OBJECTIVES OF WRITING THIS ARTICLE: Forensic accounting(F.A.) has come into limelight due to rapid increase in financial frauds and white-collar crimes. But it is largely untrodden area in India.The integration of accounting, auditing and investigative skills creates the speciality know as F.A.The opportunities for the Forensic Accountants are growing fast;they are being engaged in public practice and are being employed by insurance companies, banks, police forces, government agencies etc.This article seeks to examine the meaning and nature, activities and services rendered, core knowledge and personal skills required for forensic accounting as a specialized field in accountancy profession. Indeed there is a future in F.A. as a separate niche consulting.
The lack of respect and belief in India's law enforcement agencies and the rate at which white-collar crimes have increased has prompted the development of Forensic Accounting in India. The fraud detecting agencies seems to lack time and devotion needed for detecting and prevention of errors and fraud. According to a large global accounting firm, the market is sufficiently big enough to maintain an unit devoted entirely towards "forensic accounting". Many large as well as small accounting firms as well as the tiny firms have inculcated or rather developed separate forensic accounting departments.
We were of the belief that detection and prevention of frauds or white-collar crimes is part of conventional accounting function. It was thought that the frauds, both internal as well as external has be to detected by the auditors through their periodic audit. Now it is crystal clear that auditors can only check for the compliance of a company's books to generally accepted accounting principles, auditing standards and company policies. Hence the need was felt to detect the frauds in companies that are suspected to be engaged in fraudulent transactions. This field of accounting is known as "forensic accounting".
The litmus test of investigation, first introduced by the ever great Sherlock-Homes(considered by many as the father of Forensic Accounting) is perhaps the first ever application of forensic accounting. Though, the contribution of the other few great historians to the field of forensic accounting cannot be overlooked. They used various tricks to investigate various crimes.
F.A. is a specialized a area of accounting practice that describes engagements which result from actual or anticipated disputes or litigation. The word "forensic" means "suitable for use in court". The forensic accountants have to keep in mind this statement while they have to work or chalk out their programme. The F.A. work is tailor made according to the situation and need. The gathering of information and evidences is done according to the need and situation. We can say, it is customized according to the situation. The forensic-accountants give expert evidence at the ultimate trial. All the modern medium-sized as well as the large-sized accounting firms have specialized forensic accounting departments. Within these firms there may be specialized forensic accounting departments. Within these groups their may be further sub-specializations. Various sub-specializations include insurance claims, personal injury claims, fraud detection, construction or royalty audits. Nearly 40 percent of the top 100 US accounting firms are expanding their forensic and fraud services, according to Accounting Today. Now if we consider this data as significant then we can say that the total contribution of forensic accounting to the total revenue of the C.A. firms would be highly significant in the years to come. Under rising instances of frauds and litigation and flourishing businesses these services are considered to be very significant as they are rendered at a very competitive price.
The forensic accountants utilize the various information relating the business, utilizes financial reporting systems, various accounting and auditing standards and procedures, investigative techniques and litigation processes and procedure to perform their work. By acting as advisors to audit committees and assisting in investment analyst research, they are playing more "proactive" risk reduction roles.This is possible by designing and performing extended procedures as part of the statutory audit. The objectives of such an accounting include measurement of losses caused by an auditor due to his negligence, to look into the matter whether their has been any embezzlement of cash, the amount, necessity of criminal proceedings, computation of asset values in a divorced proceeding.
The primary approach technique of forensic accounting is explanatory analysis(cause and effect)of the phenomena-including the discovery of deception(if any), and its effects -introduced into an accounting system field. The primary methodology employed by the forensic accountants is the verification of the objective. They are trained to deal with real world business and do have the sufficient expertise to look beyond(behind) the numbers. The scope of the forensic accountants are growing at a rapid pace. The increase in their work opportunities have been accelerated due to the fall of the Enron corporation and the collapse of the American Twin Towers.
