October 2013
Volume 4, Issue 39
FORENSIC ACCOUNTING
In this Issue
05 Use of Forensic Ac-
counting in Divorce Set-
tlements
06 Satyam Computers
LtdA Classic Case of
Fraud Accounting
03 Forensic Accounting
04 RBI Column
08 Personalities of the
Month
09 Market Round Up
10 Economic Rollers
11 Stock Analysis
12 Finance Buzz
13 Photo Find
14 Finance Quiz
15 Crossword
16 Answers
In this Issue Page 3
Fraud is a growing industry, unfortunately.
There has never been dearth of bad people do-
ing bad things, says Andrew Bernstein.
Hence, the opening quote suggests how im-
portant forensic accounting is.
Forensic accounting, sometimes called investi-
gative accounting, involves the application of
accounting concepts and techniques to legal
problems. Forensic Accounting utilizes ac-
counting, auditing, and investigative skills to
conduct an examination into a company's fi-
nancial statements. Thus, providing an ac-
counting analysis that is suitable for court. Fo-
rensic accountants investigate and document
financial fraud and white-collar crimes such as
embezzlement. They also provide litigation
support to attorneys and law enforcement agen-
cies investigating financial wrongdoing.
Assignments of a Forensic Accountant:
1. Criminal Investigations- Forensic Ac-countant performs criminal investigations on
the behalf of police force and organizations
such as Law Society.
2. Shareholders and Partnership Disputes- Encompasses the post-mortem of historical da-
ta like disputes arising in the case of benefits
and compensation received by the aggrieved
shareholder or partner.
3. Personal Injury Claims / Motor Vehicle
Accident- A forensic accountant also estimates
the economic loss as a result of a motor vehicle
accident. Cases pertaining to medical malprac-
tice and wrongful dismissal calls for the quanti-
fication of the economic losses.
4. Business Interruption/Insurance Claims- A forensic accountant assists from either an
insured or insurers perspective in cases like
business interruption, property losses, fidelity
claims.
5. Business/Employee Fraud Investigation-
It includes funds tracing, due diligence report
reviewing, forensic intelligence gathering and
asset identification and recovery.
6. Matrimonial Disputes- This covers evalu-ation and valuation of assets pertaining to busi-
nesses, property or other assets.
7. Business Economic Losses- This assign-ment takes up business losses such as; contract
disputes, construction claims, expropriations,
product liability claims, trademark and patent
infringements.
8. Professional Negligence- It is being viewed from two angles i.e. Technical- Breach
of GAAP or GAAS and Loss quantification.
9. Mediation and Arbitration- Forensic Ac-countants do possess expertise on legal process and procedures in turn provide assistance in alternative dispute resolution to help individu-als and businesses to resolve disputes with minimal interruption and in timely manner.
Inference- The famous saying, Auditor
should be a watchdog but not a bloodhound,
invites the forensic accountants to look beyond
numbers to comprehend the business realities.
After the Satyam fraud, the demand for foren-
sic accounting is growing rapidly. Moreover,
with the advent of plethora of e-commerce
businesses, the need for forensic accounting
relative to the cyber space is worth mention-
ing. Therefore, it is time for the Chartered Ac-
countants to focus on the timely detection as
well as the prevention of burgeoning cyber
frauds.
FORENSIC ACCOUNTING
ANINDITA NATH - F1
Page 4 Volume 4, Issue 39
1. The Reserve Bank of India asked banks to
link the disbursal of home loans to stages of con-
struction to protect the interests of buyers and
contain the fallout of "innovative" housing fi-
nancing schemes. These loan products, the RBI
said, are popularly known by names such as
80:20 and 75:25 schemes. The RBI said such
home loan products are likely to expose banks
and their borrowers to additional risks.
With effect from June 21, 2013 the RBI revised
the Loan-to-Value (LTV) ratio, which deter-
mines how much the banks can finance. For
loans of up to Rs 20 lakhs, banks can lend to a
maximum of 90 per cent, while the borrower has
to pay the remaining 10 per cent.
2. In order to encourage capital flows, RBI eased
the External Commercial Borrowing (ECB)
norms by allowing companies to use funds raised
from foreign partners for general corporate pur-
poses. Till now, borrowings in the form of ECBs
were not to be utilised for general corporate pur-
poses. However, the RBI has put certain condi-
tions for availing the benefits of relaxed norms.
