SUNDAY MARCH 18: White collar crimes: FIA, top chartered accountant firms capable of conducting forensic audit

ISLAMABAD: Only select government agencies such as Federal Investigation Agency (FIA) and leading chartered accountant firms have some capability to carry out forensic audit for investigating white collar crime/financial crimes. A senior police official told Business Recorder here on Saturday that the FIA has the capacity of forensic audit, necessary to trace embezzlement and fraud, essentially white collar crimes.
He said that the agency has forensic experts who conduct the audit through employing different methods. However other sources said that only a select few private chartered accountant firms have the capacity to undertake forensic audit. A senior official of the National Accountability Bureau (NAB) said that the Bureau has yet to develop the capacity to conduct audit in cases of embezzlement and fraud.
Recently, NAB hired a chartered accountant firm to assist in the inquiry proceedings with particular reference to interpret financial data/already audited accounts, transactions of funds flow by and amongst a non-banking financial company and associated undertakings and their respective core directors/ officials and more particularly in assisting to determine money trail of selected transactions etc.
A leading chartered accountant maintained that forensic audit expertise is not available in Pakistan. There is no tradition of conducting forensic audit in the country. Pakistan's investigative agencies and chartered accountant firms are not trained to do this kind of job. Even tax officials of the Federal Board of Revenue (FBR) do not have the capability to conduct forensic audit of cases involving tax fraud.
Tax officials can do annual audit, desk-audit or investigative audit, but are not trained to do forensic audit. The tax machinery lacks the capacity to conduct forensic audit due to non-availability of training facilities. Past VAT Law incorporated a provision of forensic audit by tax officials. But merely introducing a provision as law does ensure capacity amongst tax officials to conduct such audit. It is important that an investigative audit not be termed a forensic audit unless it goes into detailed scrutiny of records which is required under forensic audit.
Analysts emphasised the need to give priority to the important area of forensic audit in Pakistan. An analyst said that Pakistani financial institutions have very limited capacity to conduct forensic audit. He referred to Stock Market Crash of 2005 when the Securities and Exchange Commission of Pakistan had hired the services of a foreign company M/s Diligence to conduct forensic audit for presenting an independent and objective expert analysis of the key market-related events of March 2005.
A US team of forensic investigators headed by Lead Forensic Specialist David T Wolfe of M/s Diligence came to Pakistan and conducted forensic investigation with the findings that 88 brokers including 13 leading brokerage houses/financial companies breached the rules/regulations of SECP. At that time, the forensic investigators of the US had submitted their final report to the government.
The government's first choice was to get a forensic investigator from Pakistan. The SECP contacted top four local accounting firms to conduct forensic investigation of stock market crash-2005. But none of these companies were ready to take the task. Later SECP moved to four international best accounting firms however none of them was ready to take the assignment. Thus, all top eight national and international forensic experts refused to conduct the investigation.
The commission also contacted two US accounting firms in Boston and New York but they also have conflict of interest. M/s Diligence was finally appointed on the recommendation of an ex-executive director of SECP, who had closely worked with the firm in Canada. Particularly, the firm was appointed keeping in view the expertise of Tsui, an ex-employee of US Securities Market. Tsui had conducted a lot of forensic investigation.
An analyst said that the draft Value-Added Tax (VAT) Law in the past had the intent to empower the Federal Board of Revenue (FBR) to conduct forensic audit. Draft Act of VAT has empowered an official of Inland Revenue to conduct audit, including forensic or investigative audit of any registered person after giving advance notice. The concept of forensic audit is not available in the GST laws. However, under sales tax an investigation can be undertaken to determine refund claim's authenticity.
When asked about the basic principals of forensic audit, an expert explained that forensic auditing refers to the entire process of investigating a financial matter, including potentially acting as an expert witness if the fraud comes to trial. The process of forensic accounting includes the 'forensic investigation' itself, which refers to the practical steps that the forensic accountant takes in order to gather evidence relevant to the alleged fraudulent activity. The investigation is likely to be similar in many ways to an audit of financial information, in that it will include a planning stage, a period when evidence is gathered, a review process, and a report to the client.
The purpose of the investigation, in the case of an alleged fraud, would be to discover if a fraud had actually taken place, to identify those involved, to quantify the monetary amount of the fraud (ie the financial loss suffered by the client), and to ultimately present findings to the client and potentially to court.
Forensic audits are performed by specialists with knowledge of financial matters and are referred to as forensic accountants. They include certified fraud examiners who have a background in accounting, prosecuting fraud, loss prevention or criminology/sociology.