A New Domestic Accounting Model based on Domestic Well-Being
Summary of Rationale and Technical Introduction
Other articles on Domestic Well-Being Accounting (DWBA) have hinted about the new ideas upon which this new domestic accounting model is based. In this article, the rationale, ideas and concepts are summarised, based on the coverage in a new book 'Accounting for a Better Life'.
Accounts
At its simplest, an account is just a list of transactions relating to some area of financial activity or interest. The most familiar form of account is the bank statement that customers periodically receive from their bank.
The first important thing to appreciate is that accounts are for accumulating information about value. We are so used to bank and credit card accounts which are all about currency that people sometimes do not realise that accounts are equally useful for accumulating transaction details relating to, for example, our home, our car(s) - one account for each car - our investments, etc.
Accounts will usually have two columns, one for increasing (+) amounts and the other for decreasing (-) amounts.
The next important concept is to appreciate that there are two distinct, overarching types of accounts that we can use in our sets or books of accounts. One is called an asset account and the other is a liability account.
The asset type account as its name infers, typically relates to storing transactions for assets such as bank accounts, houses, cars, etc. The idea behind this is that positive amounts entered into the + column of an asset account signify increasing value; so £500 entered into the + column of an asset account implies an increase in value of £500. However accountants will also have in their business accounts, what I call working accounts for home accounting, as other accounts of the asset type which are not strictly for an asset such as a car or home. Examples include accounts for asset acquisitions and for depreciation.
That other overall type of account is a liability account. It is used for accumulating debts and/or liability. Now we have the reverse concept in that increasing amounts e.g. £300 in the + column of these types of accounts imply more debt or more liability, whilst a decrease of £200 represents less of a debt. You might think more debt means less value but it all depends on the purpose for which a liability account is being used. Again, accountants mostly use liability type accounts for holding true debt amounts but again, have a need for other accounts of the liability type to mediate certain transactions. I refer to these as working accounts in home accounting as they do not relate to any true debts of a person or household; examples of these are for accumulating temporary information about asset acquisitions and growth in the value of a home.
Another area for confusion here relates to the names for column headings used in the different software packages available to support accounting; in business, the convention is that debits (the + column for asset accounts and the - column for liability accounts) are traditionally in the left-hand column of each account, with the credits on the right (the - column of asset accounts and the + column of liability accounts). This convention is not always adhered to in some software packages, together with not always using the headings, debit and credit.
Double Entry and the Accounting Equation
The last bit of theory to mention which lies at the heart of DWBA accounting is so-called, double entry. This concept appears confusing to people because it has two aspects. First, it is an accounting concept which relates to an approach for taking into account (there's an appropriate phrase!) all the financial aspects of some financial entity. In business, an entity might be a department or a division, a sole-trader or even a whole plc. For domestic accounting, such an entity would most often be an individual or a household. The point is that the accounts supporting any of these entities consider or model the totality of the financial aspects of the entity. As such, the accounts will be able to capture and make visible both the static and dynamic aspects of the entity finances. The practical effect is that a set of double entry accounts (the books) requires an account to store the total financial value of the entity as well as usually, some accounts for accumulating periodic changes in terms of increases and decreases to this overall value. The result is what is termed a balanced set of accounts, related to an accounting equation.
The other common use of the word double entry is related to the bookkeeping techniques for implementing this form of accounting which requires two (double) entries in the accounts for each new transaction, in order to maintain the required balance.
What do we mean by balance? Well balance is the key to double entry and it comes from balances in accounts, as maybe related in some way in this equation; the so called accounting equation.
Other articles on Domestic Well-Being Accounting (DWBA) have hinted about the new ideas upon which this new domestic accounting model is based. In this article, the rationale, ideas and concepts are summarised, based on the coverage in a new book 'Accounting for a Better Life'.
Accounts
At its simplest, an account is just a list of transactions relating to some area of financial activity or interest. The most familiar form of account is the bank statement that customers periodically receive from their bank.
