Forensic accounting: A method for timely flag raising

Financial crime is not a new phenomenon in the corporate world of Bangladesh. According to a report of the Centre for Policy Dialogue (CPD), scams in 14 banks cost Tk.225.02 billion in the past decade, which is about four-fifths the project cost of Padma bridge and two-fifths that of Sonadia deep-sea port. One after another, financial crimes at colossal scales are taking place in Bangladeshi corporate sector starting from stock market crash twice in the year 1996 and again in 2010, institutional frauds like Hallmark, Bismillah Group (2012), and not to forget some big scandals exposed even in financial institutions (BASIC bank, Janata bank, Agrani bank, Sonali Bank etc) as well.

These scams not only make the individual firm's stakeholders suffer, but also adversely affect the economy as a whole and shatter the confidence in the financial sector in particular. If we take stock market for instance, it is clear that the low confidence in the market after the 2010 crash still haunts the general investors in the form of prolonged downturn. General people without much knowledge have a perception that accounting jugglery with unscrupulous motive is responsible for financial crimes. Although the perception is not completely right, we cannot outright deny it. Any financial crime in the form of financial statement to take its desired shape in case of both public sector and private sector firms, has to cross several check points put in place by regulatory agencies such as Bangladesh Securities and Exchange Commission (BSEC), Registrar of Joint Stock Companies & Firms (RJSC) and Bangladesh Bank (BB).

Even after deploying so much regulation to ensure true and fair representation of financial statements, why financial statements fail to anticipate any financial fraud beforehand? Whom are we to hold responsible for this misrepresentation?

Typically, if we consider the task of accountants, they are responsible for preparing company’s financial statement correctly at year end to represent true and fair value of assets, liabilities and profit with proper disclosures. Moreover, to ensure true and fair value, the Companies Act 1994 as applicable in Bangladesh requires these companies' financial statements to be audited by members of Institute of Chartered Accountants of Bangladesh (ICAB). These days accounting information systems, as a discipline to keep pace with modernisation in terms of technological advancement, use accounting software packages. This technological advancement is not only evident in accounting but also in other departments, which thus operates in a network to make a synergy at their operational level. However, the question still remains valid as to why these audited reports fail to uncover the intentions of fraudsters in process of auditing of their financial statements.

Auditors evaluate whether the financial statements prepared by the management of the company are stated in all material respects in accordance with general accounting principles. Thus, the audited reports reflect the opinion based on tests, evidence supporting amounts and disclosures in the financial statements. Taking into consideration the main objective of auditors (internal or external), we can conclude that they fail to trace the deliberate misstatement and potential financial crime. Moreover, auditors are not responsible for detecting counterfeit documents. In fact, given the scope of the auditors, it is at times next to impossible to go as far as to detect the genuineness of documents. So, auditors have to rely mainly on sampling techniques -- given the scope of their time and resources. At times, falsified, altered or forged documents are almost indistinguishable from the original ones. Nevertheless, auditors may still raise red flag on doubtful issues, if they have the appropriate tools in hand. 

To overcome the shortcomings, a specialised field of accounting integrating auditing, accounting and investigation came into limelight namely "forensic accounting". Forensic accounting is specifically designed to uncover any fraud or financial crime that has already taken place or is in process of occurrence. Forensic accounting has the all-important investigative characteristic to unearth financial frauds. To amplify forensic work, accountants use recent and updated tools and technologies in their investigative system in order to focus on authentic picture.

Maurice E Peloubet,a partner in New York Accounting Firm, first introduced the term "Forensic Accounting" to the world in 1946. But its need and application became evident in 1990s and soon the forensic accounting service started to grow as an individual discipline. There is a saying that 'an accountant (normal) acts like a watchdog, but a forensic accountant must be trained to act like a bloodhound.' Today, around the globe, the demand for forensic accounting is flourishing. Internationally reputed universities offer full-length bachelors and masters degree programmes on forensic accounting. However, forensic accounting, as a discipline is not yet fully known in the corporate world of Bangladesh as it is yet to be recognised by the key players in the corporate sector.

Since forensic accounting is investigative in nature, it is often believed that its scope is confined to investigating financial crime once it has already been committed. But in its right perspective, forensic accounting should be made use of when any suspicion of fraud arises. In reality, the true scope of forensic accounting is enormous and far-reaching spanning a wide range of areas of public and private interests like in the case of bankruptcy, insolvency and reorganisation, economic damage calculation, family law and business valuation etc.

It is high time that forensic accounting is recognised and practised in Bangladesh as a discipline and an effective method to fight financial crimes.

Mohobbot Ali PhD is Professor, Department of Accounting and Information Systems, Dhaka University, Bangladesh. Shanjida Ahmed is Senior Accounting Teacher, Maple Leaf International School