FORENSIC ACCOUNTING

Volume 4, Issue 39 October 2013

In this Issue
03 Forensic Accounting 04 RBI Column 08 Personalities of the Month 09 Market Round Up 10 Economic Rollers 11 Stock Analysis 12 Finance Buzz 13 Photo Find 14 Finance Quiz 15 Crossword 16 Answers 06 Satyam Computers LtdA Classic Case of Fraud Accounting 05 Use of Forensic Accounting in Divorce Settlements

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In this Issue

FORENSIC ACCOUNTING
ANINDITA NATH - F1

Fraud is a growing industry, unfortunately. There has never been dearth of bad people doing bad things, says Andrew Bernstein. Hence, the opening quote suggests how important forensic accounting is. Forensic accounting, sometimes called investigative accounting, involves the application of accounting concepts and techniques to legal problems. Forensic Accounting utilizes accounting, auditing, and investigative skills to conduct an examination into a company's financial statements. Thus, providing an accounting analysis that is suitable for court. Forensic accountants investigate and document financial fraud and white-collar crimes such as embezzlement. They also provide litigation support to attorneys and law enforcement agencies investigating financial wrongdoing. Assignments of a Forensic Accountant: 1. Criminal Investigations- Forensic Accountant performs criminal investigations on the behalf of police force and organizations such as Law Society. 2. Shareholders and Partnership DisputesEncompasses the post-mortem of historical data like disputes arising in the case of benefits and compensation received by the aggrieved shareholder or partner. 3. Personal Injury Claims / Motor Vehicle Accident- A forensic accountant also estimates the economic loss as a result of a motor vehicle accident. Cases pertaining to medical malpractice and wrongful dismissal calls for the quantification of the economic losses. 4. Business Interruption/Insurance ClaimsA forensic accountant assists from either an insured or insurers perspective in cases like business interruption, property losses, fidelity claims. 5. Business/Employee Fraud Investigation-

It includes funds tracing, due diligence report reviewing, forensic intelligence gathering and asset identification and recovery. 6. Matrimonial Disputes- This covers evaluation and valuation of assets pertaining to businesses, property or other assets. 7. Business Economic Losses- This assignment takes up business losses such as; contract disputes, construction claims, expropriations, product liability claims, trademark and patent infringements. 8. Professional Negligence- It is being viewed from two angles i.e. Technical- Breach of GAAP or GAAS and Loss quantification. 9. Mediation and Arbitration- Forensic Accountants do possess expertise on legal process and procedures in turn provide assistance in alternative dispute resolution to help individuals and businesses to resolve disputes with minimal interruption and in timely manner. Inference- The famous saying, Auditor should be a watchdog but not a bloodhound, invites the forensic accountants to look beyond numbers to comprehend the business realities. After the Satyam fraud, the demand for forensic accounting is growing rapidly. Moreover, with the advent of plethora of e-commerce businesses, the need for forensic accounting relative to the cyber space is worth mentioning. Therefore, it is time for the Chartered Accountants to focus on the timely detection as well as the prevention of burgeoning cyber frauds.

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RBI COLUMN
R VISHNU VARTHANA - F2

