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Forensic Accounting
And
Auditing
Submitted By
Durvesh S. Naik
Roll No: - 6025
MCOM PART-II
(Advanced Accountancy)
2014-15
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DECLARATION
Place:-
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Parle Tilak Vidyalaya Association's
MULUND COLLEGE OF COMMERCE
Sarojini Naidu Road, Mulund West, Mumbai 400080.
Certificate
This is to certify that
Mr. __________________________________________________________
This is a bonafide project work & the information presented is true/ and
original to the best of our knowledge and belief.
ACKNOWLEDGEMENT
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I acknowledge with gratitude my indebtness to Professors for giving me the
opportunity to work on this project and gave valuable guidance for preparing
this project.
I would like to thanks those people those people who directly or indirectly help
me to enhance my practical knowledge in the field of commerce and express my
sincere gratitude to all those who share valuable thoughts with me.
This is being my first effort, the possibilities of errors and omissions in its
contents and presentation cannot be completely ruled out. I shall, however,
grateful to my teachers, colleagues and other readers from their suggestions for
its improvement.
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Contents
INTRODUCTION.......................................................................................................7
WHAT IS FORENSIC ACCOUNTING?..................................................................9
FORENSIC ACCOUNTING IMPLEMENTATION IN INDIA............................10
OBJECTIVES OF STUDY:......................................................................................11
RESEARCH METHODOLOGY:............................................................................11
HISTORICAL PERSPECTIVE OF FORENSIC ACCOUNTING IN INDIA.....12
NATURE OF FORENSIC ACCOUNTING............................................................13
TYPES OF FRAUDS:...............................................................................................14
THE SCAMS IN INDIA:-.........................................................................................15
USES OF FORENSIC ACCOUNTING:.................................................................17
FORENSIC ACCOUNTANTS - THE BLOODHOUNDS OF BOOK-KEEPING
.................................................................................................................................... 18
WHAT DOES A FORENSIC ACCOUNTANT DO?..............................................20
APPLICATION OF PRINCIPLES OF FORENSIC ACCOUNTING TO AN
ORGANISATION.....................................................................................................21
THE TECHNIQUES OF FORENSIC ACCOUNTING:........................................22
COMMON ACCOUNTING FRAUD AREAS........................................................24
WHY ENGAGE A FORENSIC ACCOUNTANT?.................................................25
ROLE OF FORENSIC ACCOUNTANT.................................................................26
ROLE OF FORENSIC ACCOUNTANTS UNDER INDIAN STATUTES...........28
WHAT CHARACTERISTICS/SKILLS SHOULD FORENSIC ACCOUNTANT
POSSES?.................................................................................................................... 30
ADVANTAGES AND DISADVANTAGES OF FORENSIC ACCOUNTING......32
CURRENT AFFAIRS:-.............................................................................................34
CONCLUSION.........................................................................................................35
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INTRODUCTION
Thats not surprising given how the incidence of corporate fraud is on the rise.
Investigations and risk consulting firm Kroll unearthed in a recent survey that
69% of companies studied were affected by fraud in FY13, up from 68% in the
previous year. The value of fraud, the study found, rose, to 71% from 67%.
Crimes are of all hues, seven in particular theft of physical assets, theft of
information, corruption and bribery, internal financial fraud, vendor fraud,
management conflict of interest and regulatory breach.
Insider fraud was particularly rife in India, with 89% of respondents indicating
the perpetrator was an insider of some sort a junior, middle management or
senior employee, or an agent.
Which is why, as Rohit Mahajan, Deloitte Forensic (India) national leader and
senior director, points out, forensic audit practices have evolved significantly
over the last 10-15 years? Earlier the investigations were restricted to books
and records but now there is a significant element of intelligence gathering, he
explains. Mahajan adds that technology and analytics have a greater play in
every aspect of forensic accounting today, whether its market intelligence or
human resources (HR) intelligence.
Not surprisingly, the financial sector finds itself most vulnerable to fraud. As
Sandeep Dhupia, head of KPMGs forensic services in India, explains, this is
due to misuse of technology and despite the presence of a strong regulator.
Data released by the Reserve Bank of India (RBI) show that public sector banks
lost money to the tune of Rs 8,734 crore in the last three years on account of
loans (personal, housing, corporate and others) that were disbursed against fake
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documents. The amount was nearly four times higher than that in 2010 of Rs
1,202 crore.
