| Forensic Accounting | | | | trade practices like synchronized share trading, |
| Forensic accounting is a rapidly growing area of | | | | manipulate and fabricate the books of accounts |
| accounting concerned with the detection and | | | | and cheat the gullible investors. Regulation 11 C of |
| prevention of financial fraud and white-collar | | | | the SEBI Act, 1992 empowers the SEBI to direct |
| criminal activities. George A. Manning in his book | | | | any person to investigate the affairs of |
| "Financial Investigation and Forensic Accounting" | | | | intermediaries or brokers associated with the |
| defines Forensic Accounting as the science of | | | | securities market whose transactions in securities |
| gathering and presenting financial information in a | | | | are being dealt with in a manner detrimental to |
| form that will be accepted by a court of | | | | the investors or the securities market. Thus |
| jurisprudence against perpetrators of economic | | | | fraudulent and unfair trade practices of the |
| crimes. The integration of accounting, auditing, and | | | | brokers or market intermediaries are investigated |
| investigative skills yields the specialty known as | | | | by the investigator appointed by SEBI which |
| Forensic Accounting which focuses very closely | | | | require the broker or market intermediary to |
| on detecting or preventing accounting fraud. | | | | furnish information, books of accounts, registers, |
| "Forensic", according to the Webster's Dictionary | | | | documents or records etc. which is analyzed by |
| means, "Belonging to, used in or suitable to courts | | | | the investigator to find out any manipulation, |
| of judicature or to public discussion and | | | | fraudulent practice or otherwise of the broker. |
| debate." The word accounting is defined as "a | | | | Thus, Forensic Accountant can play a lead role in |
| system of recording and summarizing business | | | | assisting the SEBI to unearth the complex share |
| and financial transactions and analyzing, verifying, | | | | related frauds perpetrated by the brokers. |
| and recording the results." The term ‘forensic | | | | 3) The Insurance Act, 1938: |
| accounting' refers to financial fraud investigation | | | | Section 33 of the said Act empowers the IRDA |
| which includes the analysis of accounting records | | | | to direct any person ("Investigating Authority") to |
| to prove or disprove financial fraud and serving as | | | | investigate the affairs of any insurer. The |
| an expert witness in Court to prove or disprove | | | | investigating authority may seek assistance of the |
| the same. Thus, basically, the forensic accounting | | | | auditor (or actuary or both) who shall be the |
| is the use of accounting for legal purposes. | | | | Chartered Accountant within the meaning of |
| | | | Chartered Accountant Act, 1949 for the purpose |
| The forensic accounting can be traced back as | | | | of assisting him in any investigation. The books of |
| far as 1817 to Meyer v. Sefton, a Canadian case | | | | account, registers and other documents are taken |
| that allowed an ‘expert witness' to testify in | | | | by the investigating authority in its custody to |
| court. The term ‘forensic accounting' was first | | | | analyze it to find out the manipulations or |
| published in an article in 1946 "Forensic Accounting- | | | | fabrication in the books of accounts. Thus, |
| Its Place in Today's Economy" authored by | | | | Chartered Accountants plays a front role as an |
| Maurice E. Peloubet, a partner in Price Waterhouse. | | | | Forensic Accountant and aid in the investigation |
| He stated that, "during the war both the public | | | | conducted into the affairs of the insurer as per |
| and industrial accountant have been and now | | | | the provisions of Insurance Act, 1938. |
| engaged in the practice of forensic accounting". | | | | 4) The Prevention of Money-Laundering Act, |
| Many scholars have traced the roots of | | | | 2002: |
| investigative accounting to his work. Interest in | | | | Section 3 of the Prevention of Money Laundering |
| forensic accounting spread through the United | | | | Act, 2002 defines the offence of money |
| States and England early in the twentieth century. | | | | laundering as involvement of a person in any |
| One of the first institutions to use the services of | | | | process or activity connected with the proceeds |
| such investigative accountants was the IRS. The | | | | of crime and projecting it as untainted property. |
| story of Al Capone the famous mobster being | | | | The three important stages in the money |
| caught on a tax evasion scheme is well-known. | | | | laundering process are: |
| The FBI decided to use forensic accountants and | | | | · Placement: Physical disposal of cash acquired |
| employed nearly 500 such agents during World | | | | from illegal sources by depositing the cash in |
