India's capital market regulator Sebi has formed a separate team to detect financial or corporate frauds in a bid to beef up its investigation process. The new unit, called Forensic Accounting Cell, will be part of the Securities and Exchange Board of India's corporate finance department that will aim at creating a mechanism to warn against corporate scandals.

Forensic accounting is done to detect financial frauds which involves accounting manipulations done by altering financial statements or other documents in a manner that does not reflect the true picture of the company's financial activities.

Sebi has set up this unit in the wake of increasing complaints against companies by investors, accusing them of rigging financial statements. The regulator is already investigating the Satyam Computer accounting fraud--the biggest corporate fraud in India. Initially, the forensic accounting team will have six members, who have been shifted from various other departments. Sebi plans to expand the team by recruiting experts from the field.

"Sebi very much needs a cadre of accountants who can pore over financial documents of companies, assist in investigation involving financial chicanery and provide a solid forensic accounting team to unearth and unravel financial fraud hidden deep inside numbers spun out by a company," said Sandeep Parekh, founder of Finsec Law Advisors.

"They would also be useful in recommending accounting and auditing standards based on their experience with examining documents of listed companies," said Parekh, who was an executive director of Sebi.

Internationally, many regulators have dedicated teams of accountants who work with other teams to pore over routine financial disclosures for checking any problems. For example, the US securities market regulator, SEC, has what is known as the Office of the Chief Accountant, which assists other departments in investigations and ensures that financial statements used for investment decisions are presented fairly.

"Very often, it is not realised that forensic accountants require a combination of very specialised skill sets which goes well beyond investigative skill sets," said Pratip Kar, former executive director of Sebi and advisor to the International Finance Corporation's global corporate governance forum. "Materiality is a fundamental concept in auditing. But not so in forensic accounting. The forensic accountants, like Sherlock Holmes, may be looking for the one transaction, one instance of misdemeanor, which may be somewhat different but may be indicative of something funny is going on. It may open the door to something bigger," Kar said. (Economic Times)