Understanding the Forensic Mandate
Demystifying the Buzzword: Why “Forensic Audit” is a Misnomer
Forensics is now a new buzzword in this era of high-profile frauds which has found many headlines these days. The term forensics has become so popular that the media (and some others) have coined a new term called “Forensic Audit” to indicate a fraud investigation. Forensic Accounting, in its classical sense, refers to the activity of gathering facts and evidence in the accounting domain to support legal cases.
However, now it has become more of a generic term to indicate a particular type of “detailed audit” designed to unearth fraudulent activity. This stems primarily from the fact that forensics is seen as an extension of a typical audit and Chartered Accountants (CAs) are generally best placed to also undertake Forensic Accounting and Investigation work.
In this article, we will look at the fundamentals of forensics, especially in so far as it applies to the auditing domain, with which it gets confused so often. But first, we need to explore this term a little and make a clear distinction between what it is, and why it’s actually not an audit.
1. Correcting the Terminology: Four Distinct Professional Domains
Before we talk about forensic fundamentals and the mandate, we need to make sure we are speaking a standard “forensic language” so that we are all on the same wavelength. This is very important since so much of the terminology in different domains gets interchanged and causes unnecessary confusion, added to the fact that new terms like “Forensic Audit” mentioned above, get used quite casually and cause misuse of technical terms.
There are actually four domains where aspects of forensics come into play – Statutory Audit, Internal Audit, Forensic Accounting and Investigations. However, this is more by accident, and not by design. In fact, if you look at it closely, all four domains are absolutely different by design.
Hence, it’s inappropriate to mix-up the terms, or use them interchangeably, especially by the professional conducting an assignment in any one of the domains. It’s risky not only for the professional but also for clients and other stakeholders, as the receiver of the output has to be absolutely clear as to the nature of the outcome of the assignment. Mixing them up can also result in a confusing approach and sub-standard execution of the assignment. Hence the term “Forensic Audit” should be avoided, as it mixes up the two domains.
*NOTE: This matrix is an analytical creation based on author’s infographics to clarify structural distinctions across the four domains and is not directly part of the FAIS literature text.
2. ICAI’s Milestone: 20 Forensic Accounting and Investigation Standards (FAIS)
The Institute of Chartered Accountants of India (ICAI) has recently issued a full set of new 20 Standards covering the two domains of Forensic Accounting and Investigations. These are referred to as the “Forensic Accounting and Investigation Standards” (or FAIS) and, sometime in the future, will become mandatory for all members of the ICAI when conducting assignments in these two domains. It’s also probable that these may eventually apply to all professionals operating in the area of forensics and investigations.
It would be prudent for all professionals engaged in forensic accounting or investigations to be conversant with the FAIS as they will be able to conduct high-quality assignments based on these Standards.
3. Role Boundaries & The Lethal Danger of “Domain Drift”
Practising CAs must ensure clear engagement communication to confirm their mandate. However, many times this is not crystal clear, especially for CAs working in industry (e.g., as an Internal Auditor). A promoter may believe the mandate is very broad (incorporating forensics or investigations), while operational management may think it is narrow. Part of this confusion stems from organizational culture, but also from the personal credibility of the CA, who is expected to deliver beyond the mandate!
⚠️ Why Auditors Must Not Drift into Ad-Hoc Investigations
When an auditor encounters “red flags”, the standard procedure is to report them to management to be addressed with urgency. Technically, the Auditor is not expected to go beyond this scope or undertake forensic or investigative work to confirm or deny suspicions. It is neither his mandate nor may he possess the requisite investigative skillset.
If the auditor undertakes rogue procedures on his own to validate suspicions, he runs the grave danger of creating irreparable problems for the FAIS professional who comes later. The culprit may be prematurely alerted, cover their trail, and destroy vital documentary or digital evidence!
Exception: Where the Internal Audit Department (IAD) has a formal, standing mandate to conduct fraud investigations, the Chief Audit Executive must ensure the team is fully prepared, equipped, and specifically trained in forensic investigation techniques.
