Over the last decade or so, the role of a professional forensic auditor has gained recognition due to increasing forensic investigations into bad loan accounts,growing importance of corporate governance, tightening regulatory norms and growing dissent of the market at large towards scams and frauds.
ETCFO chatted with Amit Meher, Partner - Forensics, Business Advisory Services, BDO India to understand the role of a forensic auditor in today's dynamic business environment and against the backdrop of rising expectations from statutory auditors to detect frauds. "Such expectation from statutory auditors will only help in identifying the unusual activity at an early stage from where where forensic professionals can collaborate with stakeholders including statutory auditors and investigate the matter," Meher said adding there is no blurring of the roles between the statutory and forensic auditors. Below are the edited excerpts:
Q: What are your views on the increasingly growing role of a forensic auditor today?
Amit Meher: Before the Satyam scam in 2009, ‘forensic auditing’ was almost an unheard term for corporates and other stakeholders in India.
Unlike western markets, in India, forensic services are still in a transitional phase and many stakeholders are yet to fully understand the capabilities of forensic services or the value these professionals can bring to the business. Although this is changing precipitously and so is the role of forensic professionals in India.
Further considering the array of services provided by forensic professionals today from the traditional investigations of ‘cooking the books’, integrity due diligence, quantification of economic damages, forensic technology support to predictive data analytics, the role of forensic auditors in both detecting and preventing frauds is evolving rapidly.
Q: Is the role of forensic auditors getting blurred with that of statutory auditors given the expectation from the latter is to detect frauds?
Amit Meher: It is important to understand that each type of audit has a distinct objective and purpose. Also, the specialisations required in each type of audit whether it is a statutory audit, internal audit, or forensic audit are different.
The role of a statutory auditor requires reporting on fraud in the course of perormance of duties as an auditor and is applicable only when the auditor has knowledge and reason to believe that a fraud has occurred or is occurring i.e., when the auditor has evidence that fraud exists. However, legal determination of fraud and assessing the financial impact of fraud is not the responsibility of a statutory audit.
The Companies Act’s provisions and corresponding rules envisage the statutory auditor to report an offense of fraud in the company to the Audit Committee or to the Board of Directors and thereafter, where applicable, to the central government and as per CARO 2020, an auditor needs to report on whistle-blower complaints received.
After such reporting by auditors, it is the responsibility of the Audit Committe/Board to investigate and provide information on the steps taken on such offenses.
This is a job that calls for specialist experience and skills and hence the Audit Committee/Board generally takes the assistance of a forensic auditor to conduct investigations regarding the offense of fraud. The role of a forensic auditor requires the examination of financial records as an investigative measure that attempts to derive evidence suitable for use in litigation.
Q: What are the key challenges facing forensic auditors?
Amit Meher: From an operational perspective, the complexity of transactions, accessibility to the right information, and time management are key issues. Records tend to be immense and unstructured even when they are organized digitally, and activities can extend across multiple jurisdictions.
The timing of using a forensic auditor could also demand rapid and intense actions that sometimes constrain relationships with clients. Another key challenge is gathering evidence that can be permissible in courts.
Q: How can forensic auditors overcome the above challenges?
Amit Meher: Fortunately, technology comes to the rescue for managing the challenges of handling complex and unstructured data. Forensic auditors these days use sophisticated data analytical tools which not only organize data in required formats but also help analyze them based on the testing criteria. The use of technology also reduces time and minimizes effort, thus helping in meeting aggressive timelines.
The other challenge of creating the awareness of how forensic services can help organizations provides an opportunity to reach out to such vast untapped markets and make them aware of how value-added forensic services can help in resolving complicated issues.
Q: What are the top reasonable expectations of forensic auditors from regulators?
Amit Meher: Comprehensive and clear legislation combined with strong and timely enforcement can be a great fraud preventive measure. While the government and regulators have introduced vigorous legislation and policy initiatives, the unrelenting shenanigans of those who want to exploit the ambiguity within the ambiguity within the system keep posing challenges to the spirit of these reforms.
Alternatively, these days regulators engage forensic professionals to assist them with fraud investigations, money trail of funds, big data analytics, forensic technology support, gathering necessary evidence including digital evidence to legally determine the occurrence of fraud, and as expert witness support.
Q: Going forward, where do you see the road ahead for forensic auditors?
Amit Meher: As businesses become more sophisticated, so does fraud. The global economy plays a key role in the overall landscape; given that instability and disruptions seem to be the order of the day, companies and individuals have to deal with more financial pressures, and this tends to lead to an increase in fraud and corruption. Therefore, companies need assistance in dealing with these challenges timely.
Thus, forensic professionals will play an important role in preventing as well as detecting fraud. Following business trends, we anticipate a rise in the demand for services like dispute advisory and forensic technology. This involves provid ing expertise in civil disputes, quantification of losses, e-discovery and acting as expert witnesses in courts and arbitration proceedings.
Source: Economics Times