Forensic accounting - source ca club india

[CS A Rengarajan]

 kindly go through the same

 

regards

 

 

 

 

Forensic Accounting is an integration of accounting, auditing and investigative skills. The term 'forensic accounting' was coined by Maurice E.Peloubet, in whose words "financial statements have some but not all the characteristics of forensic Accounting." According to oxford dictionary, the term forensic mean of or used in 'law court'. Thus, Forensic accounting as a special practice area provides accounting analysis that is suitable to the court and which form the basis for discussion, debate and ultimately dispute resolution. Forensic accounting looks beyond numbers and the focus is on looking at the business reality of the situation.

 

Companies (Auditor report) order, 2003 requires auditors to report, amongst others, "whether any fraud on or by the company has been noticed or reported during the year. If yes, the nature and amount are required to be indicated." Thus, in the Indian context, forensic accounting has gained importance in this background.

 

Areas covered by forensic Accounting:

 

1. Certain engagement related to civil disputes viz. disagreements related to company acquisitions like business valuation, calculating and quantifying losses and economic damages through breach contracts etc.

 

2. Shareholders and partnership disputes involving detailed analysis of numerous years accounting records to quantify the issues in dispute.

 

3.Cyber crimes like credit card frauds, ATM card frauds, cyber extortion, cyber stalking, phishing i.e. sending unsolicited e-mails & collection of sensitive information by simple techniques.

 

4.Forensic accounting also deals with areas of professional negligence claims, involving assessment and reporting on work of other professionals. This involves investigating whether breach of 'generally agreed accounting and/or auditing principles' has occurred.

 

5. Engagement involving criminal matters, involving assessment of accounting systems and accounts presentation, where forensic accountants are hired by the law enforcement agencies.

 

6. Business investigations involving fund tracing, asset identifications and recovery, forensic intelligence gathering and due diligence reviews.

 

7. Employee fraud investigations involving procedures to determine existence, nature and extent of fraud and may involve identification of the clauses etc

 

8. Business Economic losses viz. contract disputes trademark and patent infringements, losses arising from breach of non-compete clauses etc.

 

9. Cases involving medical insurance claims, medical malpractices resulting in economic losses.

 

10. Mediation arbitration in alternative dispute resolution mechanisms due to familiarity of forensic accountants with legal issues and procedures, helping individuals and businesses resolve disputes with minimum disruption and loss of time.

 

Terminologies used pertaining to forensic accounting:

 

1. Forensic investigation:

This refers to using specialized investigative skills to undertake inquiry in such a manner that outcome shall have application in court of law. Forensic investigation may be grounded in areas like accounting, medicine or engineering.

 

2. Forensic Audit:

This refers to investigation of a fraud or presumptive fraud with a view to gathering evidence that could be presented in courts of law. It is essentially a blend of propriety, investigative, regularity and financial audits. The Objective is to ascertain whether true business value has been reflected in the financial statement and during the course of examination to find whether any fraud has taken place.

 

Approach to a forensic accounting assignment:

 

Since each forensic accounting assignment is unique, actual approach and procedures adopted may vary depending on the circumstances of the case. The general step to be adopted may be followed for the forensic accounting assignment as under.

 

1. Meeting with the client, to obtain an understanding of important fact and issues, so as to develop an overview of the investigative situation.

 

2. Performing a conflict check as soon as the relevant parties are identified.

 

3. Carry out preliminary investigative before developing a detailed a plan of action.

 

4. Developing detailed action plan based on knowledge gained from step above, clearly setting out the objectives and methodology to be adopted to accomplish the same.

 

5. Obtaining relevant evidence through documents. Economic information personnel the company, Expert or proof of occurrence of event.

 

6. Perform analysis which may involve calculating economic damages, tracing of assets, summarizing large number of transaction, present value calculations applying appropriate discount rates, repression & sensitivity analysis, using computerized applications like spreadsheet, database, charts and graphics.

 

7. Prepare reports which may include section like nature of assignment, scope of investigation, approach utilized, limitation of scope and finding of investigation. Report may be appropriately supported by schedules,

 

8. Chart and graphics to support the assertions made.

 

Detection techniques used in forensic accounting:

 

A. Critical point auditing(CPA)

In CPA, symptoms of fraud are filtered out from regular transactions where they may be concealed.

Scrutiny for CPA purpose may involve: use of

 

1. Trend analysis

 

2. Checking unusual debits/credits in the accounts

 

3. Discrepancies in receivable /payable /inventory balances evidenced from financial records corresponding subsidiary records.

