India's forensic auditors join war on fraud
By Raja Murthy
MUMBAI - Even as India's federal investigating agency last week stunningly
doubled to US$3.02 billion the amount of money involved in the Satyam Computer
Services scam exposed early this year, a tribe of forensic auditors is emerging
to upgrade the country's war against corporate crooks and book-keeping frauds.
"Forensic auditing work has seen growth of at least 100% in the post-Satyam
era," Mayur Joshi, a leading Indian forensic accountant, told Asia Times
Online. "The nature of work involves investigating frauds committed by
employees against their
companies. Retail, telecom, insurance and banking sectors are the biggest
sufferers."
As forensic auditor, Joshi applies a more penetrating and skeptical approach to
auditing than conventional methods. Forensic auditors follow the accountancy
equivalent of presuming a suspect is guilty until proved innocent. The evidence
they unearth can be presented in courts for prosecution.
These auditing sleuths are trained to probe for fraud, unlike conventional
auditors at the likes of PricewaterhouseCoopers (PwC) who failed to spot, or
ignored, the seven-year long Satyam scam when PwC was the outfits auditor. In
early January, Satyam chairman and founder, Ramalinga Raju, shocked the Indian
corporate world when he confessed to the fraud, initially put at $1.5 billion,
at what was then one of the country's top software companies.
This September, India took a big step against corporate crimes with regulator
Reserve Bank of India (RBI) asking banks to include forensic auditing
practices. A cleaner, transparent banking system is key to fighting accounting
fraud and other white-collar crimes like money laundering.
RBI chief general manager PK Panda's circular on September 16th, 2009, titled
"Fraud Risk Management System in banks - Role of Chairmen / Chief Executive
Officers", urged banks to identify and train staff in forensic auditing to
investigate "large value frauds" or scams involving more than 1 crore rupees
(about US$200,000).
The Ministry of Corporate Affairs has also established the Serious Fraud
Investigation Office (SFIO), which seeks the help of forensic auditors. The
five-year old SFIO says it has filed 756 serious fraud cases for prosecution.
Even so, it is not well placed to detect in it early stages a Satyam-sized
fraud.
That's where globally networked forensic auditors and their number skills can
help expose frauds earlier and reduce the risk of governments facing
multi-billion-dollar bailouts to fraud-wrecked companies while investors' life
savings vanish, jobs are lost and families ruined.
International standards are sought by many of those involved. Mayur Joshi,
whose Pune-based Indiaforensic does work for US and well as Indian companies,
was in 2006 the first Indian fraud investigator to receive the "Outstanding
Achievement in Outreach/Community Service" from the United States-based
Association of Certified Fraud Examiners (ACFE).
The 50,000-member ACFE, headquartered in Austin, Texas, calls itself the
world's largest anti-fraud organization and a leader in anti-fraud training. In
the US alone, fraud cost companies an estimated $994 billion last year,
according to the industry body.
"We have 555 members registered in India, and 2,857 in Asia overall," says ACFE
spokesman Scott Patterson. "We have an active ACFE - India Chapter based in New
Delhi."
Patterson told Asia Times Online that there is growing awareness in India about
fighting fraud. "Several organizations from India signed up as supporters of
our International Fraud Awareness Week" in November. Among them, former Satyam
auditors PwC. The event included free fraud prevention seminars and other
activities.
India is starting to get an idea of the mountain of corporate filth that fraud
cleaners face. Joshi said his firm discovered a staggering 1,200 stock
exchange-listed companies indulging in crooked accounting practices. This study
in 2008, he says, was done before the Satyam fraud was exposed.
"Companies need to do a lot more to tackle the fraud menace, as they face more
threats within the company than from their competitors," said Vinod Khurana,
president of the Delhi-based Institute of Forensic Accounting &
Investigative Audit (IFAIA).
The IFAIA will be conducting one-day workshops on corporate fraud in various
Indian cities, including the financial capital, Mumbai, this month. Khurana, a
practicing lawyer, revealed his firm has invariably found some type of
accounting fraud in nearly every company they have investigated.
Another headache facing the authorities arises from government investigators of
fraud themselves being arrested for fraud. On November 24, R Vasudevan, acting
chairman of the Company Law Board (CLB), which arbitrates on fraud cases, was
arrested in New Delhi at his official residence for accepting bribes worth
$118,000. The CLB, a quasi-judicial governmental body, and Vasudevan were among
various investigators probing the multi-billion dollar Satyam scam.
Such "jeewollockies" - or highly embarrassing official mishaps - don't help a
case where the full contours and complexity of the Satyam scam are still being
mapped, nearly a year after it was unearthed. India's top investigation agency,
the Central Bureau of Investigation revealed last week that the scale of the
fraud had crossed the $3 billion mark.
Another forensic auditor who directly investigated the Satyam scam revealed how
in-house crooks had spun a meticulous, extensive web of deceit. "They made
swift use of technology to create forged documents and developed software
internally to avoid audit trails," the accountant told Asia Times Online. "They
had a team of highly qualified professionals perpetrating the fraud by
considering every aspect of pros and cons of their fake accounts."
Khurana of the IFAIA mentions in his paper "Frauds & White-Collar Crime"
that "While in recent years frauds are growing in size and complexity,
well-planned fraud is too complicated to be unearthed by any plain
investigating agency." Forensic auditing bodies such as the IFAIA and
Indiaforensic say they are also training law enforcement officials in piercing
accounts for scams. (click here for
an edited interview with Khurana.)
Khurana splits accounting scams into two types: transaction and statement
frauds. Statement frauds involve cheating investors and clients with fake
profits, such as the $11 billion Enron, the $4 billion Worldcom and the $3
billion Satyam scams. Transaction frauds involve more direct theft and
embezzlement of company funds.
Forensic auditor Joshi categorizes accounting frauds by unlisted and listed
companies on the stock exchanges. "If a company is listed, then the fraud could
inflate revenues for increased share prices. The second type of fraud is if the
company is not listed on the stock markets; then it deflates revenues to avoid
direct and indirect taxes."
Is it possible to spot anything fishy about a company from its publicly
available account statements.
"Yes," said Joshi. "We have an entire chapter on early warning signs. For
instance, if a company is showing increased profits for past 10 quarters but
the cash flows are going down, then this is an indication of liquidity problems
at the company. A second example could be salary differences. If the average
industry salary for a position is 25,000 rupees, or US$538, per month and a
'leader' company in the same sector pays only 5,000 rupees for the same
position, then there is something to worry about."
Forensic accountants like Joshi are not a new species, with their earliest
presence noted back to 1814, in an accountant's advertising circular in
Glasgow, Scotland. But they are finding increasing recognition in a
frauds-ridden corporate landscape trying to regain investor trust. They also
serve as a reminder of the truth that crime doesn't pay, and that the truth
can’t be hidden for long.
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