But other spaces too are exposed to fraud, which is why the scope of forensic
auditing is getting wider. Whats more, chartered accountants, MBAs and
lawyers are no longer solely relied upon. While they do form the core part of
forensic accounting, there is now a need for financial research analysts,
engineers, journalists, artists and even former law enforcement officials. As
experts point out, fraud related to a toll road or competitive bidding would call
for the services of a professional with insights into the infrastructure industry
while a white-collar crime in financial services and issues related to stressed
assets or anti-money laundering would require an understanding of the working
of banks and financial intermediaries. The nature of crimes is complicated and
issues such as conflicts of interests, code-of-conduct violations and regulatory
non-compliance require a strong working knowledge of the sector.
More companies are waking up to the fact that corporate offences cant be
wished away. Indeed, the Kroll report showed India was well above the average
when it came to most crimes. Theft of physical assets 33% of companies
were affected versus 28% for the survey as a whole, and corruption 24%
compared with 14%. India also beat the average on internal financial fraud
22% against 16% and had an above- average incidence of information theft
24% compared with 22%. Indian companies were aware they operated in a
high-corruption environment... Companies need to avoid accepting that fraud is
just a normal part of business, Kroll observed.
But there are other reasons why demand may be rising. Provisions of the new
Companies Act mean that every company now has to have proactive fraud risk
management policies. The Act requires independent directors to increase
safeguards against fraud and reminds them of their whistleblowing
responsibilities. Objections must be documented, and now that the Act defines
fraud and safeguards explicitly, ignorance of the parameters of either will no
longer be a defense.
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WHAT IS FORENSIC ACCOUNTING?
Forensic accounting is very important tool to detect, investigate and prevent the
frauds .Whether it is stock market fraud or bank fraud or cyber fraud; forensic
accounting has become an indispensable tool for investigation. With India being
ranked as the 88th most corrupt nation, the needs for forensic accountants
become all the more profound.
Forensic Investigation:-
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law. A Forensic Investigation may be grounded in accounting, medicine,
engineering or some other discipline.
Forensic Audit:-
In India, Forensic Accounting has not got its due recognition even after
alarming increase in the complex financial crimes and lack of adequately
trained professionals to investigate and report on the complex financial crimes.
The task of Forensic Accountants is handled by Chartered Accountants who
apart from handling traditional practice of auditing as required under the
Companies Act, 1956 or Income Tax Act are called upon by the law
enforcement agencies or the companies or private individuals to assist in
investigating the financial crime or scam.
The CA or CMAs in India are best suited for this profession due to their
financial acumen acquired during their rigorous training which can be further
honed by introducing post qualification degree or diploma in Investigating and
Forensic Accounting similar to one introduced by CICA.
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financial crimes and give expert testimony in the Court of Law. However, no
efforts has so far been made by the ICAI and ICMAI, the two leading statutory
accounting professional bodies to move in this direction and set up a institute
which can offer the post qualification diploma in Investigative and Forensic
Accounting to its members.
However, growing financial fraud cases, recent stock marker scams, failure of
non financial banking companies, phenomena of vanishing companies and
plantation companies and failure of the regulatory mechanism to curb it has
forced the Government of India to form Serious Fraud Investigation Office
(SFIO) under Ministry of Corporate Affairs which can be regarded the first step
of Government of India to recognize the importance and advance the profession
of forensic accountants. The SFIO is a multidisciplinary organization having
experts from financial sector, capital market, accountancy, forensic audit,
taxation, law, information technology, company law, customs and investigation.
These experts have been taken from various organizations like banks, Securities
& Exchange Board of India, Comptroller and Auditor General and concerned
organizations and departments of the Government. However, the main
important law enforcement agency involved directly in combating frauds is the
Police, CBI, DRI etc.
OBJECTIVES OF STUDY:
1. To know the various uses of forensic accounting in India.
RESEARCH METHODOLOGY:
The paper is based on secondary data and some discussion with eminent
persons in the corporate sector. Forensic Accounting is investigation
accounting which involves analyzing, testing, inquiring and examining the
civil and criminal matters and finally giving an unbiased and true report.
Just as forensic investigations and lab reports are needed in the court to
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solve the murder and dacoit mysteries. Similarly forensic accounting plays
a key role in tracing the financial frauds and white-collar crimes.