| War II. As a profession, forensic accounting | | | | domestic banks or other kinds of financial |
| continued to grow during the latter half of the | | | | institutions. |
| century, as GAAP and tax laws became | | | | · Layering: Working through complex layers of |
| widespread and mandatory. | | | | financial transactions to distance the illicit proceeds |
| The need for Forensic Accounting | | | | from their source and disguise the audit trail. |
| Forensic Accounting is a fast emerging field in the | | | | · Integration: Making the wealth derived from |
| "World of Accounting". Although it has been | | | | crime appears legitimate. |
| around for a long time, it has become increasingly | | | | Forensic Accountant can often be involved in the |
| popular and much relevant today in view of global | | | | following antimony laundering activities: |
| financial crisis due to the downfall of the Lehman | | | | · Investigating and analyzing financial evidence to |
| Brothers and its ripples felt across the globe. | | | | establish a suspicious transaction; |
| Thus, a new avatar of Accountant has emerged | | | | · Developing computerized applications to assist |
| known as Forensic Accountant. Although | | | | in the analysis and presentation of financial |
| Investigative Accounting has been around for | | | | evidence; |
| years, it has only recently begun to transform | | | | · Communicating their findings in the form of |
| into a new branch of accounting, hence Forensic | | | | reports, exhibits and collections of documents that |
| Accounting. Forensic accountants unlike traditional | | | | assist the banks in submission of the suspicious |
| accountants, look beyond the numbers, put their | | | | transaction reports to the regulator; and |
| nose and eye deep into the financial books, | | | | · Assisting in legal proceedings, including testifying |
| records and data to uncover fraud, hidden assets, | | | | in court as an expert witness and preparing visual |
| siphoned funds and the like. The word forensic is | | | | aids to support trial evidence. |
| defined as the application of scientific knowledge | | | | 5) The Companies (Auditor's Report) Order, |
| to legal problems and legal proceedings. The word | | | | 2003: |
| accounting is defined as "a system of recording | | | | CARO, 2003 requires the auditor to report to the |
| and summarizing business and financial transactions | | | | effect that if a substantial part of fixed assets |
| and analyzing, verifying, and recording the | | | | have been disposed off during the year, whether |
| results." By combining these two definitions it can | | | | it has affected the going concern status. In order |
| be concluded that forensic accounting utilizes his | | | | to carry out the duties, the auditor has to draw a |
| regular accounting principles & practices in | | | | corollary and reference to the section 293 |
| legal situations. Forensic Accounting is like the | | | | Companies Act, 1956, AS 24 ('Discontinuing |
| bridge which connects accounting system to legal | | | | Operations') and to AAS 16 (Going Concern) and |
| system. Thus, we can say that the forensic | | | | thereafter make his observations on this matter. |
| accounting is an accounting that is used in a court | | | | It also requires the auditor to report on Frauds i.e.; |
| of law. One of the most notable legal situations in | | | | if any fraud on or by the company has been |
| the recent past would be the Enron scandals; | | | | noticed or reported during the year. |
| where large numbers of American forensic | | | | Expert forensic accounting evidence |
| accountants were employed. The wave of | | | | Who is an expert witness? |
| financial crisis primarily caused by corporate | | | | An expert witness is a witness, who by virtue of |
| malfeasance and fraudulent financial activities | | | | education, training, skill, or experience, is believed |
| eroded public trust and investor confidence in | | | | to have knowledge in a particular subject beyond |
| financial reports and audit services and need was | | | | that of the average person, sufficient that others |
| felt to look beyond the conventional accounting | | | | may officially (and legally) rely upon the witness's |
| function which only fulfilled the compliance | | | | specialized (scientific, technical or other) opinion |
| requirements i.e. company's books of accounts | | | | about an evidence or fact issue within the scope |
| are kept in accordance with rules & | | | | of their expertise, referred to as the expert |
| regulations. In view of the increasing number of | | | | opinion, as an assistance to the fact-finder. Expert |
| financial frauds committed by conspiracy with | | | | evidence is evidence given to a court or tribunal |
| complex accounting records manipulation, it was | | | | by a person, skilled and experienced in some |
