This article is written by Kashvi Rajvansh, a first-year student of Faculty of Law, Delhi University, Delhi
ABSTRACT:
In this paper we will discuss about the meaning of forensic accounting. We will then analyse what role corporate governance plays in it, and the role of auditors in it. We will further analyse what is the companies act and how it plays a rule in providing a guideline for the role of auditors in forensic accounting in corporate governance.
INTRODUCTION:
Forensic accounting has begun to play an important role in the way companies are governed. Earlier the governments used to rely on forensic accountants to uncover the cases of frauds in the company. These forensic accountants are the people that act as financial detectives that uncover fraudulent financial reporting and misappropriated assets. They are in great demand for their skills such as accounting, auditing, legal, and investigation in the current reporting environment. They often play a major role in coordinating company efforts and achieve a better ethical environment in the company.
BODY:
The role of forensic accountants is evolving to meet the changing demands of businesses. This emerging field combines financial expertise, knowledge of fraud, and an understanding of business operations and legal processes. Forensic accounting requires a diverse skill set, including proficiency in accounting, auditing, finance, quantitative methods, law, and research. Additionally, it demands investigative abilities to gather, analyse, and assess financial evidence, as well as the capacity to interpret and communicate findings effectively.
Forensic accounting is at the crossroads of accounting, investigation, and the law, encompassing litigation support, investigation, and dispute resolution. It involves using accounting, auditing, and investigative skills to aid in legal matters. This field comprises two main components: litigation services, which involve the accountant acting as an expert consultant, and investigative services, which leverage the skills of forensic accountants and may necessitate testimony in court.
In simpler terms, being a forensic accountant means that one needs to know their way around financial accounting and internal controls, understand the law and other rules that companies have to follow, be vigilant and attentive with investigative traits, and be able to talk to people with confidence.
Companies find these skills very effective because they help keep everything running smoothly. From making sure everyone knows what’s going on both inside and outside the company to keeping an eye on things to catch any frauds, forensic accountants are extremely essential in the business world.
Thus, more and more experts are realizing that when companies aren’t managed properly, it may lead to issues of management such as bad financial reports, unhappy investors, and general chaos. So, companies and government agencies are working hard to fix any issues in how they report their company’s management.
Forensic accountants are extremely essential for companies due to the role they play. They can dig into how a company is set up, how it reports its finances, and how it’s being run as far as its management is concerned. They are kind of like the detectives of the accounting world, making sure everything is well managed.
Forensic accountants also help companies set up better systems to prevent fraud, create a more positive work environment, and make sure everything functions smoothly and diligently
A few objectives of forensic audit include:
- Improving Management Accountability: It is all about making sure the folks in charge are held accountable for their actions.
- Enhancing Corporate Governance: Making sure the company is being run smoothly and by the rules.
- Strengthening Financial Reporting: Ensuring that the numbers on the financial reports are accurate and trustworthy.
- Detecting Financial Fraud: Sniffing out any funny business happening with the company’s finances.
- Boosting Auditor Independence: Making sure auditors can do their job without any outside influences.
- Providing Extra Assurance for Audit Committees: Giving those in charge of oversight some extra peace of mind.
- Helping Financial Statement Auditors Take More Responsibility: Giving them a hand in catching any shady stuff in the financial reports.
- Giving Audit Committees Better Tools for Evaluation: Making sure those overseeing the audit process have all the info they need to do their job well.
Now that we have discussed the role of auditors and what is forensic accounting, let us understand the definition of fraud. Basically, “fraud” means tricking someone on purpose to benefit yourself while causing harm to someone else, either financially or personally. Simply put, fraud is when someone deceives others on purpose to benefit themselves, often at the expense of someone else. To understand forensic audit, we need to first grasp what an audit is. According to the English Oxford Dictionary, an audit is an official check of an organization’s finances, usually done by an independent group. However, it is important to note that audits might not catch every instance of fraud.
Now, when we talk about forensic audit, we are talking about a deep dive into evidence to see if it matches certain standards, typically for use in court. Investopedia defines it as an examination of financial information that can be used as evidence in legal proceedings.
Forensic audits are becoming more common, especially when it comes to hiring top executives. With stricter corporate governance rules and higher stakes, companies want to ensure that the people they bring on board have clean records.
The Companies Act, 2013 defines what a company is by explaining the difference between private as well as public companies. It also provides for the definition of auditing standards as well as provides with mechanisms to deal with frauds and other issues when faced by a corporate body.