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HISTORICAL PERSPECTIVE OF FORENSIC
ACCOUNTING IN INDIA
Maurice E. Peloubet who coined the term Forensic Accountant in 1946 essay
"Forensic Accounting: Its Place in Today's Economy." Archaeological findings
reveal that, during 3300-3500 BC, accountants of their day in Egypt, were
involved in the prevention and detection of fraud. During 1800 close
relationship developed between accountancy and legal profession. Many
amendments to financial statement disclosure can be attributed to frauds in
corporate. In 1930s America Eliot Ness was credited to bring down gangster Al
Capone, but his case was based on the investigative work done by Elmer Irey,
an accountant with the Internal Revenue Service that ensured Capones
conviction for tax evasion. He was probably Americas first high-profile
forensic accountant.
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NATURE OF FORENSIC ACCOUNTING
Forensic accounting is the specialty area of the accountancy profession which
describes engagements that result from actual or anticipated disputes or
litigation. Forensic means suitable for use in a court of law and it is to that
standard and potential outcome that forensic accountants generally have to work
(Crumbley et al. 2005). It is often said Accountants look at the numbers but
Forensic accountants look behind the numbers (Okoye 2009). Forensic
accountants are trained to look beyond the numbers and deal with the business
realities of the situation. Analysis, interpretation, summarization and
presentation of complex financial and business related issues are prominent
features of the profession (Bhasin 2007).
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TYPES OF FRAUDS:
Following are the types of frauds:
1) Bank frauds
2) Corporate frauds
3) Insurance frauds
4) Cyber frauds
5) Securities frauds
1) Bank Frauds:
2) Corporate Frauds:
In India, is rising 45% from leading Indian business declared that fraud e.g.
Satyam Computers stunned the national financial world in 2009 Satyam
Founder B. Ramalingan Raju declared he had inflated profit and jacked up the
companys Balance Sheet by more than one billion dollars.
3) Insurance Frauds:
4) Cyber Frauds:
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Who says Indian cyber crimes are still in the infancy? This is a man who
penetrated the Ecommerce for his personal benefits to a great use credit card,
ATM card, cyber taking
Work at home etc.
5) Securities Frauds:
Although not corruption scams these have affected may people there is no way
that the investor community forget the under truncate Rs. 4000 crore Harshad
Metha scam and over Rs. 1000 Crore Ketan Parekh scams which ended the
shareholder wealth in form of big market.
Satyam 2009 Rs.14000 Ramalinga Raju & his Inflated figures of cash &
Scam crore family, CFO & other bank balance, operating
top level management, profit artificially boosted
Auditors & Board of from 61 crores to 649
Directors crores, fictitious names of
employees
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which is illegal.
Coal gate 2012 Rs. 1.86 Govt of India, private & Govt of India allocating
lakh crore public sector companies coal blocks in an
inefficient manner
leading to windfall gain
to allottees (chose not to
go through the
competitive bidding
process)
VVIP 2013 Rs. 362 Augusta Westland It has been alleged that
Chopper crores Company, Former IAF former IAF chief has
deal scam chief SP Tyagi & his accepted bribes to win
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cousins, politicians, contract worth Rs. 36
Govt officials & several billion. Two Indian firms
middlemen played key role in the
controversy.
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USES OF FORENSIC ACCOUNTING:
The services rendered by the forensic accountants are in great demand in the
following areas:
2. Criminal Investigation:
Matters relating to financial implications the services of the forensic
accountants are availed of. The report of the accountants is considered in
preparing and presentation as evidence.
4. Arbitration service:
Forensic accountants render arbitration and mediation services for the business
community, since they undergo special training in the area of alternative dispute
resolution.
6. Dispute settlement:
Business firms engage forensic accountants to handle contract disputes,
construction claims, product liability claims, infringement of patent and trade
marks cases, liability arising from breach of contracts and so on.
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FORENSIC ACCOUNTANTS - THE BLOODHOUNDS
OF BOOK-KEEPING
Forensic accounting requires the most important quality a person can possess:
the ability to think. There is no book that tells you how to do a forensic
investigation. It is about solving a puzzle or peeling an onion. It takes creativity.
All of the larger accounting firms, as well as many medium-sized and boutique
firms have specialist forensic accounting departments. Within these groups,
there may be further sub-specializations: some forensic accountants may, for
example, just specialize in insurance claims, personal injury claims, fraud,
construction, or royalty audits.
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In addition to the specialized knowledge about the techniques of finding out the
frauds one needs patience and analytical mindset. One has to look beyond the
numbers and grasp the substance of the situation. It is basically the work of the
intelligent accountants. He needs to question seemingly benign document and
look for inconsistencies. He searches for evidence of criminal conduct or assists
in the determination of, or rebuttal of, claimed damages.
