crores. LIC was institutional investor in Satyam
and suffered the huge loss of Rs950 crores.

The meaning of word Satyam in Sanskrit is ‘Truth’. But there was no truth in operations of
Satyam. To earn the money Raju did many illegal activities like Money Laundering, Insider
Trading and Accounting fraud due to which many common investors of Satyam suffered a lot.

There is one thing for us to learn from this scam, that if promoters of any company are selling
their shares then always check why they are doing so and mostly do not invest in such
companies.

The Satyam accounting fraud, by the admission of its own founder and chairman Ramalinga
Raju, involved over Rs 7,000 crore in misstated financials.

What PW Did Wrong

SEBI examined Price Waterhouse’s audit work on five specific grounds to determine its role
in the accounting fraud.
1. Non-existent cash/bank balances of Rs 5,040 crore
SEBI’s investigation and show cause notices found that PW did not independently verify bank
statements and fixed deposit receipts nor disclose the lack of such verification in the audit
report. PW argued that it had undertaken verification and that the fixed deposit receipts
appeared to be genuine.
In one instance, SEBI has cited Satyam’s significant current account balances, Rs 1,782.6 crore
in Sep. 2008, with Bank of Baroda’s New York branch. The regulator found that not once in
eight and half years did PW request independent confirmation from the bank and instead relied
on Satyam to source the confirmations from the bank.
In another instance, the regulator said a 2006 balance confirmation letter from ICICI Bank to
PW did not contain even the name of the company for which the balance was being confirmed.
PW said in its defence that there was no standard format for bank statements.
It was also found that two separate sets of fixed deposit balance confirmation letters were
received by PW - one from banks and the other from Satyam.
2.Inflated sales revenues using 7,588 fake invoices
SEBI’s order states that PW did not carry out any reconciliation between invoices and that it
allowed receipts “represented by non-existent additional transactions in the monthly bank
statements to be reported in the books of accounts without there being supporting invoices...”
PW argued that there was nothing distinguishable in the invoices that suggested they were fake.
And that they were inserted in the billing system without the audit firm’s knowledge.
But the order points out that though Satyam was predominantly a services company, several of
the fake bills related to products - and that should have alerted the audit firm.
SEBI also found that PW ignored red flags in the internal audit reports.
3.Overstated debtors’ position by hundreds of crores of rupees
PW claimed that every year the client engagement team sought confirmations from a sample
of debtors. Except for financial year 2008. Because of poor response rate in previous years.
SEBI’s order states that “fictitious sales would automatically result in fictitious debtors; it is
but a natural corollary”.
Here too SEBI has underscored, several times, the importance of external confirmation, even
though it is not the only mandated procedure.