1. Forensic Accounting and Fraud Prevention By, CA K RAGHU, PAST PRESIDENT – INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

2. Introduction A specialized field of accountancy Application of Financial Skills and investigative mentality Investigating fraud and analyzing financial information to be used for tracking and collection of forensic evidence Focuses on Detection of Financial Frauds Encompasses Accounting, Investigative accounting, investigative audit and litigation support Mixture of Accounting, Finance, Law, Computerization, Ethics and Criminology

3. Need for Forensic Accounting Forensic Accounting ensures the integrity and transparency of Financial Statements. It helps in formulating and establishing a comprehensive corporate governance policy. It has been gaining huge importance due to the increasing number of frauds and scams which are taking place in the corporate world.

4. Major Scams and Frauds in the Recent Years Scams and FraudsYear Losses Suffered / Amount involved in Fraud Waste Management Scam1998$100 Million Enron Scam2001$74 Billion WorldCom Scam2002$180 Billion Tyco Scam2002$150 Million Freddie Mac Scam2003$100 Million AIG Scam2005$3.9 Billion Bernie Madoff Scam2008$65 Billion Major Scams and Frauds which took place globally in the recent years :

5. Major Scams and Frauds in the Recent Years Scams and FraudsYear Losses Suffered / Amount involved in Fraud (Rs.) Harshad Mehta Securities Market Scam 19915,000 Crores Fodders Scam1992950 Crores The UTI Scam20014,800 Crores UP Food Grains Scam200335,000 Crores Satyam Scam200810,000 Crores The 2G Spectrum Distribution Scam 20081,75,000 Crores Sahara India Pariwar Investor Fraud Scam 201025,000 Crores Coalgate Scam20121,85,600 Crores Sarada group Financial Scam201320,000 – 30,000 Crores Major Scams and Frauds in India in the recent years :

6. Types of Frauds Bank frauds Corporate frauds Insurance frauds Health Care Frauds Cyber frauds Securities frauds Consumer frauds

7. Cyber Frauds Cyber Attacks have been a major threat over the recent years due to Computerization of Business operations. Following are some of the Cyber threats : Malware Attacks such as Viruses, Worms and Trojans Phishing Denial of Service(DOS) Attack Password Theft Spoofing Tampering etc.

8. Cyber Attacks in the Recent Years According to a recent survey report, 72% of the Indian Companies faced Cyber Attacks in 2015. Sony Pictures (Nov 2014) – Loss of several internal data centers Staples (Oct 2014) – Access to Information of about 1.16 Million Credit Cards

9. Factors influencing Cyber Attacks Failure in inclusion of Security and Controls in the Company design principles. Failure in understanding the root cause of the attacks / issues while resolving them. Lack of Technical Expertise on the Cyber Security within the Organization Ineffective Threat analytics

10. How to Mitigate Cyber Risks ? Know potential attackers ? Understand their objectives Know what tactics they might use ? Establish or/and Enhance risk – prioritized controls. Detect violations & anomalies through better situational awareness across the environment. Establish the ability to quickly return to normal operations & repair damage to the business.

11. Who is responsible for Cyber Security Management Has the ownership, responsibility and accountability for assessing, controlling and mitigating risks. Audit Committee Also has an equal or higher role in establishing and ensuring Cyber Security. Internal Audit Responsible for regularly reviewing controls pertaining to Cyber Security External Auditor / Specialist Can be valuable source of information on cyber security and may well assist in assessing Cyber Security. Cyber Security

12. Fraud Detection Use of Techniques such as : Statistical & Mathematical Techniques Digital/ Electronic Techniques CAAT Data Mining Identification of Fraud Symptoms Investigation of Symptoms

13. Data Mining / Big Data Analytics The Process of examining the large data sets containing a variety of data types.i.e.Big Data. It uncovers hidden patterns, unknown correlations, trends and other useful business information.