"Minimum paid-up equity of 25 per cent should
be held directly by the lender (overseas part-
ner)," the RBI said. Also, repayment of the prin-
cipal will commence only after completion of
minimum average maturity of seven years and
no prepayment will be allowed before maturity,
it added.
3. The Reserve Bank of India (RBI) tightened
regulations governing non-banking finance
companies (NBFCs) lending against gold jew-
ellery. The new rules include strict documen-
tation for high value loans against gold and
prohibition on misleading advertisements by
NBFCs such as offering availability of gold
loans in a matter of 2-3 minutes.
4. RBI also said that NBFCs financing
against the collateral of gold must insist on a
copy of the PAN card of the borrower for all
transaction above Rs5 lakhs and all high value
loans of Rs 1 lakh and above must only be
disbursed by cheque. The apex bank has
clearly stipulated that NBFCs should not issue
misleading advertisements like claiming the
availability of loans in a matter of 2-3
minutes.
RBI has also asked NBFCs to make the auc-
tion process of the gold more transparent by
disclosing the details of the auction process in
their annual report, including full details of
the value fetched in the auction.
The RBI said that the reserve price for the
pledged ornaments should not be less than
85% of the previous 30 day average closing
price of 22 carat gold as declared by the Bom-
bay Bullion Association Ltd, an industry
body.
Source : www.rbi.org
RBI COLUMN
R VISHNU VARTHANA - F2
In this Issue Page 5
It is no surprise that financial issues are among
the most contentious in divorce actions. The fi-
nancial aspects associated with marital disputes
and dissolution are often complex and consume
most of the effort and attention of the parties.
Forensic accountants possess unique skills that
allow them to provide valuable support to the
divorcing spouses and their attorneys. While
attorneys have traditionally engaged accountants
to assist with general financial issues related to
divorces, attorneys are increasingly relying upon
forensic accountants to provide more in-depth
forensic services beyond alimony and child sup-
port calculations.
Though the trend has not gathered as much pace
in India as in the West, however, there are rea-
sons where the services of a forensic accountant
can prove to be of immense value:
Even though India has different marriage laws
for different religious communities, a divorce
settlement can be disputed in the Court for the
issue of alimony or maintenance.
To determine the amount of alimony or mainte-
nance, the Court would consider the status of the
husband and the wife with respect to their in-
come, assets and lifestyle and reasonable wants
of the husband/wife.
Uncovering Hidden Income and Assets- Detect-
ing hidden, transferred or deferred income
through techniques like the analysis of the fami-
ly's lifestyle to determine if the level of reported
income is sufficient to support the family's ex-
penditures, an examination of the couple's net
worth at two or more points in time to determine
whether the reported income during the period is
consistent with the change in net worth, and an
analysis of bank deposits.
Investigating Closely Held Businesses- The
spouse with higher income may attempt to
hide, transfer or defer income or assets in an-
ticipation of the formal decision to divorce.
The spouse may accomplish this by withdraw-
ing unreported cash from a closely held busi-
ness, manipulating receipts and expenses of a
closely held business, transferring cash to oth-
er individuals or entities, or by deferring the
receipt of a bonus or other compensation until
after the divorce is settled. The forensic ac-
countant conducts a detailed review of busi-
ness records and practices, including internal
controls, to detect any manipulation or con-
cealment.
Forensic accountants are an invaluable re-
source to attorneys in divorce litigation, and,
when utilized appropriately, their examina-
tions can facilitate a more equitable settle-
ment. While the need for a forensic account-
ant depends upon a variety of circumstances
of each case, including the size of the marital
estate, the extent of actual or perceived mari-
tal misconduct, the financial needs of the de-
pendent spouse post-dissolution, etc., the re-
ward will generally exceed the money invest-
ed in fees and costs.
References:
http://www.lorman.com/newsletter/article.php?
article_id=1470&newsletter_id=313 (Author: Barbara A.
Ruth & Michael A. Gillen)
http://businesstoday.intoday.in/story/divorced-how-to-best-
negotiate-for-good-alimony-amount/1/192713.html
USE OF FORENSIC ACCOUNTING IN DIVORCE SETTLEMENTS
MUFADDAL NIMAKWALA - F1
Page 6 Volume 4, Issue 39
The science of conduct is swayed in large
by human greed, ambition, and hunger for
power, money fame and glory - This testa-
ment is well proved by the fraud committed
by the founders of Satyam Computers Ltd. in
the year 2009.
