Expectations from Forensic
Auditors have sky rocketed after the revelation of many large value scandals,
which have rocked corporate India in the last decade. The latest one relating
to the LOU scam has crossed over Rs 11,000 crores! Not only the affected banks,
enforcement agencies, and the regulatory bodies, but even the hitherto
unaffected banks and even blue chip companies have started doing a lot of deep
diving exercises to ascertain whether they have been abused in any way. Thus,
experts in forensic accounting services are being sought out to perform this
massive task which is unprecedented in terms of size and scale.
In this backdrop, the
challenges to forensic auditors are huge. Perpetrators of financial crimes and
fraud have evolved with stronger capabilities and are armed with technology to
launch lethal attacks. This is further compounded by the growing complexities
in business operations. The nature of the business transactionssometimes are so
technical that they are not easy to comprehend for even technically qualified
experts, and to do a thorough forensic audit in such circumstances needs a huge
amount of patience and perseverance apart from the expertise. Therefore, to do
a good forensic audit in the days to come, forensic auditors will need to
adapt. In the theory of evolution, it is believed that the species which
survives the longest is not the one which is the strongest, nor that which is
the most intelligent, but that which is able to
adapt to the changing environment. Forensic auditors need to do exactly
that. They will have to adapt to the environment which poses such new
challenges.
The process of adapting
will be greatly facilitated if forensic auditors bring in creativity and
imaginative thinking. The following suggestions may facilitate a forensic auditor
to adapt better and perhaps bring in more penetrative results:
– Firstly, remove complete
reliance on standard checklists by customising them to the objectives of the
given situation. This can be better understood with a case study. In an
investigation assignment in a life insurance company, the forensic auditor had
to investigate and report on suspicious death claims based on data and
documents given to him for the last one year. He compiled a checklist, which
included selection of a test sample of transactions and applying routine
processes of vouching and verification of supporting claim documents like the
death certificates, crematorium receipts, doctors cause of death reports,
application form details, etc. The sample selection was done by using one of
the standard sampling methods like statistical sampling. The auditor’s entire
focus was on completing the work as per his checklist on a statistical sample,
and submitting his report. This procedure of applying a statistical sample and
then vouching and verifications of documents is certainly important, possibly
to gain confidence on the controls and procedures, but maynot be sufficient to
detect the possibility of fraud. One suggestion is to then reduce complete
reliance on standard sampling techniques and apply other kinds of focussed and
adapted sampling techniques additionally. The forensic auditor in this case
tried this approach. Since he had the full data dump of all the death claims on
an electronic spreadsheet, he started thinking about different ways of
extracting data samples which could possibly throw up any clues of fraud. That
was the key to his success. When one starts looking beyond the routine and
tries to visualise various possible ways of exposing a crook, amazing solutions
can come from such a thought process. In fact, it is said that a good
investigator is one who can think like a fraudster. The forensic auditor, in
this case, saw that in the data of death claims, there were many data fields
that were not addressed or checked by his audit check list. He realised that
fraudsters also realise what auditors check and what they generally don’t look
at. The forensic auditor spotted two data fields which caught his eye. Date of
birth of the deceased and date of birth of the beneficiary or the claimant.
These were not within the focus of the forensic audit at all. The forensic
auditor then decided to extract a new sample of data by filtering out those
claims paid where the date of birth of the
deceased and the date of birth of the claimant were the same. The
forensic auditor expected such instances to be nil or very miniscule. Except in
the rare situations where the claimantor beneficiary was a twin sibling of the
deceased, the date of birth of the beneficiary would be unlikely to be exactly
the same as that of the deceased. So out of 13,000 line items, he expected to
find no more than 4-5 such transactions where the date of birth of the deceased
and the beneficiary would be exactly the same. The data was filtered to those transactions
where the dates of birth were matching and to his surprise he found 82
transactions where the date of birth matched exactly for the deceased and the
beneficiary. Now the forensic auditor had a new direction of investigation and
he started examining them in greater detail. He made inquiries as regards which
branch offices had originated and paid these claims, who were the claims’
approving officers, which period during the year were these claims paid and
even how fast they were paid. He then grouped the sample data appropriately
branch wise, officer wise. The results were spectacular. 77 of the 82 claims
with the common dates of birth came from only one specific branch in North
Mumbai. A claims officer Mr. M. Thanvir was the common authorising claims
officer for all these claims. These claims were paid off 50 % faster (in number
of days after lodgement). Now the original checklist for document examination
was again used to vouch and verify in detail the claims of these 77 deaths. As
expected, solid evidence of falsified death certificates and other documents
was found and a major insurance fraud in the North Mumbai branch was exposed!
Thus customising the sampling technique, and applying appropriate additional
checks based on the revelations, did the trick. In other words adapting and
innovating was the key to the forensic auditor’s success.
