Article on “Forensic Accounting – A need of an ERA” by CA Sourabh Lahoti, Advisor, Bizsolindia Services Pvt. Ltd (March 2022)

Introduction :

In 2002, the world had observed the collapse of US energy sector giant Enron Corporation when it was at the peak of business with the reputation of ‘America’s most innovative companies’ for six consecutive years by Fortune. In 2016, the world had observed a series of paper leak, known as Panama Papers, which revealed that how the worlds’ wealthy investors avoided tax by establishing shell companies in remote tax havens. Recently we all heard about the ABG Shipyard Scam which is claimed to be India’s largest financial scam. In either case, the beneficiary companies or parties used an accounting device to fulfil their ill motives. So, the question remains, whether the regular accounting and auditing fail to recognize such unethical and illegal activities?

Both the corporate world and the policymakers started giving more emphasis on the issues such as corporate governance, auditing, corruption control and stakeholder interest. Because of these corporate scandals and stakeholder awareness, a relatively new branch of accounting called forensic accounting has emerged. This sub-discipline of accounting has already proven its importance in the eyes of the stakeholders. These days, forensic accounting is being taught in several universities and colleges with the help of its separate and unique textbooks. Accounting researchers are also getting interested in this topic and are continuously writing and publishing research articles in renowned journals.


To understand the term “Forensic Accounting” let us first understand the term “Forensic”. The word “Forensic” comes from the latin word Forensis, meaning “of or before the forum”. In short, which can be used in or before the Court of Law. Thus the term Forensic Accounting refers to integration of accounting, auditing and investigative skills yields.

Although forensic accounting requires an integration of accounting, auditing and investigative skills, it differs from the traditional financial audit. The difference between the statutory audit and forensic accounting are presented below

  Statutory Audit Forensic Accounting
Objective The objective of statutory financial audit is to provide an opinion to the stakeholders on the fairness of overall financial statement for a particular period. The objective of forensic accounting is to ascertain the likelihood of fraud occurring and determining the magnitude of the fraud.
Nature In general, a statutory audit adds credibility to the financial statements. The purpose of forensic accounting is to deal with the particular suspicious related to accusation of fraud.
Frequency The statutory audit is conducted on a recurring basis. Forensic accountants are consulted when a particular problem / question/ suspicion needs to be addressed. That means forensic accounting is non-recurring.
Beneficiary In general, the statutory financial audit serves the interest of investors and other stakeholders. The audience of forensic accounting is the engaging party who employs the forensic accountants to investigate a particular fraud.


Forensic Accountants – Skills and Attributes

In terms of investigative services, the forensic accountants may perform three significant activities : fraud detections, fraud examination and fraud deterrence. Fraud detection is related to discovery of fraud. When there is an indication / suspicion of fraud, forensic accountants can be hired to examine the depth and nature of fraud. A proactive firm can undertake fraud deterrence strategy to prevent fraud. Potential preventive strategies include pre-employment screening, employee training and monitoring, inculcation ethical organizational culture etc. Other than these, forensic accountants can get involved in financial viability assessment such as analysis of financial and management sustainability and determining the reasonableness of insurance claims. These days’ forensic accountants can also be employed in case of dealing with bankruptcy, insolvency and reorganization, computer forensic analysis, economic damage calculations and business valuation.

A Forensic accountant should have the ability of critical thinking, reasoning and communication.

Benefits of Forensic Accounting:

The objectives of the forensic auditing are as below

  1. Use to conclude cases – the conclusions of the forensic accountant are used to facilitate settlement, claim or jury award by decreasing the financial elements as an area of ongoing debate.
  2. Prevention of Fraud – Now a days various corporates are following the principle of “Prevention is better than cure” and get their companies audited by the forensic accountant to prevent future mishap
  3. Rebuilding degraded public trust – A forensic audit assures the public and other stakeholders of the good corporate governance and policies of the company. This help the company to build the trust among the public or the stake-holders
  4. Formalizing and forming a governance policy – A forensic audit can also be used to formalise and form a comprehensive corporate governance policy with the help of solutions suggested or formed for the shortcoming and issues found during the forensic audit

Forensic Audit – Meaning:

A forensic audit is review and evaluation of the financial information of the firm or the individual for the use in court as evidence. To prosecute a party for fraud, misappropriation or other financial claims, a forensic audit may be conducted.

Forensic Audit – Process

To tell about the steps or process of conducting forensic audit can be briefly described in following 5 stages:-

Stage Explanation
The Engagement Once a fraud incident takes place / is assumed to have taken place, forensic accountants are employed to investigate. At this phase the forensic accountant agrees with the client on the scope of the investigation
Discovery of Evidence At this phase, the actual investigation takes place and the necessary pieces of evidence are collated from all the possible sources. As such, the forensic accountant physically visits the place, observes the operations, interviews the people and collect archival documents.
Analysing the Evidence The technical and analytical knowledge of the forensic accountants come to play in this phase. To see the broader picture, they not only corroborate one source of evidence with other but also conduct statistical analysis here.
Communication Once the analysis is completed the forensic accountant need to communicate the findings through a formal report.
The Action This is the final step of the entire investigation process. Once the report is given, the victim may initiate legal proceedings against the fraudster. Also the forensic accountants and their report can be used as expert testimony.

Forensic Accounting Vs Forensic Audit:

To an outsider these two terms sound as the same and used as synonym many times, but these are not the same and are based on the purpose of Audit. Hence I would like to detail out the difference between these two terms.

Points Forensic Accounting Forensic Audit
Purpose of Audit The purpose of audit is to use the findings for improvement in system or to determine out of court settlement value. However the Forensic accountant can be an expert witness in proceedings of the court if matter goes to court. A forensic auditing relates to Frauds for the Business. These are generally committed by the promotors and shareholders of the business to deceit the bankers, revenue authorities and regulators.
Nature of assignment Forensic Accounting assignment is complex in nature as it must answer “Who did the fraud?”, “What was modus operandi?”, “What are the losses?”, “How can the system be improved? Forensic Auditor is engaged to check trail of money from the source of Fund to utilisation to answer the question “What was the motive of behind Fraud?
Appointed by Forensic Accountant is mostly appointed by the business themselves when the suspect a fraud or data leakage. Forensic Accountant is mostly appointed by the regulators, revenue authorities or bankers.


Over the past few decades, because of some notorious corporate scandals, the demand of forensic accountants has increased. Also now increasing awareness and need for good corporate governance in various corporates the preventive forensic accounting and prevention of fraud has taken up a good start. However there are very few universities or educational institution in India offering the courses on this particular subject leading to a gap in demand and supply.

However not many practise in this field of Forensic Accounting, we at Bizsolindia Services Pvt. Ltd. offer this service of forensic accounting and fraud detection through our qualified team of certified Forensic Accountants and a special IT division to support them with the fast changing IT environment.


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