Satyam Computers Ltd. was one of the up-
coming stars in the outsourced IT service
industry in India. Satyam was formed in the
year 1987 in Hyderabad by Mr Ramalingam
Raju. It was considered to be an example of
Indias growing success. The company re-
ceived a number of awards for corporate ac-
countability, innovation and governance.
Ironically, Satyam in Sanskrit means truth.
However, the company was not able to live
up to the literal meaning of its name.
The big revelation was made on 7th, Janu-
ary, 2009 when Ramalingam Raju, the
founder of the company disclosed that he
had been manipulating the companys ac-
counts for a number of years. He
overstated the balance sheet by US$1.47
billion. The US$1.04 billion cash balance
in the companys balance sheet was non-
existent. The balance sheet was inflated
with interest income from 6,000 fake salary
accounts. Fake customer identities with
fake invoices were created to inflate reve-
nue. The board resolution was forged by
the global head of Internal Audit. Moreo-
ver, money raised by Satyam through
American Depositary Receipt (ADR) was
not publicized in the balance sheet. In an
attempt to shore up profits and increase the
incentives payable to the companys execu-
tives, funds were diverted to real estate in-
vestments.
This led to a huge difference between the ac-
tual profits and book profit as Mr Raju could
not fudge the expenditure figures as easily as
the revenue figures. Therefore, a desperate
attempt was made to close the gap by buying
group entities Maytas Infrastucture and May-
tas properties and bringing in some real as-
sets in the business to absorb fictitious prof-
its. However, it was opposed by the investors
and the attempt was not successful.
The CBI reported the scam at around Rs
14,000 crores. Satyam Scam is a classic case
of lack of corporate responsibility, negli-
gence of fiduciary duties and poor ethical and
moral standards of the top management. The
greed for success, power and money led to
the collapse of the company.
SATYAM COMPUTERS LTD.A CLASSIC CASE OF FRAUD ACCOUNTING
FARHEEN IMAM - F1
In this Issue Page 7
Forensic accounting has become crucial the
web of complicated accounting entries and
exposing the real picture behind the scenes.
Along with accounting failure the Satyam
fraud was also a case of poor corporate gov-
ernance. Auditors PWC (the external auditor
for Satyam) was also found guilty of profes-
sional misconduct and for overlooking irregu-
larities in the accounting entries of the com-
pany.
Thus, Satyam Computers Limited taught a
very important lesson to India. It highlighted
the significance of ethics, a need for stronger
corporate governance, and last but not the
least, forensic accounting in order to prevent
such mishaps from reoccurring.
Fabricated balance sheet and income
statement of Satyam: 30th September,2008
Page 8 Volume 4, Issue 39
Virginia Ginni Rometty is Chairman, President
and Chief Executive Officer of IBM and the
first woman to head the company. Mrs. Romet-
ty began her career with IBM in 1981 in De-
troit, Michigan. Since then she has held a series
of leadership positions in IBM, most recently
as Senior Vice President and Group Executive,
IBM Sales, Marketing and Strategy. In this
role, she was responsible for business results in
the 170 global markets in which IBM operates
and pioneered IBM's rapid expansion in the
emerging economies of the world. As part of
this, she established IBM's Growth Markets
organization, which is expected to contribute
as much as 30 percent of IBM revenues by
2015.
Mrs. Rometty serves on the Council on Foreign
Relations; the Board of Trustees of Northwest-
ern University; and the Board of Overseers and
Board of Managers of Memorial Sloan-
Kettering Cancer Center. She holds a Bachelor
of Science degree with high honors in comput-
er science and electrical engineering from
Northwestern University.
Margaret Cushing Whitman is an Ameri-
can business executive. She is the presi-
dent and chief executive officer of
Hewlett-Packard. Whitman served as an
executive in The Walt Disney Company
where she was vice president of strategic
planning throughout the 1980s. In the
1990s, she served as an executive for
DreamWorks, Procter & Gamble, and
Hasbro. Whitman served as president
and chief executive officer of eBay from
1998 to 2008. During her 10 years with
the company, she oversaw its expansion
from 30 employees and $4 million in
annual revenue to more than 15,000 em-
ployees and $8 billion in annual revenue.
In 2008, she was cited by The New York
Times as among the women most likely
to become the first female President of
the United States. In February 2009,
Whitman announced her candidacy for
Governor of California, becoming the
third woman in a 20-year period to run
for the office.
