Forensic Audit and It’s importance
The number of fraudulent activities and ambiguous financial activities have been accelerating all over the world. Consequently, businesses are exposed to risks of fraudulent activities. With all of the recent corporate accounting scandals at Parmalat, Xerox Corporation, and Satyam Computer Services, and all the high profile corporate frauds at Enron, WorldCom, and HealthSouth followed by Bernie Madoff’s colossal ponzi scheme, the media has made Forensic Accounting and Forensic Auditing into
a growth industry.
Forensic Auditing has established itself as dynamic and strategic tool in combating corruption, financial crimes and frauds through investigations and resolving allegations of fraud and embezzlement. Thus, a new area of auditing, known as Forensic Audit, was needed to detect the frauds in companies that suspected fraudulent transactions. “Forensic” means “suitable for use in the court of law”. Bologna said that it is the application of financial skills and investigative mentality to unresolved issues, conducted within the context of the rules of evidence. As an emerging discipline, it encompasses financial expertise, fraud knowledge and a sound knowledge and understanding of business reality and the working of legal system. However, the definition of Forensic Auditing keeps on changing in response to the growing needs of corporations. Simply stated, Forensic Auditing includes the use of accounting, auditing and investigative skills to assist in legal matters.
Forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims. In addition, an audit may be conducted to determine negligence in addition, an audit may be conducted to determine negligence
Forensic Accounting:The integration of accounting, auditing and investigative skills yields the specialty known as Forensic Accounting. It is the study and interpretation of accounting evidence. It is the application of accounting methods to the tracking and collection of forensic evidence, usually for investigation and prosecution of criminal acts such as embezzlement or fraud. Forensic Accounting can sometimes be referred to as Forensic Auditing.
Forensic Investigation:Also known as forensic audit is the examination of documents and the interviewing of people to extract evidence. Forensic Accounting examines individual or company financial records as an investigative measure that attempts to derive evidence suitable for use in litigation.
Fraud Auditing:In a fraud audit one searches for the point where the numbers and/or financial statements to do mesh. It is a meticulous review of financial documents conducted when fraud is suspected. Some entities do them as a precaution to prevent fraud from happening and to catch it before the loss magnifies. A Fraud Audit however is not an Investigation. Fraud auditing is used to identify fraudulent transactions, not to figure out how they were created. Fraud auditors often go outside the books of accounts to find fraudulent transactions.
Red Flag:Red flags are sign or warning of any impending danger or inappropriate behaviour. Red flag do not necessarily indicate the existence of fraud however are indicators that caution needs to be exercised while investigating the situations. Red flags are classified in categories such as financial performance red flag, accounting system red flags, operational red flags and behavioural red flags.
Forensic Audit v/s Audit
The primary difference between financial and forensic audits lies in the purpose of the audit. A financial audit confirms the validity of a company’s financial records, providing investors and creditors with confidence in the financial information. Forensic audits relate directly to an issue defined by the audit client. This issue may involve employee fraud or a dispute with a vendor or customer. The auditor’s report must meet the standards for presentation in court.
To an external observer, financial audits and forensic audits may look similar. Both types of auditors closely examine and confirm accounting records, using similar methods. The two types of audits differ significantly in their end product — the auditor’s report.
A financial audit results in a statement from the auditors (or the audit firm) that they have examined the books of XYZ Corporation. The statement notes that the auditors find that the financial statements report the company’s financial position fairly.
Because companies engage forensic auditors to answer specific questions, a standard forensic audit report format does not exist. The forensic auditor must supply the requested information and provide sufficient evidence to argue the results in court, if needed.
A Forensic Auditor is often retained to analyze, interpret, summarize and present complex financial and business related issues in a manner which is both understandable and properly supported. Forensic Accountants are trained to look beyond the numbers and deal with the business reality of the situation.A Forensic Auditor must initially consider whether his/her firm has the necessary skills and experience to accept the work. Forensic audits are highly specialized, and the work requires detailed knowledge of fraud investigation techniques and the legal framework.