minimum average maturity of seven years and no prepayment will be allowed before maturity, it added. 3. The Reserve Bank of India (RBI) tightened regulations governing non-banking finance companies (NBFCs) lending against gold jewellery. The new rules include strict documentation for high value loans against gold and prohibition on misleading advertisements by NBFCs such as offering availability of gold loans in a matter of 2-3 minutes. 1. The Reserve Bank of India asked banks to link the disbursal of home loans to stages of construction to protect the interests of buyers and contain the fallout of "innovative" housing financing schemes. These loan products, the RBI said, are popularly known by names such as 80:20 and 75:25 schemes. The RBI said such home loan products are likely to expose banks and their borrowers to additional risks. With effect from June 21, 2013 the RBI revised the Loan-to-Value (LTV) ratio, which determines how much the banks can finance. For loans of up to Rs 20 lakhs, banks can lend to a maximum of 90 per cent, while the borrower has to pay the remaining 10 per cent. 2. In order to encourage capital flows, RBI eased the External Commercial Borrowing (ECB) norms by allowing companies to use funds raised from foreign partners for general corporate purposes. Till now, borrowings in the form of ECBs were not to be utilised for general corporate purposes. However, the RBI has put certain conditions for availing the benefits of relaxed norms. "Minimum paid-up equity of 25 per cent should be held directly by the lender (overseas partner)," the RBI said. Also, repayment of the principal will commence only after completion of 4. RBI also said that NBFCs financing against the collateral of gold must insist on a copy of the PAN card of the borrower for all transaction above Rs5 lakhs and all high value loans of Rs 1 lakh and above must only be disbursed by cheque. The apex bank has clearly stipulated that NBFCs should not issue misleading advertisements like claiming the availability of loans in a matter of 2-3 minutes. RBI has also asked NBFCs to make the auction process of the gold more transparent by disclosing the details of the auction process in their annual report, including full details of the value fetched in the auction. The RBI said that the reserve price for the pledged ornaments should not be less than 85% of the previous 30 day average closing price of 22 carat gold as declared by the Bombay Bullion Association Ltd, an industry body.
Source : www.rbi.org

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In this Issue

USE OF FORENSIC ACCOUNTING IN DIVORCE SETTLEMENTS

MUFADDAL NIMAKWALA - F1

It is no surprise that financial issues are among the most contentious in divorce actions. The financial aspects associated with marital disputes and dissolution are often complex and consume most of the effort and attention of the parties. Forensic accountants possess unique skills that allow them to provide valuable support to the divorcing spouses and their attorneys. While attorneys have traditionally engaged accountants to assist with general financial issues related to divorces, attorneys are increasingly relying upon forensic accountants to provide more in-depth forensic services beyond alimony and child support calculations. Though the trend has not gathered as much pace in India as in the West, however, there are reasons where the services of a forensic accountant can prove to be of immense value: Even though India has different marriage laws for different religious communities, a divorce settlement can be disputed in the Court for the issue of alimony or maintenance. To determine the amount of alimony or maintenance, the Court would consider the status of the husband and the wife with respect to their income, assets and lifestyle and reasonable wants of the husband/wife. Uncovering Hidden Income and Assets- Detecting hidden, transferred or deferred income through techniques like the analysis of the family's lifestyle to determine if the level of reported income is sufficient to support the family's expenditures, an examination of the couple's net worth at two or more points in time to determine whether the reported income during the period is consistent with the change in net worth, and an analysis of bank deposits. Investigating Closely Held Businesses- The spouse with higher income may attempt to hide, transfer or defer income or assets in anticipation of the formal decision to divorce.

The spouse may accomplish this by withdrawing unreported cash from a closely held business, manipulating receipts and expenses of a closely held business, transferring cash to other individuals or entities, or by deferring the receipt of a bonus or other compensation until after the divorce is settled. The forensic accountant conducts a detailed review of business records and practices, including internal controls, to detect any manipulation or concealment. Forensic accountants are an invaluable resource to attorneys in divorce litigation, and, when utilized appropriately, their examinations can facilitate a more equitable settlement. While the need for a forensic accountant depends upon a variety of circumstances of each case, including the size of the marital estate, the extent of actual or perceived marital misconduct, the financial needs of the dependent spouse post-dissolution, etc., the reward will generally exceed the money invested in fees and costs.

References: http://www.lorman.com/newsletter/article.php? article_id=1470&newsletter_id=313 (Author: Barbara A. Ruth & Michael A. Gillen) http://businesstoday.intoday.in/story/divorced-how-to-bestnegotiate-for-good-alimony-amount/1/192713.html