 

4. False credits to boost sales with corresponding debits to non-existent/dummy personal accounts.

 

Critical aspects to be followed while conducting forensic accounting:

 

1. The objective of forensic accounting is to determine correctness of accounts and whether any fraud has taken place.

 

2. Some of the techniques used could be analysis of past trends or 'substantive' or in depth checking of selected transactions.

 

3. There is no limitation of time period unlike statutory audits and thus accounts may be examined in details from very beginning.

 

4. In case of, verification of stock, realizable value of current assets and provisions or liability estimation etc. Independent verification of selected / suspected items may be carried out.

 

5. In case of off-balance –sheet items like contracts, regularity and propriety of these transactions are examined.

 

6. In case of adverse findings, legal determination of fraud and naming persons behind the fraud is contemplated.

 

Forensic accountant's role:

 

Forensic accountants utilize an understanding of business information, financial reporting systems, accounting and auditing standards, evidence gathering and investigate techniques, Litigation procedures and processes to perform their work. They also play a pro-active role in risk reduction by designing and performing extended procedures as part of statutory audit, acting advisor to audit committee, fraud deterrence engagements and assisting in investment analysis research.

They may play a coherent role against money laundering activities which may involve recovering proceeds of crime. In UK, the relevant legislation for the same is contained in proceeds of crime act, 2002.

 

B. Propriety audit(PA)

 

1. PA is conducting by supreme audit government accounts prepared are in order , in terms of approvals and sanctions of expenditures incurred, whether the expenditure incurred was need-based and that the revenues have been realized in time and properly credited to government accounts.

 

2. The analogy of "value for money audit" is applied to forensic audits whereby financials frauds are unearthed saving wasteful and unwarranted expenditures.

 

Characteristics a forensic accountant should possess:

 

1. Forensic accounting requires specialized knowledge about techniques of finding out the frauds: the forensic accountants must have patience and an analytical mindset.

 

2. Ability to think where he questions seemingly benign documents, looks for inconsistencies, searches for evidence of criminal conduct, looks beyond the number and grasps the substance of the situation.

 

3. Some other characteristics which could aid a forensic accountant could be:

a) Curiosity

b) Persistence

c) Creativity

d) Confidence

e) Sound Professional judgement.

 

4. Good Communication skills including effective listening, considering various alternatives open, and ability to see the large picture are other attributes that could be useful the forensic accountant.

 

Assistance of forensic accountants during fraud investigation:

 

1. Review of factual situation and providing suggestion on possible courses of action.

 

2. Assistance with recovery of assets by way of civil action or criminal prosecution.

 

3. Investigating and analyzing financial evidence.

 

4. Assisting in legal proceedings including testifying in court as expert witness and preparing visual aids to support trial evidence.

 

5. Helps in analysis, interpretation, summarizing and presenting complex financial and business related issues.

 

6. Developing computerized applications in analysis and presentation of financial evidence.

 

7. Providing litigation support viz. assistance in obtaining documents necessary to support or refute a claim, assistance with settlement discussions and negotiations, attendance at trial to hear the testimony of opposing expert and to provide assistance with cross- examination.

 

Forensic accounting opportunities:

 

Forensic accounting as such is centuries old since KAUTILYA the famous economist, recognized the need for forensic accountants, when he mentioned forty different ways of embezzlement. SHERLOCK HOLMES was perhaps the most famous practicing forensic chemist.

 

Growing Cyber Crimes, Failure of Regulatory agencies to track security scams, busting of many co-operative banks and collapse of Giant Corporation like Enron emphasize the need of using forensic accounting, for chartered Accountants in India, forensic accounting provides an exciting opportunity to foray into this field. Growing regulatory and compliance procedures shall demand greater services in the nature of forensic accounting practice. According to 'Accounting Today' nearly 40% of top 100 American accounting firm's are expanding their forensic and fraud service. With Indian corporate now turning global, with higher volume of cross-border transactions, use of hi-tech technology leaving little audit trail, use of forensic accounting in India is likely to catch pace.

 

Conclusion:

Forensic accounting through a new field in Indian accounting world has tremendous potential as a new practice area for Indian CAs given the increasing use of e-commerce application, cyber frauds and increasingly complex transaction in both domestic as well as cross-border businesses. Indian CAs with their extensive theoretical education and practical experience can create forensic accounting and auditing as their niche area.