| felt that a new tribe of Accountant is needed to | | | | professional or technical sphere, of the conclusions |
| detect the financial fraud in companies with his | | | | he has reached on the basis of his knowledge, |
| accounting, auditing, and investigative skills and also | | | | from facts reported to him or discovered by him |
| assist in legal matters. This area of accounting | | | | by tests, measurements or similar means. It is |
| came to be known as ‘forensic accounting'. | | | | commonly given by, for example, doctors, |
| There is a global awareness to fight the cases of | | | | chemists, surveyors, architects, accountants and |
| financial frauds. Though many strategies have | | | | the like. In a Scottish case, Davie v Edinburgh |
| been formulated and many actions have been | | | | Magistrates (1953) , it was said that the function |
| taking to fight against it, the problem still persists. | | | | of an expert witness "…is to furnish the judge |
| One of the major hindrances in fighting financial | | | | with the necessary scientific criteria for testing |
| crime cases is lack of quality forensic analysis of | | | | the accuracy of his conclusions, so as to enable |
| the financial statements and records due to lack | | | | the judge to form his own independent judgment |
| of forensic accounting professionals. This author | | | | by the application of those criteria to the facts |
| who had been an investigating officer during his | | | | proved in evidence" . |
| tenure with Delhi Police in number of major cases | | | | An expert witness is different from ordinary |
| of financial crimes have faced this dearth of | | | | witness |
| quality forensic accounting experts who could | | | | Expert witnesses have a different status from |
| have come handy in timely & accurate | | | | ordinary witnesses when giving evidence at a |
| investigation of the intricate financial crimes and | | | | Court or other judicial or quasi-judicial tribunals. |
| unearth the complex modus operandi adopted by | | | | The evidence of the "expert" differs from that of |
| the fraudsters who are themselves in some | | | | the ordinary witness who testifies as to facts |
| cases highly qualified financial professionals. The | | | | observed, in that the expert is permitted to |
| reason why there has been rampant increase in | | | | express his/her opinion on a matter that has |
| white collar financial crimes because they think | | | | occurred in the past, or may occur in the future |
| that they can get away with it with impunity and | | | | which have not been actually observed by the |
| the greatest deterrent to thwart the criminal act | | | | expert, who is providing evidence. The relevance |
| is law enforcement. However, the conviction rate | | | | and weight which the Court or tribunal will |
| in the financial fraud cases was very low due to | | | | attribute to such an opinion within the total |
| weak law enforcement which is attributable to | | | | evidence which is adduced is a matter for the |
| weak litigation support in prosecution process. | | | | Court or tribunal. |
| Without full support of accounting expert, | | | | An expert, unlike other witnesses, is allowed, |
| prosecutors often fail to prove and provide | | | | because of his special qualifications and/or |
| strong evidence to put fraudsters behind bar. | | | | experience, to give opinion evidence. It is for his |
| Here, the Forensic accounting can play an | | | | opinion evidence that he is called, not for his view |
| important role here by providing accounting or | | | | of the facts or circumstances of the dispute, |
| financial information or other evidentiary inputs for | | | | although his interpretation of the facts is often |
| legal purposes. To achieve the aim, forensic | | | | necessary in order to explain and/or justify his |
| accountant besides having financial accounting | | | | conclusions. |
| expertise, should also have proven skill in law, | | | | Forensic Accountant as an Expert Witness: |
| scientific investigative technique, interpersonal and | | | | The tradition and law relating to the status of the |
| communication skills etc. | | | | experts as witnesses dates back to English |
| Growth of Forensic Accounting | | | | Courts around 1550. However, the first recorded |
| The Western Countries are utilizing the forensic | | | | use of an accountant as an expert witness was in |
| accounting expertise to address the financial fraud | | | | Meyer V. Sefton, 2 Stark. 274 (1817). The use of |
| cases. United States and Canada are pioneers in | | | | Forensic Accountant testifying as an expert |
| development & implementation of Forensic | | | | witness in the Court of law is becoming |
| Accounting. The Canadian Institute of Chartered | | | | increasingly prevalent today in view of the rapid |
| Accountant recently recognized Investigative and | | | | increase in the financial fraud cases. In court cases |