Every company or corporate body comes under the definition of a company which further brings it under the guidance and rules as well as regulations which are provided under the Companies Act, 2013. S.447 of the act gives the definition for punishment of fraud as :
“447. Punishment for fraud.—Without prejudice to any liability including repayment of any debt under this Actor any other law for the time being in force, any person who is found to be guilty of fraud, 2[involving an amount of at least ten lakh rupees or one per cent. of the turnover of the company, whichever is lower] shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud: Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years. 3[Provided further that where the fraud involves an amount less than ten lakh rupees or one per cent. of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to twenty lakh rupees or with both.] Explanation.—For the purposes of this section— (i) “fraud”, in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss; (ii) “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled; (iii) “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.”
A few cases decided in the light of forensic auditing are:
Devas Multimedia Private Limited v. Antrix Corporation Limited:
The following case acts as an essential in case of fraud. The case was filed as Antrix Corporation had filed a petition for fraud against Devas Multimedia.
In January 2022, the Supreme Court of India affirmed the ruling of the National Company Law Appellate Tribunal (NCLAT) to dissolve Devas Multimedia, an Indian multimedia services provider. The court determined that Devas was established through fraudulent means and for unlawful objectives. In 2021, the NCLAT had directed the liquidation of Devas based on allegations of fraud, citing Sections 271 and 272 of the Companies Act, 2013. This decision came in response to a petition filed by Antrix, the commercial and marketing arm of the Indian Space Research Organisation (ISRO). There were multiple legal proceedings in the case both domestically and internationally. Antrix had argued and used the clause of Force Majeure which it was not entitled to use. NCLT noticed that Devas was incorporated on 17th December, 2004 and was able to obtain the Contract on 28th January, 2005 in less than 45 days from the date of its inception. NCLT held that it is a matter of fundamental economics, rather common sense that in order to obtain a prestigious, sophisticated contract like the contract in question, the Signing Date:29.08.2022 15:28:39 This file is digitally signed by PS to HMJ Sanjeev Sachdeva. It had used the ratio of Supreme Court of India for the signing date as referred in HPA International vs. Bhagwandas Fateh Chand Daswani.
Union Of India vs Deloitte Haskins And Sells Llp:
The issue of the case was that A string of defaults by the IL&FS Group Companies in 2018, with a debt of over Rs. 91,000 crores, sent shockwaves through India’s financial markets. This turmoil threatened to destabilize money markets, drove up corporate bond yields, and triggered a stock market sell-off. The Department of Economic Affairs, Ministry of Finance, issued a memo on September 30, 2018, urging the Ministry of Corporate Affairs, Union of India, to take action under the 2013 Act. The memo highlighted the dire situation: IL&FS Group was drowning in debt, with liabilities far surpassing its equity share capital and reserves by a leverage ratio of at least 13 times. In understanding Section 140(5) of the Companies Act, 2013, learned ASG Shri Balbir Singh refers to the legislative history and intent behind this provision. Section 140 falls under Chapter X titled “Audit and Auditors” and deals with the removal, resignation, and special notice regarding auditors. It outlines procedures for removing an auditor, handling auditor resignations, and giving special notice for auditor appointments. If an auditor is found to be involved in fraudulent activities or collaborating with company management in fraud, Section 140(5) empowers the Central Government or concerned individuals to approach the NCLT for action. The NCLT can also take action on its own against such auditors. The provision includes two provisos and explanations. The first proviso allows the Tribunal, upon application by the Central Government, to order the removal of an auditor and appoint a replacement. The second proviso states that auditors against whom a final order has been passed by the Tribunal under Section 140(5) cannot be appointed as auditors for any company for five years and may face action under Section 447. Therefore, even if an auditor resigns during proceedings under Section 140(5), the proceedings can continue, and a subsequent order can render them ineligible for auditor appointments and subject to legal action. The High Court’s observation that such proceedings are unnecessary after an auditor resigns is considered a material error. Thus, in the end the appeal by Deloitte group was dismissed.
REFERENCES USED:
Article on ‘The impact of forensic auditors in corporate governance’ by A.S. Eyisi and the link for the same is
chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://isdsnet.com/ijds-v3n2-14.pdf
Article on ‘Forensic Accounting’s Adequate Role In Corporate Governance’ by Financial Crime Academy and the link is
https://financialcrimeacademy.org/forensic-accountings-adequate-role/
Article on ‘Corporate Governance and Forensic Accountants’ Role’ by Madan lal Bhasin and the link is
Research paper on professional programme forensic audit by the institute of company secretaries of India and the link is
Article on ‘Understanding Forensic Audit and the role of Forensic Auditor’ by Especia and the link is
https://especia.co.in/post/role-of-forensic-auditor/
The Companies Act, 2013
Case Laws:
Devas Multimedia Private Limited v. Antrix Corporation Limited 2022
https://indiankanoon.org/doc/188667751/
Union Of India vs Deloitte Haskins And Sells Llp, 2023
https://indiankanoon.org/doc/136418404/