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WHAT DOES A FORENSIC ACCOUNTANT DO?
Litigation Support
Assistance in obtaining documentation necessary to support or refute a
claim.
Review of the relevant documentation to form an initial assessment of the
case and identify areas of loss.
Assistance with Examination for Discovery including the formulation of
questions to be asked regarding the financial evidence.
Attendance at the Examination for Discovery to review the testimony; assist
with understanding the financial issues and to formulate additional questions
to be asked.
Review of the opposing expert's damages report and reporting on both the
strengths and weaknesses of the positions taken.
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Assistance with settlement discussions and negotiations. Attendance at trial
to hear the testimony of the opposing expert and to provide assistance with
cross-examination.
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APPLICATION OF PRINCIPLES OF FORENSIC
ACCOUNTING TO AN ORGANISATION
The related area of forensic auditing can help in reducing the transaction
processing risk by helping to perform audit type procedures on a routine
schedule.
Some of the areas that the principles and activities of forensic accounting
can apply in an organization include:
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Examining warranty claims or returns for patterns of fraud or abuse.
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THE TECHNIQUES OF FORENSIC ACCOUNTING:
The conventional accounting and auditing with the help of different accounting
tools like ratio technique, cash flow technique, a standard statistical tool
examination of evidences are all part of forensic accounting. In cases involving
significant amounts of data, the present-day forensic accountant has technology
available to obtain or source data, sort and analyse data and even quantify and
stratify results through computer audit and various other techniques.. Some of
the techniques involved in Forensic Accounting to examine the frauds are:
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or fraud. These records or fields need to relate to other variables or factors in
order to find the relationship, thus establishing the truth.
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Total overhead costs might be divided by total direct labor hours. Ratio
analysis may help a forensic accountant to estimate expenses.
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WHY ENGAGE A FORENSIC ACCOUNTANT?
A logical question to pose is why bring in a forensic accountant and his team
when the organisation's internal auditor and management team can handle the
situation which can range from a simple employee fraud to a more complex
situation involving management itself? The answer would be obvious when
management itself is involved and the fallout to the discovery of the fraud leads
to low employee morale, adverse public opinion and perception of the
company's image and organisational disarray generally. Engaging an external
party can have distinct advantages from conducting an internal investigation.
There is little doubt that an external party would be far more independent and
objective than an internal auditor or company accountant who ultimately reports
to management on his findings. An established firm of forensic accountants and
its team would also have credibility stemming from the firm's reputation,
network and track record.
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This arises from the additional dimension and depth which experienced
individuals in fraud investigation bring with them to focus on the issues at hand.
Such individuals are specialists in rooting out fraud and would recognise
transactions normally passed over by the organisation's accountants or auditors.
(ii) Personal Injury Claims: Where losses arise as a result of personal injury,
insurance companies sometimes seek expert opinion from a forensic accountant
before deciding whether the claim is valid and how much to pay.
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(v) Expert Witness Cases: Forensic accountants often attend court to testify in
civil and criminal court hearings, as expert witnesses. In such cases, they attend
to present investigative evidence to the court so as to assist the presiding judge
in deciding the outcome of the case.
(viii) Litigation Consultancy: Working with lawyers and their clients engaged
in litigation and assisting with evidence, strategy and case preparation.
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ROLE OF FORENSIC ACCOUNTANTS UNDER
INDIAN STATUTES
There is no mention of Forensic accountants in the Indian statutes so far but
there are various provisions related to Forensic accountants/auditors in the
statutes. It can be categorized under the following heads:
(2) EXPERT OPINION: Forensic accountants may see and carefully examine
the accounts and balance sheets and use his skills to find out whether there is
any fraud committed or any anomaly associated with it by giving his expert
opinion. This finds place in for example s.45, s.118 of Indian Evidence Act,
1872; s.293 of Cr.P.C, 1973.
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because of the nature of the fraud and the difficulties encountered by the
Auditors in detecting material misstatements in the financial statements
resulting from fraud. Accordingly, it may be concluded that it is enough if
the Auditor expresses his opinion on the frauds noticed and reported by the
management and not expected to be a detective to approach his work with
suspicion
Another major issue under this clause is that it also requires reporting of
frauds committed by the Company. The Auditor is left with no clues and is
expected to travel beyond the books to search for market information about
frauds committed by the Company, which is highly illogical.
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WHAT CHARACTERISTICS/SKILLS SHOULD
FORENSIC ACCOUNTANT POSSES?