PERSONALITIES OF THE MONTH
JAYAKALA A K - F2
In this Issue Page 9
Parliament gave its nod to the landmark Food Security Bill which seeks to provide as a right-
highly subsidised food grains to the country's poor representing two-third population. (ET
Pulled down by the contraction in crude oil and natural gas production, the eight core indus-
tries' output growth slowed down to 3.1 per cent in July 13, lower than 4.5 per cent growth
recorded in the July of last year. (BL)
Market regulator SEBI asked stock exchanges to calculate circuit limits - the maximum per-
missible movement allowed to Sensex or Nifty in one trading session - on a daily basis as
against the current practice of doing the same on a quarterly basis. (Mint)
The Lok Sabha on Wednesday passed the Pension Fund Regulatory & Development Authority
(PFRDA) Bill, which seeks to give statutory powers to the interim regulator constituted by an
executive order in 2003. The pension reforms Bill has fixed the ceiling on Foreign Direct In-
vestment (FDI) in the sector at 26%. (BS)
RBI has partially relaxed some of the restrictions imposed last month on capital outflows from
residents, including allowing Indian companies more leeway if they are raising funds via Ex-
ternal Commercial Borrowings (ECBs) Companies raising ECBs will be allowed to invest up
to 400% of their net worth abroad. (ET)
Commodity market regulator FMC has imposed an additional margin of 5% on base
metals trading through Futures, to tackle volatility in the market. (BS)
According to data from the Department of Industrial Policy and Promotion (DIPP), Foreign
Direct Investment (FDI) into India increased by 6 per cent year-on-year to US$10.87 billion
during the first six months of this year. (BL)
The Reserve Bank of India (RBI) has sold a massive US$5.9Bn in the spot segment of the for-
eign exchange market in July 13 to stem the fall in the Rupee. This was the highest interven-
tion by the RBI since January 2012. (BS)
MARKET ROUND UP
ANKIT MEHROTRA - F2
Page 10 Volume 4, Issue 39
Source: Finance Ministry, Office of Economic Advisory, HDFC Securities Reports, Ministry of Commerce, RBI
Repo Rate (as on 30th Sept 2013) 7.50%
Reverse Repo Rate (as on 30th Sept 2013) 6.50%
CRR (as on 30th Sept 2013) 4%
SLR (as on 30th Sept 2013) 23%
CBLO (as on 30th Sep 2013) 9.49 bps
Inflation as on July 2013: WPI Food inflation
6.10%
18.18%
Forex Reserve (as on 20th Sep 2013) US$277.38 billion
IIP growth rate (for July 2013) 2.60%
91 Days T bills (as on 30th Sep 2013) 9.57%
10 year G- Sec Yield (as on 30th Sep 2013) 8.70%
Exports during August 2013 US$26.14billion
Imports during August 2013 US$37.05billion
ECONOMIC ROLLERS
ANUBHA - F1
In this Issue Page 11
The BSE Sensex regained from 3-week lows on Tuesday (1 Oct 2013) to end above 137
points higher, as investors cheered lower-than-expected June quarter Current Account Defi-
cit (CAD) number and encouraging September top line for automobile firms.
The up movement in shares was mostly backed by the recent loser like stocks of banking,
realty, capital goods and auto stocks on heavy purchases at prevailing attractive prices. A
higher movement in the Asian region and good opening in Europe further pushed the senti-
ment.
The Sensex of the Bombay Stock Exchange (BSE), which lost 514 points in the previous two
trading sessions, reversed losses of early trade to end at 19,517.15, a gain of 137.38 points
(0.71 per cent). Rise of 1 October was the best daily gain for the Sensex since September 19,
when it soared by 684.48 points (3.43 per cent). On similar lines, National Stock Exchange
index Nifty fluctuated between 5,786.45 and 5,700.95, before ending 44.70 points higher, or
0.78 per cent at 5,780.05.
The stock markets were also supported by a strengthening rupee that gained 28 paisa to trade
at 62.34 versus the US dollar, which was under pressure after the US government shut down.
The September - 13 sales figures of firms like Maruti, Hero MotoCorp and TVS rose in 12-
16 per cent range while that of M&M slipped. CAD widened by US$21.8 billion in Q1
FY14, below the industry expectation of US$25 billion figure helped the stock market.
The market also took a positive sentiments of the easing retail inflation that eased marginally
to 10.75 per cent in August compared to 10.85 per cent in the previous month.