The first important thing to appreciate is that accounts are for accumulating information about value. We are so used to bank and credit card accounts which are all about currency that people sometimes do not realise that accounts are equally useful for accumulating transaction details relating to, for example, our home, our car(s) - one account for each car - our investments, etc.
Accounts will usually have two columns, one for increasing (+) amounts and the other for decreasing (-) amounts.
The next important concept is to appreciate that there are two distinct, overarching types of accounts that we can use in our sets or books of accounts. One is called an asset account and the other is a liability account.
The asset type account as its name infers, typically relates to storing transactions for assets such as bank accounts, houses, cars, etc. The idea behind this is that positive amounts entered into the + column of an asset account signify increasing value; so £500 entered into the + column of an asset account implies an increase in value of £500. However accountants will also have in their business accounts, what I call working accounts for home accounting, as other accounts of the asset type which are not strictly for an asset such as a car or home. Examples include accounts for asset acquisitions and for depreciation.
That other overall type of account is a liability account. It is used for accumulating debts and/or liability. Now we have the reverse concept in that increasing amounts e.g. £300 in the + column of these types of accounts imply more debt or more liability, whilst a decrease of £200 represents less of a debt. You might think more debt means less value but it all depends on the purpose for which a liability account is being used. Again, accountants mostly use liability type accounts for holding true debt amounts but again, have a need for other accounts of the liability type to mediate certain transactions. I refer to these as working accounts in home accounting as they do not relate to any true debts of a person or household; examples of these are for accumulating temporary information about asset acquisitions and growth in the value of a home.
Another area for confusion here relates to the names for column headings used in the different software packages available to support accounting; in business, the convention is that debits (the + column for asset accounts and the - column for liability accounts) are traditionally in the left-hand column of each account, with the credits on the right (the - column of asset accounts and the + column of liability accounts). This convention is not always adhered to in some software packages, together with not always using the headings, debit and credit.
Double Entry and the Accounting Equation
The last bit of theory to mention which lies at the heart of DWBA accounting is so-called, double entry. This concept appears confusing to people because it has two aspects. First, it is an accounting concept which relates to an approach for taking into account (there's an appropriate phrase!) all the financial aspects of some financial entity. In business, an entity might be a department or a division, a sole-trader or even a whole plc. For domestic accounting, such an entity would most often be an individual or a household. The point is that the accounts supporting any of these entities consider or model the totality of the financial aspects of the entity. As such, the accounts will be able to capture and make visible both the static and dynamic aspects of the entity finances. The practical effect is that a set of double entry accounts (the books) requires an account to store the total financial value of the entity as well as usually, some accounts for accumulating periodic changes in terms of increases and decreases to this overall value. The result is what is termed a balanced set of accounts, related to an accounting equation.
The other common use of the word double entry is related to the bookkeeping techniques for implementing this form of accounting which requires two (double) entries in the accounts for each new transaction, in order to maintain the required balance.
What do we mean by balance? Well balance is the key to double entry and it comes from balances in accounts, as maybe related in some way in this equation; the so called accounting equation.
Rectification Of Accounting Errors
Accountants prepare trial balance to check the correctness of accounts. If total of debit balances does not agree with the total of credit balances, it is a clear-cut indication that certain errors have been committed while recording the transactions in the books of original entry or subsidiary books. It is our utmost duty to locate these errors and rectify them, only then we should proceed for preparing final accounts. We also know that all types of errors are not revealed by trial balance as some of the errors do not effect the total of trial balance. So these cannot be located with the help of trial balance. An accountant should invest his energy to locate both types of errors and rectify them before preparing trading, profit and loss account and balance sheet. Because if these are prepared before rectification these will not give us the correct result and profit and loss disclosed by them, shall not be the actual profit or loss.
All errors of accounting procedure can be classified as follows:
1. Errors of Principle
When a transaction is recorded against the fundamental principles of accounting, it is an error of principle. For example, if revenue expenditure is treated as capital expenditure or vice versa.