| Forensic Accounting as an accounting specialty. | | | | where the knowledge of an expert can help to |
| The CICA has started granting its members to | | | | better explain the facts in issue or relevant facts, |
| use the designation initials CAIFA who complete | | | | an "expert witness" may be called upon to give |
| three years post qualification experience as a CA | | | | expert testimony. |
| with Diploma in Investigative and Forensic | | | | Section 45 of the Evidence Act which makes |
| Accounting (DIFA) from the University of | | | | opinion of experts admissible, lays down that |
| Toronto. The CA-designated specialist in | | | | when the Court has to form an opinion upon a |
| investigative and forensic accounting (CAIFA) | | | | point of foreign law, or of science, or art, or as to |
| combines the well-recognized and respected | | | | identity of handwriting or finger impressions, the |
| attributes of the CA – in particular integrity, | | | | opinions upon that point of persons specially skilled |
| understanding of business, and financial acumen | | | | in such foreign law, science or art, or in questions |
| – with an in-depth knowledge and experience | | | | as to identity of handwriting, or finger impressions |
| in investigative and forensic accounting. The | | | | are relevant facts. However, neither the Indian |
| CA-designated specialist in investigative and | | | | Evidence Act nor there is any seminal judicial |
| forensic accounting (CAIFA) combines the | | | | pronouncements which clarifies as to when, how |
| well-recognized and respected attributes of the | | | | and under what circumstances, the testimony of |
| CA – in particular integrity, understanding of | | | | Forensic Accounting Expert would be admissible or |
| business, and financial acumen – with an | | | | inadmissible. |
| in-depth knowledge and experience in investigative | | | | In order, to bring the evidence of a witness as |
| and forensic accounting. This is accomplished | | | | that of an expert it has to be shown that he has |
| through a profession-endorsed certification | | | | made a special study of the subject or acquired a |
| process that has ongoing experience and | | | | special experience therein or in other words that |
| education requirements. The CAIFA tells litigation | | | | he is skilled and has adequate knowledge of the |
| lawyers, law enforcement professionals, the | | | | subject. The Cost Accountant or Chartered |
| courts and other legal forums that the designated | | | | Accountant can be considered as an expert to |
| holder is well positioned to practise in areas such | | | | give testimony within the meaning of Section 45 |
| as fraud and economic loss quantification, including: | | | | of the Evidence Act. Moreover, the draft of "The |
| · investigating and analyzing financial evidence; | | | | Companies Bill, 2008" includes the definition u/s 2 |
| · testifying as an expert witness ; | | | | (1) (zn) which interalia includes Cost Accountant |
| · becoming involved in criminal investigations and | | | | and Chartered Accountant in the definition of |
| uncovering financial evidence in employee or | | | | "Expert" which can be also considered/extended |
| insurance fraud cases; | | | | for relying upon their testimony in the Criminal/civil |
| · Investigating in the rapidly evolving area of | | | | cases by the court. |
| computer and Internet fraud. | | | | In USA, however, the admissibility of the Forensic |
| Forensic Accounting implementation in India | | | | Accounting Expert testimony is supported by the |
| However in India, this branch of accounting has | | | | Judicial Pronouncements and Federal Rule of |
| not got its due recognition even after alarming | | | | Evidence. Over the years, the US Supreme Court |
| increase in the complex financial crimes and lack | | | | has delivered several decisions clarifying its |
| of adequately trained professionals to investigate | | | | standards for the admission of expert testimony: |
| and report on the complex financial crimes. The | | | | In Frye v. U.S., the Court stated that expert |
| task of Forensic Accountants is handled by | | | | testimony will be admitted if based on a |
| Chartered Accountants who apart from handling | | | | methodology "generally accepted" by the scientific |
| traditional practice of auditing as required under | | | | community. |
| the Companies Act, 1956 or Income Tax Act are | | | | In Daubert v. Merrell Dow Pharmaceuticals, Inc., |
| called upon by the law enforcement agencies or | | | | 509 U.S. 579 (1993) the Court concluded that the |
| the companies or private individuals to assist in | | | | trial judge must act as a gatekeeper for expert |
| investigating the financial crime or scam. The CA | | | | testimony, considering several nonexclusive |
| or CWAs in India are best suited for this | | | | factors applicableto the testimony's reliability and |