 

 AJAY KAMAL

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csarengarajan
Company Secretary, Chennai
email csarengarajan@gmail.com

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[CS A Rengarajan]

I am partially agree with your points.  Major questions are coming from youngsters who wanted to perform.  The check list conversion of private to public  vice versa  repeatedly asked our members.

 

My point is that our members  are not coming forward to discuss  corporate case laws.

 

I feel if we discuss case laws, we can improve our knowledge and self confidence will also improve

 

Why can't we discuss one case law every day and we can express our view point.  Each one is having own interpretation and practical experience

 

Contrary virw solicited

 

Best regards

 

 

On Fri, Jun 24, 2011 at 5:43 PM, <chi11...@yahoo.com> wrote:

 

Dear ashish kumar and all other who just ask questions without doing any hard work from their side

The answer to your question is yes.

I am disappointed with queries like this. Many professionals don't try to find out the answers by them selves.

Pl. Don't ask your question like " can any body send me the procedure for merger or shifting of office or holding meeting etc"

Why you people do not read the books?

One of the best book on company law is "ramaiya"

Our own Mr. Chandratre's book on company law is equally good.

For SEBI we have book written by Mr. Chandratre, Mr. Acharya Mr. Sethuraman etc. is authentic.

Company law procedure by Bhandari is very popular.

Our CS brother from Indore Mr. D K jain has also written very good books on different topics.

Our another CS Mamata bhargav is also a nice author.

Our nasik chapter chairman CS V S Datey's book on indirect tax is very popular book among students

If any one read the book they will know much more then simply cut paste the procedure.

So cultivate the habit of reading books. It is very healthy practice for a long professional life.

Tks

CS Chirag shah

chirag shah
Sent on my BlackBerry® from Vodafone

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From: ashish sharaf <ashish...@yahoo.co.in>

Sender: company_...@yahoogroups.com

Date: Fri, 24 Jun 2011 16:50:47 +0530 (IST)

To: company_...@yahoogroups.com<company_...@yahoogroups.com>

ReplyTo: company_...@yahoogroups.com

Subject: [CS_yahoogroups) Merger

 

Dear Friends

Can a Unlisted Public Limited Company be merged with Pvt Ltd Co.

Pl share reply.

Thanks

Ashish Kumar

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[CS A Rengarajan]

Source Indian Corporate law blog

 

Can we discuss the same and i would request each one of our member to participate in the discussion.  We would like to major participation in the case laws analysis.

 

Best Regards

 

Sesa industries v  krishna Bajaj  Supreme court judgment

 

 

The Supreme Court of India recently revisited the law on schemes of amalgamation under Sections 391-394 of the Companies Act, 1956 in Sesa Industries v. Krishna Bajaj. The Supreme Court was concerned with a set of appeals by special leave from the judgment of a Division Bench of the Bombay High Court at Panaji. The Division Bench had set aside a judgment of a Single (Company) Judge sanctioning a proposed scheme of amalgamation between the appellant, Sesa Industries Limited (“SIL” or “Appellant”), and another company, Sesa Goa Limited (“SGL”).

The facts in brief were that on 26th July, 2005, the Board of SIL passed a resolution seeking to amalgamate SIL with SGL. Subsequently, SIL and SGL filed company applications in the Bombay High Court seeking permission for convening a general body meeting for the purpose. Krishna Bajaj (“Krishna Bajaj”), holder of 0.29% of the shares in SIL, intervened in these petitions objecting to the amalgamation. He relied on an inspection report under Section 209A of the Companies Act, 1956, where some alleged malpractices, including siphoning of funds, were highlighted. The Single Judge rejected the objections, and allowed SIL and SGL to convene a general body meeting. The Judge also directed a disclosure to be made to the meeting in respect of the Inspection Report.

Following this, a general body meeting was held, and 99% of the shareholders consented to the scheme. SIL and SGL approached the High Court for sanctioning of the scheme. The Registrar of Companies, Goa, filed an affidavit stating that he had no objections, subject to the fact that the scheme should not result in any dilution of legal action on the basis of the Inspection Report. The Official Liquidator (“OL”) also filed a Report [(as required under the second Proviso to Section 394(1)] that the affairs of the company were not being carried out prejudicial to the interest of the members/public. This report was attacked by the objector to the scheme as being vitiated because of non-application of mind.

