Measures to Avoid Unethical Practices (Fraud)
Using the Techniques of Forensic Accounting


Gnanendra. M
Department of Management Studies
AMC Engineering College


The integration of accounting, auditing and investigative skills yields the specialty known as Forensic Accounting. "Forensic", according to the Webster's Dictionary means, "Belonging to, used in or suitable to courts of judicature or to public discussion and debate." "Forensic accounting", provides an accounting analysis that is suitable to the court, which will form the basis for discussion, debate and ultimately dispute resolution. Forensic Accounting encompasses both Litigation Support and Investigative Accounting. Forensic Accountants, utilizes accounting, auditing and investigative skills when conducting an investigation. Equally critical is their ability to respond immediately and to communicate financial information clearly and concisely in a courtroom setting. Forensic Accountants are trained to look beyond the numbers and deal with the business reality of the situation.

What are the unethical practices (fraud) in financial services?

Unethical practices are deliberate misrepresentation which causes another person to suffer damages, usually monetary losses. Most people consider the act of lying to be fraudulent, but in a legal sense lying is only one small element of actual fraud. These unethical practices cases involve complicated financial transactions conducted by 'white collar criminals', business professionals with specialized knowledge and criminal intent.

Some of the unethical practices (Frauds) in financial services are;

1. Credit cards: These credit card frauds begins with either the theft of the physical card or the compromise of data associated with the account, including the card account number or other information that would routinely and necessarily be available to a merchant during a legitimate transaction. Credit card fraud prevention is heavily pursued by the major credit card companies such as MasterCard, Visa, and American Express in order to safeguard current card holders' interests. Additionally, the credit card companies pursue credit card fraud prevention in order to limit their direct liability for securing transactions between approved sellers and card account holders.

2. Bank Cheques: A significant amount of cheque fraud is due to counterfeiting through desktop publishing and copying to create or duplicate an actual financial document, as well as chemical alteration, which consists of removing some or all of the information and manipulating it to the benefit of the criminal. Victims include financial institutions, businesses that accept and issue cheques, and the consumer. In most cases, these crimes begin with the theft of a financial document. It can be perpetrated as easily as someone stealing a blank cheque from your home or vehicle during an illegal entry to the house, searching for a canceled or old cheque in the garbage, or removing a cheque you have mailed to pay a bill from the mailbox.

3. Mortgage: Mortgage fraud is the criminal action where the intent is to materially misrepresent the information on a mortgage loan application to obtain a loan or to obtain a larger loan than would have been obtained had the lender or borrower known the truth. Mortgage fraud is prosecuted as wire fraud, bank fraud, mail fraud and money laundering etc.

4. Tax: committing a tax fraud intentionally violate the legal duty to voluntarily file income tax returns and pay the accurate amount of income, employment and excise taxes. By neglecting legal duty posed a threat to the tax administration and economy and will be charged with tax fraud by the Criminal Investigation. The violation of the tax law by misrepresenting the income or fudging numbers to avoid paying taxes is likely be committed by tax fraud

5. Bankruptcy: Bankruptcy is a legal process which allows a business or individual to be discharged of all their debts due to an inability to pay. There are three methods of committing bankruptcy frauds concealment of assets, multiple filings and petition mills. The concealment of assets fraud means when the debtor hides his assets during the declaration phase of the bankruptcy process, in an attempt to keep them from being liquidated. The multiple filling frauds are submitting incomplete lists of the assets on both filings, in an attempt to avoid liquidation of those assets. The petition mills fraud is unlike concealment of assets or multiple filings frauds but it is not perpetrated by the debtor, but by a third party.

What is Forensic Accounting?

Forensic Accounting is the act of determining whether criminal matters such as employee theft, securities fraud (including falsification of financial statements), and insurance fraud have occurred. It is applied to the evidence of first order activities, not secondary systems of controls.

It encompasses two main areas:

* Litigation support
* Investigation

Litigation support:

Litigation support assists the lawyers in investigating and assessing the integrity and amounts relating to areas such as damages resulting from personal injuries, wrongful death, breach of contract, casualty, fidelity losses, lost profits due to business interruption, product liability, shareholder disputes, bankruptcies, marital disputes, investigative services related to fraud and other illegal acts


Investigation assesses and reports on financial transactions related to allegations against individuals and companies in a variety of situations including arson, embezzlement, money laundering, investment scams, stock market manipulations and identity theft and also includes searching for irregularities associated with civil matters, such as a search for hidden assets in divorce cases.