4. Forensic Fundamentals & Core Performance Principles
FAIS literature requires five basic personal principles to establish professional credibility, and five performance-related principles to establish the reliability of forensic work. The performance-related principles require strict adherence:
(a) Predications
No forensic or investigation assignment is to commence without a clear trigger. Violations, red flags, allegations, and fraud indicators form the predications. While audit searches for the “unknown” (material misstatements or control deficiencies), forensic investigations seek evidence for something that is “known” (specific code violations or fraud allegations).
(b) Primacy of Truth
The ultimate objective is to unearth the truth supported by compelling evidence that speaks for itself and withstands vigorous cross-examination in a court of law. Truth is established solely through facts, figures, and reliable evidential matter.
(c) Facts vs. Opinions
Personal perspectives must be strictly segregated from professional judgment – especially during witness or suspect interviews. Unlike audit, where professionals express an opinion on financial statements, forensic reports must scrupulously avoid personal opinions.
5. Mandate Discipline, Legal Subpoena & Application of Hypotheses
Key Tenets of the Engagement Mandate:
- Forensic accounting acts as a legal vehicle to establish the presence or absence of fraud and irregularities as per law.
- It cannot be confused with financial examination (audit) and demands specialized techniques.
- Clarity of operational domain: Internal Audit vs. Forensic Accounting vs. Investigation.
- Avoid confusion between the role “assigned” vs. role “assumed”, verifying if the assumed posture is legally defensible.
Risk Assessment & Subpoena Exposure
Forensic assignments carry high inherent probability of suspicious arrangements and fraudulent maneuvers. These risks must be factored into engagement planning.
Legal Realities: The work papers and reports of the investigator may be subject to court subpoena. The forensic accountant must be as conversant with applicable statutes, evidence laws, and procedural rules as a lawyer!
Application of Hypotheses: The Jigsaw Puzzle
Forensic investigations require formulating and rigorously testing hypotheses that prove or disprove a modus operandi, thereby confirming or refuting the original predication. It is analogous to assembling a jigsaw puzzle: each hypothesis represents a piece that must not only fit the right position but must genuinely belong to the puzzle.
6. Two-Phase Execution, Digital Evidence & Chain of Custody
Phase 1: Behind-the-Scenes Evidence Assembly
Collecting documents, transaction records, emails, accounting logs, and digital footprints without tipping off potential perpetrators, preserving integrity.
Phase 2: Confrontational Validating Interviews
Conducting structured, face-to-face corroborative and admission-seeking interviews with witnesses and suspects based on compiled preliminary evidence.
Digital Evidence & Legal Chain of Custody
A substantial portion of modern evidence is discovered in digital form. Forensic extraction demands specialized imaging, hashing, and analysis expertise. Crucially, digital evidence must comply strictly with statutory legal standards, specifically maintaining an unbroken Chain of Custody to ensure admissibility in a court of law.
7. Reporting Mandate: Why Investigators Must Never Express Guilt or Innocence
Judicial Separation: The Investigator is Not the Judge
It is not the job of the professional to identify the suspect as “guilty or innocent”. Doing so constitutes a severe role conflict and usurps the constitutional function of the judicial authority (the judge).
The role of the forensic professional is strictly limited to reporting the objective evidence discovered and, at most, articulating the factual inferences and conclusions that can be drawn from such evidence.
8. Conclusion: Professional Mandate Adherence under FAIS
When undertaking Forensic or Investigation assignments, the CA professional has to be absolutely clear regarding the mandate given and how well this aligns with their expertise. If working in Industry, it is possible that the mandate may require the professional to assume a role which is different from the role assigned (e.g., Internal Auditor).
Consistent with this new role, the professional needs to execute forensic assignments to allow delivery in line with the agreed mandate, which will NOT be an Audit.
Assignments in this domain are now expected to comply with the new Forensic Accounting and Investigation Standards (FAIS). Hence, the report issued must be consistent with the FAIS – it will not be an audit report or an opinion over guilt or innocence, but an airtight presentation of evidences that prove or disprove predications. If evidence indicates a fraudulent modus operandi, it must be presented strictly as such. ■■■