In days when words like parallel economy, shell companies and money laundering flood blogs, intellectual and after-party discussions, liquor baron and former Kingfisher boss Vijay Mallya’s extradition proceedings in a British court are just a reminder of how high-profile white collar crimes influence the psyche of society.
Seeing an influential public figure face music over alleged irregularities – read laundering, account bungling and non-repayment of loans, perhaps, reignites the hope that justice shall prevail.
For every big fraud that hits headlines, there are dozens which go undetected. From Harshad Mehta’s security scam in 1992 to Ramalinga Raju’s Satyam Computer Services accounting scam in 2009 and now the Sahara and the liquor baron’s issue, some white collar crimes always remain in public memory because of the investigators who dared to expose something that would, otherwise, remained under cover.
The journey of catching the scent of a fraud and digging the evidence to prove irregular financial transactions is tortuous. It is like virtual reality gaming by a new-age super sleuths – also known as a forensic auditor -in the dark and meandering lanes of economic offences.
Had it not been for the court-appointed forensic auditors, the Mallya case would never have reached the current stage. The good times for the “Liquor King” would have never ended with the help of advisers - present in coteries of all over-ambitious industrialists – who specialize in bypassing the legal stipulations and rules of fair play.
The functions of a forensic auditor are akin to the blind man entering a dark room during midnight in search of a black hat that was not there, as he has to go beyond the figures and statements so as to unearth the fact.
To put it differently, a forensic auditor goes beyond numbers. The concept requires blending of the three principles - accounting, auditing and investigation. Investigation is what makes forensic audit different from a traditional audit. And, mind you we are not talking about an ordinary investigation, it has to carry the evidentiary value that can be used in a court of law.
I cannot stop myself from comparing a forensic auditor to an ethical hacker. Just as an ethical hacker helps investigators break into the most guarded programmes and files of a suspect, a forensic auditor takes off the shells of the corporate veil of the entity for establishing the intentions of the person(s) behind questionable transaction(s). A forensic audit finds out the basis on which each decision was taken.
From the point of view of a legal expert, I can say that the litigation support provided by a financial auditor helps the court understand the depth and width of the financial scams under its lens.
In any corporate environments data exists not only on PCs but on server(s) too, forensic auditors use such data to investigate into the depths of the transaction(s).
For instance, in the liquor baron’s case, the company’s internal support team allegedly took precautions against early detection but it was the skill of the investigator who thought forensically to arrive at the conclusion of the fraud and substantiate it with evidence.
If we just talk about the banking sector, it was an accepted reality much before the allegations against Mallya became public that the traditional audit methodologies will not suffice to arrive at the realities behind complex financial transactions.
What is needed is a melange of processes, techniques and investigations to fully decrypt and decipher the complex transactions under scanner and conclude about the presence of and, henceforth, present the case in a manner amenable and acceptable in the court of law.
The RBI has repeatedly underscored the importance of forensic audit, as banking is all about trust and confidence and fraud is one important aspect of eating away these vital pillars on which banking leans upon.
It is not just about the losses suffered by banks but also about the issues of culture and system in banking sector which should have a zero tolerance towards such fraudster and fraudulent activities and should have strong preventive, detective and corrective capability.
Banks are required to set up dedicated and well organised “Special Surveillance and Investigative Function”. Due to all these concerns, the RBI also wants to create a common pool of forensic audit firms.
Another aspect that cannot be ignored about financial auditors or “ethical white collar crime hackers” is their shortage in our country. The shortage persists despite the specialised field being a well-developed and established branch of probes into accounting frauds abroad.
The growing significance of forensic audit can be gauged from the Institute of Chartered Accountants of India move to introduce a specialised course in the subject recently. But, there is still a long way to go before an experienced breed of financial auditors gets down to work.
For the well-meaning and law abiding industrialists, forensic audit can prove to be a tool for checking wrongdoings of their own subordinates.
Unfortunately, this form of audit is currently used only for detecting frauds. Its use as a preventive tool – by corporates or entrepreneurs - against frauds by their own unscrupulous employees is yet to pick up in our country.
Due to the complex judicial system and political compulsion, forensic auditors face the challenge of gathering information against the “big shots‟ that is admissible in the court of law.
In our country, the situation is more challenging as the first remedy that a troubled industrialist seeks is from the investigators or guardians of law themselves, albeit, against personal favours and “cuts”.
"It takes two hands to clap!” and this is true for alleged money laundering and accounting scams as well. Economic offences are chiefly conspiracies seldom committed by an individual.
Like the script of any Bollywood pot-boiler, someone, somewhere in the government set-up turns a blind eye towards the fraudster and the booty worth millions of rupees gets divided among the beneficiaries.
As past experience has shown us, a large number of frauds revolve around functionaries of public sector. If I have my say, I would recommend appointment of forensic accountants in all public sector and large scale companies so as to limit the scope for wrongdoings.
Any fraud investigation is part art and part science. Since so much information is now created and stored electronically, a good knowledge of computers and information technology is an essential part of the investigator’s toolkit.
One of the attributes of forensic audit is the retrieval of concealed information/data majorly essential for the investigation of economic offenses.
As investigators in the Vijay Mallya’s alleged fraud case would have realized, fraud is a complicated strategy and investigation of data for fraud is gigantic.
Culprits use sophisticated technology and to withstand this cutting-edge stereotype, traditional investigation methodology has to be replaced, therefore, right technology has to be adopted to be at par with the IT platform.
Cyber crime is a huge risk since expansion of businesses geographically and organically implies attaching more and more risk and incompatibility of data and technology will only amplify such risks.
Thus, a forensic auditor isn’t a watchdog but a bloodhound sniffing out fraudulent and criminal transactions. And, my experience shows that enforcement agencies themselves lack the trained manpower or skill to take on the whiz-kids of frauds.
May be time has come for these agencies to introspect on the need and speed with which the whole new world of forensic audit should be explored for curbing the parallel economy.
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