– Secondly, the forensic
auditor must constantly do research and look for newer solutions and techniques
to address fraud in different situations. If the perpetrators of fraud can take
advantage of technology, so can the forensic auditors. A regular visit to
websites relating to latest fraud tools, techniques and approaches in fraud
investigations can enable a forensic auditor to meet the challenges of business
complexities and possibly gain from experiences of others. In one such
investigation assignment when a forensic auditor was stuck with limited
findings, he had come to a stage where he had to submit a report and close the
matter inconclusively stating there was lack of evidence. He had really worked
hard and found that all the documentary checks that he had applied were not
yielding any significant results, but there were plenty of warning bells and
other indicators which seemed to suggest that fraud existed. But he had no hard
core evidence. Of the many matters which were not resolved, he had one major
doubt in his mind that the credit card number that had been furnished as
evidence for payment was false, but he had no way to verify its correctness. He
did not give up hope and his patience and perseverance paid off. He surfed
through the internet looking for solutions for credit card frauds and with a
little effort he came across an algorithm called the Luhn’s algorithm. This
algorithm was able to ascertain whether a credit card number was a valid credit
card number. However, the algorithm in the form available on the internet was
difficult to use, so painstakingly the auditor prepared an electronic
spreadsheet incorporating the functions of algorithm and he was able to use it
to prove that the credit card number given as evidence of payment for an
expense was an invalid number. This forensic auditor was thus able to achieve
the objective only by doing research and adapting the forensic audit to the
needs of the situation.
While these two suggestions
stated above are possible approaches for solutions, there are other measures
too which not only forensic auditors, but all professionals should take. One,
do not allow ‘a stale procedures syndrome’ to set in. This stale procedures
syndrome is nothing but a term for ‘getting used to’, or ‘taking for granted’.
In our every day work we often get complacent when we do the same or similar
tasks again and again. There was a very interesting fraud investigation case
where an auditor was auditing the financial statements of a college for 2
decades. He was doing a reasonably good audit and generally the audit reports
issued were clean and unqualified. Unfortunately, he died and a new auditor was
appointed. The new auditor brought a fresh new wave of thought processes and he
started examining data with a completely new checklist, which was compiled
after a thorough understanding and evaluation of the activities and operations
of the college. One of the items in the financial statements which caught his
eye was the huge balance ofstudents deposits lying with the college. These were
amounts deposited by the students at the time of admission such as library
deposit, caution money deposit, etc. These deposits could be collected
by the students only when they left the college, which was usually about 4
years after their date of admission. Most students would forget to collect
these deposits for various reasons and consequently over a period of time the
college balance sheet disclosed a huge amount of unpaid students deposits. The earlier auditor never gave much attention
to this deposit amount since this was not a part of the college’s revenue and
it was merely an unclaimed liability payable only when requested for by the
students. Nevertheless, the new auditor painstakingly studied the deposit
collection and refund procedure and performed some checks on them as a part of
his new audit checklist. While he was examining the refund procedure, something
unusual caught his eye. The ledger account of deposit repayments showed
repayments for each date person wise, amount wise strangely in an
alphabetical order. To his surprise, he found that almost throughout the
entire year (barring some random exceptions) deposits were repaid to students
in an alphabetical order of their names.
This was not only queer but
also absurd. It was unthinkable that students would come to claim their deposit
refund in an alphabetical order. The new auditor called a few of the students
who had claimed their refund. All of them confirmed his suspicions that they
had not made any request for, nor had they got any refund. It was thus revealed
that the repayments were actually effected on forged refund applications
prepared and collected by the cashier himself. The cashier had adroitly taken
great care to ensure the forged application forms were prepared with all the
necessary supporting details and were attached to the cash payment vouchers,
but he made one fatal mistake. He got the names of students from the attendance
registers of the college, which were always in an alphabetical order.The
previous auditor also would have seen this ledger, but he had been auditing for
over two decades and his mind became ‘used to’ or `stale’ and he did not spot
this absurdity. The central lesson in this for all professionals is to combat
setting in of such a stale procedures syndrome by having more than a different
person to review the work, so as to bring in freshness and a greater alertness
to spot any warning bells of fraud.
Thus, in the foreseeable
future, forensic audits can increase their chances of success if they try to
innovate and adapt. The future holds opportunities for even the middle level
and smaller sized professional firms who want to do this kind of forensic
auditing work. Presently, that may appear to be difficult, but even smaller
firms can and will get a share of the pie. For this purpose, they will have to
adapt too by undergoing training and doing intense research. This will be the
fundamental need. Once the capability has been achieved, these firms can also
get empanelled with Police, Banks, Income Tax, PSUs etc. Very soon the
need will be so intense that all companies and potential clients may not wish
to go only to giant firms but also to small specialist firms where they would
have the benefits of both economical budgets and matching quality.