By a judgment dated 18th December, 2008, the Company Judge sanctioned the scheme of amalgamation between SGL and SIL. In his decision, he gave detailed reasons after appreciation of the facts as to why the objections were being rejected. This decision was reversed by a Division Bench, inter alia on the grounds that a scheme should not be sanctioned when there was a pending investigation u/s 209A. Further, the Court stated that there was no affidavit by the Registrar that the affairs of the company were not being carried out in a manner prejudicial to the interests of the members/public; and consequently, the first Proviso to Section 394(1) was not complied with. It held that the OL’s report was vitiated, and consequently the second Proviso was not complied with either.

Before the Supreme Court, it was urged by the Appellants that the first Proviso to Section 394(1) applied only to the amalgamation of a company which was being wound up, and not to cases where the prayer in the amalgamation petition was for “dissolution without winding up”. Further, the existence of an investigation report u/s 209A or the pendency of an investigation u/s 235 was not sufficient grounds for refusing to sanction a scheme which was approved by the general body. Contrary to this, the Respondents urged that Chapter V of Part VI of the Act was intended to introduce “a system of checks and balances to promote the interests of shareholders, creditors and society at large so as to promote a healthy corporate governance culture, and the Courts should adopt an interpretation that advances this object.” After discussing these contentions in light of earlier cases including Miheer Mafatlal, the Supreme Court observed:

“… while it is trite to say that the court called upon to sanction a scheme of amalgamation would not act as a court of appeal and sit in judgment over the informed view of the concerned parties to the scheme, as the same is best left to the corporate and commercial wisdom of the parties concerned, yet it is clearly discernible from a conjoint reading of the aforesaid provisions that the Court before whom the scheme is placed, is not expected to put its seal of approval on the scheme merely because the majority of the shareholders have voted in favour of the scheme. Since the scheme which gets sanctioned by the court would be binding on the dissenting minority shareholders or creditors, the court is obliged to examine the scheme in its proper perspective together with its various manifestations and ramifications with a view to finding out whether the scheme is fair, just and reasonable to the concerned members and is not contrary to any law or public policy… the Court has to see that the provisions of the Act have been duly complied with; the statutory majority has been acting bona fide and in good faith and are not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purport to represent and the scheme as a whole is just, fair and reasonable from the point of view of a prudent and reasonable businessman taking a commercial decision.”

Subsequently, the Supreme Court confirmed the finding that the OL’s report was vitiated. However, the Supreme Court then considered the issue of whether a lapse by the OL would be sufficient to refuse to sanction a scheme. This – the Court held – was a matter which was to be seen by the Company Judge. The Court refused to lay down an absolute rule that the vitiation of the OL’s report u/s 394(1) would result in vitiation of a scheme of amalgamation. It held, “We are of the view that it will neither be proper nor feasible to lay down absolute parameters in this behalf. The effect of misdemeanour on the part of the official liquidator on the scheme as such would depend on the facts obtaining in each case and ordinarily the Company Judge should be the final arbiter on that issue. In the instant case, indubitably, the findings in the report under Section 209A of the Act were placed before the Company Judge, and he had considered the same while sanctioning the scheme of amalgamation. Therefore, in the facts and circumstances of the present case, the Company Judge had, before him, all material facts which had a direct bearing on the sanction of the amalgamation scheme, despite the aforestated lapse on the part of the Official Liquidator…”

On this basis, the Court allowed the appeal, and the order of the Single Judge sanctioning the scheme was restored.

One question which arises from this decision is – assuming that the OL had in fact properly applied his mind and had given an unfavourable report, would it still be open to the Court to reject that report by re-considering the relevant facts? There can certainly be instances where two reasonable persons (say, the OL and the Company Judge) can come to different views on the same set of facts. The decision of the Supreme Court suggests that it is open to the Company Judge to carry out a de novo review of the facts. Unless this were so, on what basis could the Court have sanctioned the scheme despite holding that the OL’s report was vitiated? And if the Company Judge can carry out a de novo review when the report is vitiated, why can he not carry out a de novo review in each case? What principle would bar the Judge from exercising such powers in all cases?

The second Proviso requires the existence of a report by the OL (“no order… shall be made… unless the Official Liquidator… made a report”) – in this case, admittedly, the report was vitiated. Certainly, the ‘report’ contemplated under the Proviso would not include a vitiated report. Thus, in the facts of the case, it must be held that there was no report at all. The decision of the Court appears to have the impact of treating the OL’s report as directory, and instead giving complete discretion in this regard to the Company Judge. Such a reading does not appear to fit in with the language of the second Proviso. With respect, perhaps the better course in such cases would be to require the OL to prepare a fresh report to rectify the infirmities in the original report.

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