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SATYAM COMPUTERS LTD.A CLASSIC CASE OF FRAUD ACCOUNTING

FARHEEN IMAM - F1

The science of conduct is swayed in large

by human greed, ambition, and hunger for power, money fame and glory - This testament is well proved by the fraud committed by the founders of Satyam Computers Ltd. in the year 2009. Satyam Computers Ltd. was one of the upcoming stars in the outsourced IT service industry in India. Satyam was formed in the year 1987 in Hyderabad by Mr Ramalingam Raju. It was considered to be an example of Indias growing success. The company received a number of awards for corporate accountability, innovation and governance. Ironically, Satyam in Sanskrit means truth. However, the company was not able to live up to the literal meaning of its name. The big revelation was made on 7th, January, 2009 when Ramalingam Raju, the founder of the company disclosed that he had been manipulating the companys accounts for a number of years. He

fake invoices were created to inflate revenue. The board resolution was forged by the global head of Internal Audit. Moreover, money raised by Satyam through American Depositary Receipt (ADR) was not publicized in the balance sheet. In an attempt to shore up profits and increase the incentives payable to the companys executives, funds were diverted to real estate investments. This led to a huge difference between the actual profits and book profit as Mr Raju could not fudge the expenditure figures as easily as the revenue figures. Therefore, a desperate attempt was made to close the gap by buying group entities Maytas Infrastucture and Maytas properties and bringing in some real assets in the business to absorb fictitious profits. However, it was opposed by the investors and the attempt was not successful. The CBI reported the scam at around Rs 14,000 crores. Satyam Scam is a classic case of lack of corporate responsibility, negligence of fiduciary duties and poor ethical and moral standards of the top management. The greed for success, power and money led to the collapse of the company.

overstated the balance sheet by US$1.47 billion. The US$1.04 billion cash balance in the companys balance sheet was nonexistent. The balance sheet was inflated with interest income from 6,000 fake salary accounts. Fake customer identities with

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In this Issue

Forensic accounting has become crucial the web of complicated accounting entries and exposing the real picture behind the scenes. Along with accounting failure the Satyam fraud was also a case of poor corporate governance. Auditors PWC (the external auditor for Satyam) was also found guilty of professional misconduct and for overlooking irregularities in the accounting entries of the company.

Thus, Satyam Computers Limited taught a very important lesson to India. It highlighted the significance of ethics, a need for stronger corporate governance, and last but not the least, forensic accounting in order to prevent such mishaps from reoccurring.

Fabricated balance sheet and income statement of Satyam: 30th September,2008

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PERSONALITIES OF THE MONTH

JAYAKALA A K - F2

Virginia Ginni Rometty is Chairman, President and Chief Executive Officer of IBM and the first woman to head the company. Mrs. Rometty began her career with IBM in 1981 in Detroit, Michigan. Since then she has held a series of leadership positions in IBM, most recently as Senior Vice President and Group Executive, IBM Sales, Marketing and Strategy. In this role, she was responsible for business results in the 170 global markets in which IBM operates and pioneered IBM's rapid expansion in the emerging economies of the world. As part of this, she established IBM's Growth Markets organization, which is expected to contribute as much as 30 percent of IBM revenues by 2015. Mrs. Rometty serves on the Council on Foreign Relations; the Board of Trustees of Northwestern University; and the Board of Overseers and Board of Managers of Memorial SloanKettering Cancer Center. She holds a Bachelor of Science degree with high honors in computer science and electrical engineering from Northwestern University.

Margaret Cushing Whitman is an American business executive. She is the president and chief executive officer of Hewlett-Packard. Whitman served as an executive in The Walt Disney Company where she was vice president of strategic planning throughout the 1980s. In the 1990s, she served as an executive for DreamWorks, Procter & Gamble, and Hasbro. Whitman served as president and chief executive officer of eBay from 1998 to 2008. During her 10 years with the company, she oversaw its expansion from 30 employees and $4 million in annual revenue to more than 15,000 employees and $8 billion in annual revenue. In 2008, she was cited by The New York Times as among the women most likely to become the first female President of the United States. In February 2009, Whitman announced her candidacy for Governor of California, becoming the third woman in a 20-year period to run for the office.