| profession due to their financial acumen acquired | | | | relevance, including: |
| during their rigorous training which can be further | | | | · Whether the theory or technique has been or |
| honed by introducing post qualification degree or | | | | can be tested, |
| diploma in Investigating and Forensic Accounting | | | | · Whether the theory or technique has been |
| similar to one introduced by CICA. The CA or | | | | subjected to peer review or publication, |
| CWA who acquire post qualification in | | | | · The known or potential rate of error, and |
| Investigative & Forensic Accounting can use | | | | · Whether the theory or technique is generally |
| the designation CA-IFA or CWA-IFA and be legally | | | | accepted in the relevant scientific community. |
| recognized as the Forensic Accounting Experts to | | | | Although Daubert focused on the admissibility of |
| handle the investigation of financial crimes and | | | | scientific expert testimony, its progeny have had |
| give expert testimony in the Court of Law. | | | | a great impact on Financial Expert testimony. In |
| However, no efforts has so far been made by | | | | Kumho Tire Co. V. Carmichael, 526 U.S. 137 |
| the ICAI and ICWAI, the two leading statutory | | | | (1999), the Court made clear that the gatekeeper |
| accounting professional bodies to move in this | | | | function applies to all expert testimony, not just |
| direction and set up a institute which can offer | | | | scientifically-based testimony. |
| the post qualification diploma in Investigative and | | | | Rule 702 of the Federal Rules of Evidence |
| Forensic Accounting to its members. | | | | effectively codifies the Supreme Court's decisions |
| However, growing financial fraud cases, recent | | | | in "Daubert" and "Kumho". Rule 702 provides that |
| stock marker scams, failure of non financial | | | | if the Court finds that scientific, technical or other |
| banking companies, phenomena of vanishing | | | | specialized knowledge "will assist the trier of fact |
| companies and plantation companies and failure of | | | | to understand the evidence or to determine a |
| the regulatory mechanism to curb it has forced | | | | fact in issue," and if the Court finds that the |
| the Government of India to form Serious Fraud | | | | witness is qualified as an expert "by knowledge, |
| Investigation Office (SFIO) under Ministry of | | | | skill, experience, training, or education," then the |
| Corporate Affairs which can be regarded the first | | | | Court may permit the witness to testify — so |
| step of Government of India to recognize the | | | | long as the witness' testimony is based on |
| importance and advance the profession of | | | | "sufficient facts or data," the testimony "is the |
| forensic accountants. The SFIO is a | | | | product of reliable principles and methods," and |
| multidisciplinary organization having experts from | | | | the witness has "applied the principles and |
| financial sector, capital market, accountancy, | | | | methodology reliably to the facts of the case. |
| forensic audit, taxation, law, information | | | | Further, concerning determinations of nonscientific |
| technology, company law, customs and | | | | expert testimony reliability, financial expert |
| investigation. These experts have been taken | | | | testimony (which includes Forensic Accountant |
| from various organizations like banks, Securities | | | | Testimony) in particular, the Advisory Committee |
| & Exchange Board of India, Comptroller and | | | | on the Federal Rules of Evidence and the Standing |
| Auditor General and concerned organizations and | | | | Committee on Rules of Practice and Procedure |
| departments of the Government. However, the | | | | ("Committee") which proposed amendments to |
| main important law enforcement agency involved | | | | the texts of Rules 701, 702, and 703, specifically |
| directly in combating white-collar crimes is the | | | | observed: |
| Police, CBI, DRI etc. There is a total lack on the | | | | "Some types of expert testimony will not rely on |
| part of these law enforcement agencies to train | | | | anything like a scientific method, and so will have |
| their investigators in this specialized part of | | | | to be evaluated by reference to other standard |
| investigating white-collar crimes involving forensic | | | | principles attendant to the particular area of |
| accounting. The investigation of the major financial | | | | expertise. . . . The expert's testimony must be |
| crimes is handled by ordinary investigating officers | | | | grounded in an accepted body of learning or |
| who after spending some time in investigation of | | | | experience in the expert's field, and the expert |
| conventional crimes are shunted to the economic | | | | must explain how the conclusion is so grounded. |
| offence wing and they are expected to handle | | | | "Whether the testimony concerns economic |
