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Rise of the forensic accountant

The Satyam fraud and the subsequent regulatory changes have put companies in Asia on guard, concerned about the effects a scandal can have on reputation and business prospects. This concern has led to higher demand for forensic accountants in countries like India and China. Swati Prasad reports.

Photo of, and pullquote from, KPMG India forensic services executive director Rohit Mahajan The name B Ramalinga Raju is synonymous with the Satyam Computer Services fraud which rocked India more then two years ago and started the ball rolling for regulatory and reactionary changes across the country’s industries.

In January 2009, when Raju, the founder and former chairman of Satyam, admitted to perpetrating the $1.54bn (INR70bn) fraud, little did he know that the event would bring about such far-reaching changes in companies not just across India, but also in other Asian economies.

The fraud has led to higher focus on forensic accounting, with the demand for forensic experts rising at a rapid pace across Asia.

Post-Satyam, financial statement fraud is being perceived as a big risk to business. And in the KPMG India Fraud Survey Report 2010, the percentage of people indicating financial statement fraud as a significant risk increased from 22% in 2008 to 81% in 2010.

"Prior to Satyam, most companies perceived fraud as largely an internal event, primarily pinching the bottom-line," KPMG India forensic services executive director Rohit Mahajan says.

Fraud was not perceived to affect the way business was being conducted in any major way. However, today things are very different, with recent street demonstrations against perceived corruption a further sign of the changing mood.

"They now understand that fraud can have an impact not only on the reputation and business prospects but also on the survival of the firm," Mahajan explains.

A reactionary response

The Satyam fraud was unique. It was perpetrated for seven years before it was detected. According to the Association of Certified Fraud Examiners’ (ACFE) 2010 report to the Nations on Occupational Fraud and Abuse, the median length for a fraud is 18 months.

Ernst & Young (E&Y) India fraud investigations and dispute services partner and national leader Arpinder Singh says the increase in demand for forensic accountants is reactionary as "every time there is a fraud, there is an increase in demand for forensic accountants. We have more than doubled our business this year".

E&Y India fraud investigations and dispute services revenue increased by 60% in the year to June 2010 and by more than 100% in the year to June 2011, Singh says.

The growing concern about corporate fraud has led to an increased interest in gaining knowledge about forensic accounting.

A few days after Raju admitted the fraud, the Institute of Chartered Accountants of India (ICAI), the apex body for accounting professionals in India, introduced courses in forensic accounting. Big Four firms too are organising awareness sessions on the subject.

Growth in economic offences

Box story explaining how the number of Indian fraud examiners has risen by 160%Satyam opened the eyes of business leaders and government officials in India to the problem of fraud and how widespread its effects can be."It was also seen by some as a failure of conventional auditing," Bachman says.

However, it is not just the Satyam issue, but a whole lot of other factors that are drawing more interest in forensic accounting. For instance, there is a general increase in the incidence of fraud, particularly since the start of the financial crisis in the late 2000s.

In the past year, India witnessed another major fraud at Subhiksha, a home-grown retail chain. Subhiksha started out with one store in 1999 and expanded at a rather rapid pace, reaching a size of nearly 1,600 stores by 2008.

Trouble began in late 2008, when the company ran out of cash, bringing its operations to a standstill. Subhiksha faced a severe financial crisis over its liquidity. The cash shortage eventually resulted in the closing down of its nationwide network of supermarket stores, and defaulting on loans, vendor payments and staff salaries.

In March 2010, Azim Premji, an Indian business tycoon and chairman of Wipro Ltd, who had invested in Subhiksha through his private investment vehicle only a few months prior to its downfall, described Subhiksha as the retail equivalent of Satyam.

"There was an overstatement of accounts, fake inventory, fake bills, and fake companies that money was transferred to," Premji said.

Indiaforensic Consultancy Services (ICS) founder Mayur S Joshi says there is a rise in economic offences, banking frauds and financial statement frauds, which have led to more action by regulators.

ICS is a Pune-based training and educational organisation engaged in fraud examination, security, risk management and forensic accounting in India. Joshi is also the principal consultant at Riskpro Management Consulting Private Ltd, a Pune-based forensic accounting firm. Riskpro typically handles Ponzi or pyramid schemes where thousands of investors lose money.

Apart from the increase in the number of frauds, legislation such as the UK Bribery Act and the Foreign Corrupt Practices Act (FCPA) of the US is making it mandatory for companies to have a tighter risk management framework in place. Even in India, regulations mandate the need for forensic accountants and in September 2009, India took a big step against corporate crimes with the regulator, the Reserve Bank of India (RBI), asking banks to include forensic auditing practices.