2. Clerical Errors
These errors can again be sub-divided as follows:
(i) Errors of omission
When a transaction is either wholly or partially not recorded in the books, it is an error of omission. It may be with regard to omission to enter a transaction in the books of original entry or with regard to omission to post a transaction from the books of original entry to the account concerned in the ledger.
(ii) Errors of commission
When an entry is incorrectly recorded either wholly or partially-incorrect posting, calculation, casting or balancing. Some of the errors of commission effect the trial balance whereas others do not. Errors effecting the trial balance can be revealed by preparing a trial balance.
(iii) Compensating errors
Sometimes an error is counter-balanced by another error in such a way that it is not disclosed by the trial balance. Such errors are called compensating errors.
From the point of view of rectification of the errors, these can be divided into two groups :
(a) Errors affecting one account only, and
(b) Errors affecting two or more accounts.
Errors affecting one account
Errors which affect can be :
(a) Casting errors;
(b) error of posting;
(c) carry forward;
(d) balancing; and
(e) omission from trial balance.
Such errors should, first of all, be located and rectified. These are rectified either with the help of journal entry or by giving an explanatory note in the account concerned.
Rectification
Stages of correction of accounting errors
All types of errors in accounts can be rectified at two stages:
(i) before the preparation of the final accounts; and
(ii) after the preparation of final accounts.
Errors rectified within the accounting period
The proper method of correction of an error is to pass journal entry in such a way that it corrects the mistake that has been committed and also gives effect to the entry that should have been passed. But while errors are being rectified before the preparation of final accounts, in certain cases the correction can't be done with the help of journal entry because the errors have been such. Normally, the procedure of rectification, if being done, before the preparation of final accounts is as follows:
(a) Correction of errors affecting one side of one account Such errors do not let the trial balance agree as they effect only one side of one account so these can't be corrected with the help of journal entry, if correction is required before the preparation of final accounts.
All errors of accounting procedure can be classified as follows:
1. Errors of Principle
When a transaction is recorded against the fundamental principles of accounting, it is an error of principle. For example, if revenue expenditure is treated as capital expenditure or vice versa.
2. Clerical Errors
These errors can again be sub-divided as follows:
(i) Errors of omission
When a transaction is either wholly or partially not recorded in the books, it is an error of omission. It may be with regard to omission to enter a transaction in the books of original entry or with regard to omission to post a transaction from the books of original entry to the account concerned in the ledger.
(ii) Errors of commission
When an entry is incorrectly recorded either wholly or partially-incorrect posting, calculation, casting or balancing. Some of the errors of commission effect the trial balance whereas others do not. Errors effecting the trial balance can be revealed by preparing a trial balance.
(iii) Compensating errors
Sometimes an error is counter-balanced by another error in such a way that it is not disclosed by the trial balance. Such errors are called compensating errors.
From the point of view of rectification of the errors, these can be divided into two groups :
(a) Errors affecting one account only, and
(b) Errors affecting two or more accounts.
Errors affecting one account
Errors which affect can be :
(a) Casting errors;
(b) error of posting;
(c) carry forward;
(d) balancing; and
(e) omission from trial balance.
Such errors should, first of all, be located and rectified. These are rectified either with the help of journal entry or by giving an explanatory note in the account concerned.
Rectification
Stages of correction of accounting errors
All types of errors in accounts can be rectified at two stages:
(i) before the preparation of the final accounts; and
(ii) after the preparation of final accounts.
Errors rectified within the accounting period
The proper method of correction of an error is to pass journal entry in such a way that it corrects the mistake that has been committed and also gives effect to the entry that should have been passed. But while errors are being rectified before the preparation of final accounts, in certain cases the correction can't be done with the help of journal entry because the errors have been such. Normally, the procedure of rectification, if being done, before the preparation of final accounts is as follows:
(a) Correction of errors affecting one side of one account Such errors do not let the trial balance agree as they effect only one side of one account so these can't be corrected with the help of journal entry, if correction is required before the preparation of final accounts.
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