| the financial crime cases involving complex & | | | | principles, accounting standards, property valuation |
| intricate financial records which is required to be | | | | or other non-scientific subjects, it should be |
| analyzed to unearth crime or unique MO adopted | | | | evaluated by reference to the ‘knowledge |
| by the white collar criminal. The result is obvious, | | | | and experience' of that particular field." |
| the case dies its natural death and the criminals | | | | Therefore, under the Federal Rules of Evidence, a |
| roam free as the IO given his lack of specialized | | | | judge will permit an accountant to testify as an |
| knowledge & qualification fails to properly | | | | expert witness only if the judge decides that: |
| investigate the financial crime to its logical | | | | The accountant's testimony will help the jurors or |
| conclusion. On the other hand if we look at the | | | | judge understand the evidence or determine a |
| western countries particularly USA, the law | | | | fact in issue. |
| enforcement agencies of which like DEA, FBI, CIA | | | | The accountant is qualified as an expert by |
| has well marshaled its pool of special agents | | | | knowledge, skill, experience, training, or education. |
| having forensic accounting backgrounds that are | | | | The accountant can show that his or her |
| the backbone of the bureau's financial crimes and | | | | testimony (a) will be based on sufficient facts or |
| terrorism financing units and investigate with | | | | data and (b) will be the product of reliable |
| professional acumen, the complex financial crime | | | | principles and methods that have been applied |
| like money laundering, internet crimes, financial | | | | reliably to the facts of the case. (These |
| institution fraud and other economic crimes. | | | | requirements are often referred to in shorthand |
| Today, there are more than 600 FBI agents with | | | | as "qualification, reliability, and fit.") |
| accounting backgrounds. Thus, it is highly | | | | Thus, under the rule announced in Daubert v. |
| imperative on the part of law enforcement | | | | Merrill-Dow Pharmaceuticals, Inc., 509 U.S. 579 |
| agencies in India that they follow the suit and | | | | (1993) and expanded in Kumho Tire Co. v. |
| engage specialist forensic accountant on its roll | | | | Carmichael, 526 U.S. 137 (1999), the courts must |
| whose engagements relating to criminal matters | | | | ensure that experts-scientific and otherwise-will |
| typically arise in the aftermath of financial fraud. | | | | offer testimony that is methodologically sound and |
| The Indian Law which refers to Forensic | | | | relevant to the facts of the case before |
| Accounting: | | | | admitting their expert testimony. |
| 1) The Companies Act, 1956:a) Section 235 and | | | | Qualifying as an Expert Witness |
| 237: There are provisions in Companies Act | | | | Challenges to financial expert testimony have |
| (Section 235 and 237) which empowers the | | | | skyrocketed in recent years. Since Daubert v. |
| Central Government to inspect the books of | | | | Merrell Dow Pharmaceuticals, Inc. (1993), an |
| accounts of a company, to direct special audit, to | | | | increasing number of testifying experts have been |
| order investigation into the affairs of a company | | | | subjected to challenges by opposing counsel in an |
| and to launch prosecution for violation of the | | | | attempt to prevent the experts from testifying |
| Companies Act, 1956. Books of accounts and | | | | (Journal of Forensic Accounting: 1524-5586 |
| other documents of the companies are inspected | | | | Vol.IV(2003), Page-113). Figlewicz and Sprohge in |
| by the officers of the Directorate of Inspection | | | | their article, "The CPA's Expert Witness Role in |
| and Investigation and the Registrars of | | | | Litigation Services: A Maze of Legal and |
| Companies. These inspections are designed to find | | | | Accounting Standards," offer ten guidelines to help |
| out whether the companies conduct their affairs | | | | avoid legal challenges: |
| in accordance with the provisions of the | | | | 1. Know the relevant professional standards. |
| Companies Act, 1956 to see whether any unfair | | | | 2. Apply the relevant professional standards. |
| practices prejudicial to the public interest are being | | | | 3. Know the relevant professional literature. |
| resorted to by any company or a group of | | | | 4. Know the relevant professional organizations. |
| companies and to examine whether there is any | | | | 5. Use generally accepted analytical methods. |
| mismanagement which may adversely affect any | | | | 6. Use multiple analytical methods. |
| interest of the shareholders, creditors, employees | | | | 7. Synthesize the conclusions of the multiple |
| and others. Wherever inspection reports disclose | | | | analytical methods. |
| any information that may be of interest to other | | | | 8. Disclose all significant analytical assumptions and |