The Ministry of Corporate Affairs in India has also established the Serious Fraud Investigation Office (SFIO), which seeks the help of forensic auditors. The government recently proposed to give more teeth to the SFIO under the new Companies Bill by providing it statutory recognition and endowing it with more powers.

According to Singh, fraud investigations are not simple and the extraction of data plays a key role.

"Text data comprises 80% of the investigations as opposed to financial information," he says. "While financial information still forms the basis, most effort is centred on text. Everyone knows how to manipulate financial statements but hiding text data such as emails is not always that simple."

During investigations, the first thing investigators do is to take away the hard drive. "People are extremely naïve when it comes to sending texts. You would be surprised at the kind of emails people send. The junior staff may not even know the implications of sending such emails. Therefore, data should never be discounted," Singh notes.

But sieving through data in hundreds of computers is no mean task. And this is where software for detecting frauds comes in handy. Forensic experts need to create keyword searches along with software that link and manage emails from various computers in order to get to the fraud."

Paucity of forensic accountants

Before Satyam, there was little knowledge about forensic accounting in India. Media highlighted the irregularities at Satyam and the importance of hiring forensic accountants but even today the number of forensic accountants in India is still small.

In the pre-Satyam era, ICS had predicted more than 1,200 companies could be involved in financial statement frauds. But there are very few forensic accountants in India to fight increasing frauds.

The US loses more than $900bn to fraud and has more than 45,000 professionals certified to fight it. However, India has frauds worth more than $60bn, with just 600 forensic experts.

"Even if we take the frauds at par in the dollar terms we still need at least 3,000 forensic accounting professionals to fight the frauds. However, there is demand for more than 16,000 professionals in India today," Joshi explains.

ICS runs distance-learning certification programmes for those who want to be certified forensic accounting professionals. It started certification programmes in 2006 with the first certification programme on banking frauds. In 2007, it launched a Certification in Money Laundering and in 2008 a Certification in Forensic Accounting.

In the past two years there has been a significant increase in the number of forensic accountants.

"As of 31 March 2011 there were 622 members certified as forensic accountants and working in various Indian organisations. Of these, 400 completed their exams in 2010 and 2011," Joshi notes.

A long way to go

Indian corporate sector fraud-fighting is still in its infancy. Different sectors and companies are at varying levels of maturity in their efforts to mitigate fraud risk.

In India, fraud is still viewed as the cost of doing the business, and little money is set aside to fight it. "Due to the scarcity and dominance of the big firms in the forensic space, forensic accounting services turn out to be costly. As a result, clients sometimes prefer to lose money rather than spend on investigating," Joshi says.

Once the supply increases, the services are bound to become more affordable.

Bachman says ACFE is training professionals as fraud examiners specifically to detect, prevent and deter fraud and not simply to perform auditing functions that aren’t necessarily designed to catch fraud.

"Our experience suggests that the approach followed by Indian companies is generally not comprehensive and tends to be piecemeal and reactive," KPMG’s Mahajan says.

Mahajan thinks very few companies in India, with the exception of financial services and telecom sectors, have set up dedicated teams for managing fraud risks. In most companies, the fraud risk management role tends to be the responsibility of internal auditors. These companies also often rely on third-party forensic accountants to look into frauds.

In KPMG’s Fraud Survey Report 2010, 41% of respondents agreed their companies did not have a formal fraud risk management framework.

Since it is difficult to find many experienced forensic accountants in India, most companies are getting professionals from overseas, especially senior people who then train more professionals to increase the team size.

Singh says demand for forensic experts in the Asian economies is huge.

"China and India are growing at a fast pace," he notes. "Markets like the US, UK and Australia are quite mature, as far as forensic accounting is concerned. So are Hong Kong, Singapore and the Middle East. But the most active markets are India and China."

ACFE has an active chapter in New Delhi which hosts anti-fraud professional training in India and supports its membership there.

"We also have two active chapters in China – in Beijing and Shanghai," Bachman says.

There are ACFE members in more than 150 countries around the world, and ACFE has 125 chapters to support them.

As the wake of the financial crisis begins to dissipate, more fraud around the world has come to light. Non-Western countries such as India and China, who are less equipped to deal with the fraud, could face challenges on the back of regulatory improvements.

In the coming years, South and East Asian firms will have to work quickly to equip themselves with knowledge and professionals if they are to deal with the growing demand for forensic accounting services.

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