Forensic Accounting and Investigative Standards: A Watershed Moment

A significant increase in reported financial frauds and regulatory obligations over the past few years has led to demand for forensic accounting and investigations in organizations, especially in India. Forensic investigations are conducted with the aim of verifying alleged wrongdoing and identifying evidence or facts that may stand up to scrutiny by stakeholders and law enforcement authorities. Due to the lack of legal/regulatory guidelines for accounting and forensic investigation in India, every professional investigator investigates using their subjective judgments and methodologies, so results may not always be in line with stakeholder expectations. .

To ensure the quality and credibility of forensic investigations, the Institute of Chartered Accountants of India (ICAI) has introduced 30 Forensic Accounting and Investigation Standards (FAIS), which include an outline of the principles to be followed in conducting investigations . The FAIS aims to introduce uniform practices and improve the quality of investigations. Once FAIS becomes mandatory, it will be applicable to all types of surveys, and any deviations from these standards will need to be reported by the relevant professionals.

Key Considerations for Senior Management and Their Investigative Teams

The following key considerations should be kept in mind by senior management and their survey teams for effective implementation of FAIS.

A. Review survey methodology to ensure compliance with FAIS

Once FAIS becomes mandatory, the survey team will need to review its approach and methodology and align them with FAIS requirements. Interestingly, the FAIS prescribes minimum standards and therefore the survey team can adopt additional benchmarks based on experience or global best practices, if necessary, to further improve the quality of surveys.

B. Scoping and Disclosure

An organization’s senior management should fully understand the nature of the irregularities or allegations at issue, as well as the potential legal implications, as these can have a significant impact on the scope and standards of disclosure. Some investigative cases (e.g. corruption, money laundering, financial statement fraud, etc.) may require the involvement of legal counsel or a subject matter expert to define the scope of the investigation’s work. investigation and determine disclosure requirements.

According to FAIS 210, the scope of the engagement or investigation should be defined in accordance with the objectives of the engagement. Therefore, an organization’s survey team should ensure that the detailed scope of work, any perceived limitations and expected results are clearly defined.

C. Participation of independent experts

Forensic accounting and investigations are complex subjects that involve triangulations of facts using forensic technologies, analytical tools, document review and intelligence activities. However, some issues such as handwriting verification, voice recognition, estimated quantum of civil works completed for a project, may sometimes be beyond the scope of the survey team and may hamper the progress of the project. ‘investigation. This can be resolved by seeking help from independent experts in their respective fields.

FAIS 230 requires the use of an expert (subject to independence and adequate references) when the investigation team does not have the necessary skills. The scope and expected deliverables must be clearly defined with the expert.

Strive for accurate and conclusive reports

Forensic investigations seek facts or evidence to verify the veracity of an allegation in an investigation or litigation, but not to express an opinion. While FAIS would help survey teams produce high-quality results with some degree of certainty, teams must also consider the following challenges:

Unlike a statutory authority, an organization’s investigation team does not have the power to obtain information from third parties, which sometimes hampers the investigation. Therefore, investigation teams should seek additional information from alternative sources (e.g. third parties such as internal auditors, statutory auditors, suppliers, and customers) to bring the investigation to a logical conclusion. .
According to the FAIS, the principles of natural justice must be followed by the investigation team, ie discussing the observations with the entities concerned, obtaining explanations and incorporating them into the report. In cases where the team is unable to access the information for reasons beyond its control, it must implement the procedures necessary to demonstrate the sufficiency of the efforts made within the scope of its competence.

Fraud or criminal misconduct is a matter of legal interpretation and should be left to subject matter experts or legal counsel. According to FAIS, the investigation report should not express an opinion and should be limited to the discovery of facts and evidence.

Importance of Documentation

One of the most important aspects of forensic investigations is that the documentation supporting the findings must be admissible in court. The FAIS also emphasizes key documentation requirements throughout the forensic investigation life cycle and the following should be considered:

Adequate documentation should be kept for each step of the investigation process to ensure completeness and credibility.
Sometimes, implementing agencies may request investigation teams to provide clarification on the work performed and its outcome. Therefore, adequate documentation to support the scope of work, limitations encountered, depth of work procedures performed, and working papers to support findings/conclusions remains essential. FAIS 240 emphasizes the responsibility of investigative teams for documentation when dealing with or engaging with agencies.

Procedures used to uncover evidence must be forensically rigorous and supported by relevant documentation – such as chain of custody for obtaining digital evidence and use of acceptable forensic tools to preserve the reliability and admissibility.

According to FAIS 510, if the investigation could not be completed due to unforeseen or unavoidable reasons, the investigation team must provide a progress report with the incomplete assessment of the results, including limitations, covenants disclaimer and the reasons for the incomplete nature of the investigation.

Once FAIS becomes mandatory, it is expected that survey methodology will become more standardized. Additionally, this change will increase stakeholder confidence in the overall quality and outcome of forensic investigations. Although the intent and objectives are well thought out, FAIS can only be successful if they are implemented effectively, which requires significant collaboration and ownership from all stakeholders.

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