| Departments or agencies like the Ministry of | | | | variables. |
| Commerce and Industry, Central Board of Direct | | | | 9. Subject the analysis to peer review. |
| Taxes, Enforcement Directorate, State | | | | 10. Test the analysis-and the conclusions-for |
| Government or Provident Fund Authorities, such | | | | reasonableness. |
| information is passed on to them. If an inspection | | | | Now the various investigation agencies such as |
| discloses a prima facie case of fraud or cheating, | | | | Police, CBI etc. are taking the help of CA/CWA as |
| action is initiated under provisions of the | | | | a Forensic Accountant and using their report as |
| Companies Act, 1956 or the same is referred to | | | | evidence in the cases of criminal/civil nature. |
| the Central Bureau of Investigation.b) Provisions | | | | Whether the aforesaid principles/guidelines laid |
| of Sick Industrial Companies Act incorporated into | | | | down by the two US Supreme Court Judgments |
| the Companies Act, 1956: The Section 424A(5) | | | | incorporated into Federal Rules of Evidence would |
| of the Companies Act, 1956 empowers National | | | | be followed by Indian Courts or not will become |
| Company Law Tribunal (NCLT) to examine as | | | | clear in the due course of time. |
| preliminary issue whether the company is a sick | | | | However, the fact is that though till today there is |
| industrial company u\s 2(46AA). Thus even | | | | general acceptance of admissibility of scientific |
| before examining the viability of the scheme of | | | | evidence and expert's opinion in Indian Courts, |
| revival proposed by the company, NCLT can | | | | there is no special law with respect to this which |
| check the genuineness of the reference made to | | | | lays down criteria, principles or guidelines in clear |
| it. Thus, inquiry by operating agency will only be to | | | | terms with regard to when the expert opinion |
| enable NCLT to decide the viability of the scheme | | | | would be admissible and when it will not as is the |
| and to assess whether the company has the | | | | case under the US federal law. Section 45 of the |
| ability to revive on its own. Further, Section 424B | | | | Indian Evidence Act is insufficient in this regard. |
| of the Companies Act, 1956 empowers the | | | | However, in case of doubt, the principles laid |
| tribunal to make such inquiry as it may deem fit | | | | down by US Supreme Court can be adhered to. |
| for determining whether any industrial company | | | | In conclusion, one should understand that it is |
| has become a sick industrial company. Further, the | | | | ultimately for the Court Of Law to decide as to |
| Tribunal may, if it deems necessary or expedient | | | | who is qualified as an expert by knowledge, skill, |
| so to do for the expeditious disposal of an inquiry, | | | | experience, training or education, who may testify |
| require by order any operating agency to enquire | | | | thereto in the form of an opinion or otherwise if: |
| into the scheme for revival and make a report | | | | 1. The testimony is based upon sufficient facts or |
| with respect to such matter as may be specified | | | | data, |
| in the order. Operating agency is group of experts | | | | 2. The test is the product of reliable principles and |
| consisting of persons having special knowledge in | | | | methods, and |
| banking & industry in which sick industrial | | | | 3. The witness has applied the principles and |
| company is engaged and includes public financial | | | | methods reliably to the facts of the case |
| institution, State level institution, scheduled bank or | | | | However, no doubt, with the rapid increase in the |
| any other any other person as may be specified | | | | cases involving misappropriation of funds, |
| by general or special order as its agency by the | | | | manipulation of books of accounts, banking fraud |
| Board. Thus, Forensic Accountant can be part of | | | | cases, Securities scams etc. involving complex |
| operating agency and investigate whether the | | | | financial transactions, the Forensic Accountants |
| reference made by the company is genuine or | | | | and admissibility of their testimony needs to be |
| the accounts are manipulated or fabricated to suit | | | | elucidated and these would be determining factors |
| the scheme of reference made to NCLT to | | | | for deciding the fate of these cases. The |
| declare it as sick company and thereby siphon | | | | involvement of Forensic Accountant in financial |
| public funds. | | | | fraud cases and his testimony will not only take |
| 2) SEBI Act, 1992: | | | | these cases to logical conclusion but also will go a |
| The share market is highly volatile and the | | | | long way ahead to put a curb on these menace |
| brokers indulge into various unfair and fraudulent | | | | of white collar offences. |