Role of Forensic Accountant:

In Forensic accounting the accountants will analyze the crucial aspect of recognizing the implications of evidence that has been obtained. These Forensic accountants understand the business information and financial reporting systems, accounting and auditing standards and procedures, evidence gathering, investigative techniques, litigation processes and procedures to perform their work. They also increasingly play more proactive risk reduction roles by designing and performing extended procedures as part of the statutory audit, acting as advisers to audit committees, fraud deterrence engagements, and assisting in investment analyst research.

Some public accountants specialize in forensic accounting—investigating and interpreting white collar crimes such as securities fraud and embezzlement, bankruptcies and contract disputes, and other complex and possibly criminal financial transactions, such as money laundering by organized criminals. In India there is a separate breed of forensic accountants called Certified Forensic Accounting Professionals, Certified Fraud Examiners, Certified Public Accountants, and Chartered Accountants etc. These Forensic accountants combine their knowledge of accounting and finance with law and investigative techniques in order to determine if illegal activity is going on. Many forensic accountants work closely with law enforcement personnel and lawyers during investigations and often appear as expert witnesses during trials.

Measures to avoid unethical practices (fraud):

1. Monitoring the Cheques: Reviewing and monitoring the cheques using prenumbered cheques enables to audit for missing cheques. Also, cheques clearing out of sequence can be spotted more easily. All cheques should be kept under lock and key, and keys should not be distributed. Other precautions include having a "voided cheque" procedure and never signing blank cheques. All disbursements should be reviewed on a regular basis.

2. Maintaining Employees Manual: The best way of avoiding unethical practices in the business is by maintaining employees' manual and setting the clear standards to the employees from the beginning. This includes the appropriate ethical tone starting form top management to lower level management. An employee manual can be helpful in establishing the principles and values to guide the organization. The rules in employees manual will apply to everyone. If someone is dismissed and found in court, the manual can act as a reference that explains what actions can be taken.

3. Annual review of financial statements: Annual auditing gives a clear picture of the financial transactions in a year. An audit will not discover all fraud within an organization, but it will give an opportunity to keep an eye on the financial report of the organization. An audit also tends to motivate all bookkeeping-related staff to keep things honest because the accountants never be sure what questions an auditor is going to ask or what documents an auditor may request to review.

4. Review of sensitive documents: Small-business owners should control who first receives the bank statements and other sensitive documents. It is not farfetched for a small-business owner to have a separate post office box for the purpose of receiving bank statements, customer receipts or any other sensitive documents. This helps eliminate the possibility that someone intercepts the mail first for the purpose of stealing or covering up an earlier theft.

5. Safeguarding the payroll: Small-business owners and managers should take the extra time to review every payroll check personally. Although time consuming, this procedure provides a monitor to assure employees are being paid appropriately. This can be especially important when a business has temporary and part-time staff.

6. Checking employee references: When hiring new employees, checking references and perform background checks that include employment, credit, licensing and criminal history. The cost is far outweighed by the benefit. For example, a business owner should be wary of hiring a bookkeeper with bad credit because the weight of crippling financial obligations could turn an otherwise honest person into a thief.

7. Independent review: All account reconciliations and general ledger balances should have an independent review by a person removed from the day-to-day transactions, because theft often occurs when bookkeeping is sloppy and unsupervised. People outside the direct bookkeeping function within the organization should be familiar with the company's bookkeeping and record system. This permits spot checks and reviews, better ensuring nothing is amiss and providing a deterrent for fraudulent activities.


The complexity of the financial issues posed in litigation and forensic investigations requires a very broad, multidisciplinary approach to the investigative and damage calculation phases of the legal process. The new professional field of financial forensics and the variety of experts that fill this bill provide corporations and attorneys with the tools required to respond to complex litigation and dispute resolution.


Gnanendra. M
Department of Management Studies
AMC Engineering College

Source: E-mail July 16, 2010


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