14. Big Data Analytics : Process Converts unstructured data into Structured data. Based on such Structured data, conclusions are drawn. Suitable tools for big data analysis includes Time series Analysis, Data fusion and integration, Simulations etc. Information Data

15. An Eye on Frauds and Scams

16. Satyam Scam Fraud that disturbed the IT Industry and the whole nation Loss caused to Investors was about Rs.14,162 crores Ramalinga Raju, one of the Promoters and his family members secured illegal gains to the tune of about Rs.2,743 crores Fraud was perpetrated by inflating the revenue of the company through false invoices and showing corresponding gains by forging the bank statements with the connivance of the Statutory and Internal Auditors of the Company The Annual Financial Statements with inflated revenue were published for several years which led to higher prices of the Scrip in the Market Attempts were made to conceal the fraud by acquiring the companies of Kith and Kin

17. Satyam Scam CID revealed that actual no. of employees were only 40,000 and 53,000 as reported earlier Mr. Raju had been allegedly withdrawing Rs.200 Million every month for paying these 13,000 non-existent employees Inflated figures for Cash and Bank balances of Rs.5,040 Crores Operating profits were artificially boosted from Rs.61 Crores to Rs.649 Crores Showed an interest earning of Rs.376 Crores that was fictitious

18. Reebok Scam Fraud of Reebok India came into light in March 2012 Amount involved in the Fraud was about Rs.870 Crore Subhinder Singh Prem, former Managing director and Vishnu Bhagat, former Chief Operating Officer were key members involved in the fraudulent activity Over invoicing to the tune of Rs.147 Crores Raising fake invoices to the tune of Rs.98 Crores to claim promotions, bonus and incentives

19. Reebok Scam Running False Franchisee referral programme, receipts from were about Rs.114 Crores Maintaining four secret warehouses where company goods were diverted To finance the operations they also took loans from banks by using fake invoices and raised deposits from high net- worth individuals Goods were being siphoned to Ghost companies and distributors across the country, claiming them to be defective pieces Case was filed at Gurgaon Police Station and investigated by Serious Fraud Investigation Organization (SFIO)

20. Global Trust Bank Scam Wrong Financial disclosures in the Financial Statements of 3 FYs – 2000 – 01, 2001 – 02 and 2002 – 03 RBI declared a 3 month moratorium on July 24, 2004 Throughout its decade-long existence, the top management of the bank concentrated exclusively on generating returns to its key shareholders Also Involved in the stock market scam of 2001, in which the lead artist was the stockbroker Ketan Parekh

21. Global Trust Bank Scam Lent heavily to players in the capital market and when the market crashed the bank's balance sheet suffered a gaping hole because share prices had dropped dramatically In 2001, when attempting a merger with UTI Bank, lent more than Rs.800 crores and much of them were proved injudicious For 2001-02, the Net Worth was claimed to be Rs.400 Crores which on inspection by RBI was found to be negative Ramesh Gelli, the Chairman of the Bank colluded with Ketan Parekh to push up the Share Price Ramesh Gelli

22. Forensic Accounting: Scope of CAs’ Increasing no. of Frauds in the recent years. Lack of Sufficient Expertise or time needed with Law Enforcement agencies. Insertion of Various Provisions in connection with Fraud in the Companies Act, 2013. Assisting in the Fraud Prevention and mitigating Cyber Risks.

23. Conclusion Financial Frauds have been increasing over the last 2 decades. They have caused huge losses to the Governments and General Public. Need of the Hour is to Fraud Prevention than Fraud Detection. Finance Professionals have a significant role to play in the Fraud Prevention.

24. K.Raghu & Co. Chartered Accountants. “K R Pinnacle”,No.281,II Floor, 7th Main, B.T.M Layout, 2nd Stage, Bangalore - 560 076. Ph: +91 80 26680897 / +91 80 26680941 - Mob: +919341219091 E-mail: kraghu@kraghu.com – Website: www.kraghu.comkraghu@kraghu.comwww.kraghu.com