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In this Issue

MARKET ROUND UP
ANKIT MEHROTRA - F2

Parliament gave its nod to the landmark Food Security Bill which seeks to provide as a right highly subsidised food grains to the country's poor representing two-third population. (ET Pulled down by the contraction in crude oil and natural gas production, the eight core industries' output growth slowed down to 3.1 per cent in July 13, lower than 4.5 per cent growth recorded in the July of last year. (BL)

Market regulator SEBI asked stock exchanges to calculate circuit limits - the maximum permissible movement allowed to Sensex or Nifty in one trading session - on a daily basis as against the current practice of doing the same on a quarterly basis. (Mint)

The Lok Sabha on Wednesday passed the Pension Fund Regulatory & Development Authority (PFRDA) Bill, which seeks to give statutory powers to the interim regulator constituted by an executive order in 2003. The pension reforms Bill has fixed the ceiling on Foreign Direct Investment (FDI) in the sector at 26%. (BS)

RBI has partially relaxed some of the restrictions imposed last month on capital outflows from residents, including allowing Indian companies more leeway if they are raising funds via External Commercial Borrowings (ECBs) Companies raising ECBs will be allowed to invest up to 400% of their net worth abroad. (ET)

Commodity market regulator FMC has imposed an additional margin of 5% on base metals trading through Futures, to tackle volatility in the market. (BS) According to data from the Department of Industrial Policy and Promotion (DIPP), Foreign Direct Investment (FDI) into India increased by 6 per cent year -on-year to US$10.87 billion during the first six months of this year. (BL)

The Reserve Bank of India (RBI) has sold a massive US$5.9Bn in the spot segment of the foreign exchange market in July 13 to stem the fall in the Rupee. This was the highest intervention by the RBI since January 2012. (BS)

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ECONOMIC ROLLERS
ANUBHA - F1

Repo Rate (as on 30th Sept 2013) Reverse Repo Rate (as on 30 Sept 2013) CRR (as on 30th Sept 2013) SLR (as on 30 Sept 2013) CBLO (as on 30th Sep 2013) Inflation as on July 2013: WPI Food inflation Forex Reserve (as on 20th Sep 2013) IIP growth rate (for July 2013) 91 Days T bills (as on 30th Sep 2013) 10 year G- Sec Yield (as on 30th Sep 2013) Exports during August 2013 Imports during August 2013
th th

7.50% 6.50% 4% 23% 9.49 bps

6.10% 18.18% US$277.38 billion 2.60% 9.57% 8.70% US$26.14billion US$37.05billion

Source: Finance Ministry, Office of Economic Advisory, HDFC Securities Reports, Ministry of Commerce, RBI

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In this Issue

STOCK ANALYSIS
AJO JOSEPH - F1

The BSE Sensex regained from 3-week lows on Tuesday (1 Oct 2013) to end above 137 points higher, as investors cheered lower-than-expected June quarter Current Account Deficit (CAD) number and encouraging September top line for automobile firms. The up movement in shares was mostly backed by the recent loser like stocks of banking, realty, capital goods and auto stocks on heavy purchases at prevailing attractive prices. A higher movement in the Asian region and good opening in Europe further pushed the sentiment. The Sensex of the Bombay Stock Exchange (BSE), which lost 514 points in the previous two trading sessions, reversed losses of early trade to end at 19,517.15, a gain of 137.38 points (0.71 per cent). Rise of 1 October was the best daily gain for the Sensex since September 19, when it soared by 684.48 points (3.43 per cent). On similar lines, National Stock Exchange index Nifty fluctuated between 5,786.45 and 5,700.95, before ending 44.70 points higher, or 0.78 per cent at 5,780.05. The stock markets were also supported by a strengthening rupee that gained 28 paisa to trade at 62.34 versus the US dollar, which was under pressure after the US government shut down. The September - 13 sales figures of firms like Maruti, Hero MotoCorp and TVS rose in 1216 per cent range while that of M&M slipped. CAD widened by US$21.8 billion in Q1 FY14, below the industry expectation of US$25 billion figure helped the stock market. The market also took a positive sentiments of the easing retail inflation that eased marginally to 10.75 per cent in August compared to 10.85 per cent in the previous month.