STOCK ANALYSIS
AJO JOSEPH - F1
Page 12 Volume 4, Issue 39
Fiduciary - Person who is responsible for the administration of property owned by others.
Corporate management is a fiduciary with respect to corporate assets which are beneficially
owned by the stockholders and creditors. Similarly, a trustee is the fiduciary of a trust and
partners owe fiduciary responsibility to each other and to their creditors.
Foreclosure- Seizure of collateral by a creditor when default under a loan agreement occurs.
Safe Harbour Rule- Concept in statutes and regulations whereby a person who meets listed
requirements will be preserved from adverse legal action. Frequently, safe harbours are used
where a legal requirement is somewhat ambiguous and carries a risk of punishment for an
unintended violation. Recently, this concept has been widely used in the Transfer Pricing
(TP) rules under the Income Tax laws.
Closed-End Fund- A Closed End Fund is a publicly traded investment company that raises a
fixed amount of capital through an IPO. The fund is then structured, listed and traded like a
stock on a stock exchange.
Churning- An unethical practise employed by some brokers to increase their commissions
by excessively trading in a client's account.
Tap Issue- A procedure that allows borrowers to sell bonds or other short term debt instru-
ment from past issues. The bonds are issued at their original face value, maturity & coupon
rate, but sold at the current market price.
Tang long right is a contractual obligation - to protect minority shareholders right - when
the majority shareholder intends to sell his stake from the company, minority shareholder too
can sell his share.
Carrot Equity- A type of equity where current equity owners can purchase additional equity
if the company reaches certain financial goals or benchmarks. Financial goals include certain
net income, earnings per share, economic value added and operating cash flow thresholds.
FINANCE BUZZ
NAVEENKUMAR . M - F2
In this Issue Page 13
PHOTO FIND
T.KIRUTHIKKA DEVI - F1
Page 14 Volume 4, Issue 39
FINANCE QUIZ
AMOGHAVARSHA P - F2
1. Name the largest anti-fraud professional community in India.
2. What is the mathematical tool used in forensic accounting to find if the case is uninten-
tional or fraudulent?
3. Which are the computer programs that the auditor uses as part of the audit procedures to
process data?
4. Name the body that has been formed by the Ministry of Corporate Affairs to investigate
frauds.
5. Which is the only licencing & regulating body for forensic accounting in India?
6. Name the world's largest anti-fraud organization and a leader in anti-fraud training.
7. Expand IFAIA.
8. When did RBI introduce forensic auditing practices in banks?
In this Issue Page 15
CROSSWORD
ABHISEK SAHU - F2
2. Technicians may be required to carry out "Live analysis" of evidence - various tools to sim-
plify this procedure have been produced. This is the name of the software created by MI-CROSOFT.
3. It deals with the exchange of information in electronic format (often referred to as electroni-cally stored information or ESI). Ans. E--------
5. The field of investigation which relates to the use of evidence in a Court of Law. 9. lt is the legal status of a person or other entity that cannot repay the debts it owes to credi-
tors. 10. A civil action brought in a court of law in which a plaintiff, a party who claims to have in-
curred loss.
1. What is the proactive identification and removal of the causal and enabling factors of fraud? Ans: FRAUD ----------
4. A pricing structure in mergers and acquisitions where the sellers must "earn" part of the pur-chase price based on the performance of the business following the acquisition.
6. Action of confiscating or impounding property by warrant of legal right. 7. The term used in some jurisdictions for the party who initiates a lawsuit. 8. A civil wrong
Across
Down
Page 16 Volume 4, Issue 39
ANSWERS
Quiz
1. India Forensic 2. Benfords law 3. Computer Assisted Auditing Tools
(CAATs) 4. Serious Fraud Investigation Office
(SFIO) 5. The Institute of Chartered Accountants of
India (ICAI) 6. Association of Certified Fraud Examiners
(ACFE) 7. Institute of Forensic Accounting & Inves-
tigative Audit 8. September 2009 Fraud Risk Manage-
ment System
Crossword
Photo Find
1.Logo of PricewaterhouseCoopers 2.Mr. Barry Salzberg, the Global Chief Executive Officer of Deloitte & Touche 3.Mr. Richard.H.Girgenti, Head of Foren-sic Services for KPMG 4.Logo of Grant Thornton 5.Logo of Ernst and Young 6.Mr Subodh Kumar Agrawal, President of Institute of Chartered Accountants of
India