A forensic accountant is expected to be a specialist in accounting and financial
systems.
Yet, as companies continue to grow in size and complexity, uncovering fraud
requires a forensic accountant to become proficient in an ever-increasing
number of professional skills and competencies.
I. Core skills:
Ability to critically analyze financial statements. These skills help
Forensic
Ability to grasp internal control systems of the client and to set up a system
that achieves management objectives informs employees of their control
responsibility and monitors the quality of program and changes made to
them.
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Interpersonal and communication skills, which aid in acquiring information
about the companies ethical policies and assist forensic accountants to
conduct interviews and obtain crucially, needed information.
Command of criminal and civil laws, legal system and court procedures.
Ability to maintain his composure when detailing these events on the witness
stand.
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ADVANTAGES AND DISADVANTAGES OF FORENSIC
ACCOUNTING
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Disadvantages of Forensic Accounting
1) Confidentiality Issue
Since the scrutiny of a company's financial records is done by an external
forensic accountant, the chances of leakage of confidential matter are always
there. It is true that their code of ethics clearly mentions that forensic
accountants and other members involved in the scrutiny must not engage in
disclosing confidential data to outsiders, but the possibility of disclosure cannot
be nullified.
Despite the disadvantages associated with forensic accounting, it is, and will
continue to be an important part in the world of business. This is because it
helps organizations and individuals to figure out whether their financial
accounts are accurate or fabricated to hide illegal activities going on within the
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organization.
CURRENT AFFAIRS:-
Finance Ministry orders forensic audit on Dena Bank, OBC
in Rs. 437-cr fraud:-
The Finance Ministry has ordered a forensic audit of Dena Bank and Oriental
Bank of Commerce after some of their Mumbai-based branches allegedly
misappropriated funds worth Rs. 437 crore, mobilised through fixed deposits.
Professional services firm KPMG in India has been given the mandate to
undertake forensic investigations, sources close to the development said.
The report is expected in a months time. In the case of Dena Bank, the
misappropriation was to the tune of Rs. 257 crore and related to funds mobilised
from seven corporate. In Oriental Banks case, it related to misappropriation of
funds amounting to Rs. 180 crore, reportedly belonging to the Jawaharlal Nehru
Port Trust.
The Central Bureau of Investigation is already looking into the alleged fraud.
The developments are disparate ones and took place at different times. But a
common feature could be that they centered on mobilising deposits: fixed
deposits/bulk deposits. The incidents have again brought to the fore the weak
risk management systems in public sector banks.
The persons responsible have been taken to task; some disciplinary action is
being taken. There are also some suspensions, some transfers, said Financial
Services Secretary GS Sandhu. He was speaking on the sidelines of a realty and
banking conclave in Mumbai on Wednesday.
Sandhu added that the Finance Ministry would soon make it mandatory for all
senior officers Deputy General Managers and GMs to undergo a
compulsory risk management course before they are considered for promotions.
He said these instances (of misappropriation) have happened at the
lower/branch level because of lack of due diligence and non-adherence to norms
or procedures.
SL Bansal, CMD of Oriental Bank, told Business Line in New Delhi that the
bank had furnished the necessary information to the forensic auditor. The
incident in Oriental Bank of Commerce dated to February 2014 and the bank
had swung into action early in March itself to nip the fixed deposit scam in the
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bud, said Bansal. Of the initial amount of Rs. 180 crore, as much as Rs. 110
crore was immediately recovered and handed over to the original remitter, he
added.
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CONCLUSION
A large global accounting firm believes the market is sufficiently large to
support independent unit devoted strictly to 'forensic' accounting. All of the
larger accounting firms, as well as, many medium-sized and boutique firms
have recently created forensic accounting departments.
Because forensic accounting is relatively a new area of study, a series of
working definitions and sharing of corporate experiences should be undertaken
and encouraged to ensure a common understanding. Indeed, there is great future
in forensic accounting as a separate "niche" consulting.
While the forensic accounting and auditing practice had commenced in the US
as early as 1995, the seed of this specialization has yet to take off in India.
Forensic accountants are only dealing with financial implications of the cases
entrusted to them and not engaging in auditing exercise. On account of global
competition, the accounting profession must convince the marketplace that it
has the "best-equipped" professionals to perform such services.
While majority of CAs have excellent analytical skills, they need to
acknowledge that 'forensic' services require 'specialised' training as well as real-
life 'practical' corporate experience.
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Reference
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