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FINANCE BUZZ
NAVEENKUMAR . M - F2

Fiduciary - Person who is responsible for the administration of property owned by others. Corporate management is a fiduciary with respect to corporate assets which are beneficially owned by the stockholders and creditors. Similarly, a trustee is the fiduciary of a trust and partners owe fiduciary responsibility to each other and to their creditors. Foreclosure- Seizure of collateral by a creditor when default under a loan agreement occurs. Safe Harbour Rule- Concept in statutes and regulations whereby a person who meets listed requirements will be preserved from adverse legal action. Frequently, safe harbours are used where a legal requirement is somewhat ambiguous and carries a risk of punishment for an unintended violation. Recently, this concept has been widely used in the Transfer Pricing (TP) rules under the Income Tax laws. Closed-End Fund- A Closed End Fund is a publicly traded investment company that raises a fixed amount of capital through an IPO. The fund is then structured, listed and traded like a stock on a stock exchange. Churning- An unethical practise employed by some brokers to increase their commissions by excessively trading in a client's account. Tap Issue- A procedure that allows borrowers to sell bonds or other short term debt instrument from past issues. The bonds are issued at their original face value, maturity & coupon rate, but sold at the current market price. Tang long right is a contractual obligation - to protect minority shareholders right - when the majority shareholder intends to sell his stake from the company, minority shareholder too can sell his share. Carrot Equity- A type of equity where current equity owners can purchase additional equity if the company reaches certain financial goals or benchmarks. Financial goals include certain net income, earnings per share, economic value added and operating cash flow thresholds.

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PHOTO FIND
T.KIRUTHIKKA DEVI - F1

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FINANCE QUIZ
AMOGHAVARSHA P - F2

1. Name the largest anti-fraud professional community in India. 2. What is the mathematical tool used in forensic accounting to find if the case is unintentional or fraudulent? 3. Which are the computer programs that the auditor uses as part of the audit procedures to process data? 4. Name the body that has been formed by the Ministry of Corporate Affairs to investigate frauds. 5. Which is the only licencing & regulating body for forensic accounting in India? 6. Name the world's largest anti-fraud organization and a leader in anti-fraud training. 7. Expand IFAIA. 8. When did RBI introduce forensic auditing practices in banks?

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CROSSWORD
ABHISEK SAHU - F2

Across
2. Technicians may be required to carry out "Live analysis" of evidence - various tools to simplify this procedure have been produced. This is the name of the software created by MICROSOFT. 3. It deals with the exchange of information in electronic format (often referred to as electronically stored information or ESI). Ans. E-------5. The field of investigation which relates to the use of evidence in a Court of Law. 9. lt is the legal status of a person or other entity that cannot repay the debts it owes to creditors. 10. A civil action brought in a court of law in which a plaintiff, a party who claims to have incurred loss.

Down
1.

4. 6. 7. 8.

What is the proactive identification and removal of the causal and enabling factors of fraud? Ans: FRAUD ---------A pricing structure in mergers and acquisitions where the sellers must "earn" part of the purchase price based on the performance of the business following the acquisition. Action of confiscating or impounding property by warrant of legal right. The term used in some jurisdictions for the party who initiates a lawsuit. A civil wrong

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ANSWERS

Quiz 1. India Forensic 2. Benfords law 3. Computer Assisted Auditing Tools (CAATs) 4. Serious Fraud Investigation Office (SFIO) 5. The Institute of Chartered Accountants of India (ICAI) 6. Association of Certified Fraud Examiners (ACFE) 7. Institute of Forensic Accounting & Investigative Audit 8. September 2009 Fraud Risk Management System

Photo Find 1.Logo of PricewaterhouseCoopers 2.Mr. Barry Salzberg, the Global Chief Executive Officer of Deloitte & Touche 3.Mr. Richard.H.Girgenti, Head of Forensic Services for KPMG 4.Logo of Grant Thornton 5.Logo of Ernst and Young 6.Mr Subodh Kumar Agrawal, President of Institute of Chartered Accountants of India

Crossword