nishka oct 2013

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

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


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

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


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

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


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

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


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

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


PHOTO FIND

T.KIRUTHIKKA DEVI - F1

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?


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

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

nishka oct 2013

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