Services rendered by Forensic auditor:
- Crafting questions to be posed
- Responding to questions posed
- Identifying documents to be requested and/or subpoenaed
- Identifying individuals to be most knowledgeable of facts
- Conducting research relevant to facts of the case
- Identifying and preserving key evidence
- Evaluating produced documentation and information for completeness
- Analyzing produced records and other information for facts
- Identifying alternative means to obtain key facts and information
- Providing questions for deposition and cross examination of fact and expert witnesses
Importance of Forensic Audit
- Forensic accountants are more than just number crunchers who happen to work on criminal or civil disputes — these accountants possess additional skills. They must conduct investigations, know how to use a variety of computer programs and communicate well. Some forensic accountants specialize in specific industries that are susceptible to fraud, such as insurance or banking, and learn the business practices associated with those fields.
- Forensic Accountants work in most major accounting firms and are needed for investigating mergers and acquisitions, and in tax investigations, economic crime investigations, all kinds of civil litigation support, specialized audits, and even in terrorist investigations.
- Forensic Accountants work throughout the business world, in public accounting, corporations, and in all branches of government.
- They identifies with the use of accounting ideas and systems the unlawful issues. The result of the measurable examination, including appraisals of misfortunes, harms, and resources would be utilized as prosecution backing to lawyers.
- Forensic accounting offers imperative help for legitimate cases in numerous regions of the law, for example, securities exchange controls, value altering plans, item risk, shareholderdebate, and breaks of agreement.
- Forensic accounting, forensic auditing or financial forensics is the forte practice range of accounting that depicts engagements the outcome from genuine or expected debate or suit. “Forensic” signifies “appropriate for use in a courtroom”, and it is to that standard and potential result that legal accountants for the most part need to work. Forensic accountants, additionally alluded to as forensicexaminers or investigative evaluators, frequently need to give master proof at the inevitable trial.
- While Forensic Accountants typically don’t give assessments, the work performed and reports issued will frequently give answers to the how, where, what, why and who. The FAs have and are keeping on advancing as far as using innovation to help with engagements to distinguish oddities and irregularities.
- Forensic accountants have been depicted as experienced evaluators, accountants and specialists of legitimate and money related reports that are employed to investigate conceivable suspicions of false movement inside an organization; or are procured by an organization who may simply need to keep deceitful exercises from happening. They likewise give administrations in zones, for example, accounting, antitrust, harms, investigation, valuation, and general counselling. Forensic accountants have likewise been utilized as a part of separations, protection claims, individual damage claims, fake cases, development, sovereignty reviews, and following psychological warfare by exploring monetary records. Numerous forensic accountants work intimately with law requirement faculty and legal counsellors amid examinations and frequently show up as master observers amid trials.
- Forensic Accounting is an amalgam of forensic science and accounting. The requirement for forensic accountant has been attributed to the way that the review framework in an association had neglected to recognize certain mistakes in the administrative framework. Forensic Accounting is examination accounting which includes breaking down, testing, asking and looking at the common and criminal matters lastly giving an impartial and genuine report. Pretty much as forensic examinations and lab reports are required in the court to understand the homicide and dacoit puzzles, correspondingly forensic accounting assumes a key part in following the financial fraud and clerical wrongdoings. Be that as it may, forensic accounting covers an extensive variety of operations of which misrepresentation examination is a little part where it is generally predominant.
Practice of Forensic Audit
- Fraud detection where employees commit Fraud
Where the employee enjoys fake exercises and submits misrepresentations the forensic accountant tries to find if there any benefits made by employees out of the assets defalcated, then take a step to questionthem and attempting to discover the concealed truth.
- Criminal Investigation
Matters identified with money related ramifications the administrations of the forensicaccountants are at work. The report of the accountants consider all the facts and is prepared and presented with proof.
- Outgoing Partner’s settlement
In the event that the active accomplice is not upbeat about his settlement he can utilize a forensic accountant who will accurately evaluate his contribution (resources) and also his liabilities effectively.
- Cases relating to professional negligence
Proficient carelessness cases are taken up by the forensic accountants. Non-adaptation to Generally Accepted Accounting Principles (GAAP) or rebelliousness to examining hones or moral codes of any calling they are expected to gauge the misfortune because of such expert carelessness or deficiency in administrations.
- Arbitration service
Forensic accountants render assertion and intercession administrations for the business group, since they experience extraordinary preparing in the region of option question determination.
- Facilitating settlement regarding motor vehicle accident
As the forensic accountant is very much familiar with complexities of laws identifying with engine vehicles, and other applicable laws in power, his administrations get to be vital in measuring monetary misfortune when a vehicle meets with a mishap.
- Settlement of insurance claims
Insurance agencies connect with forensic accountants to have a precise evaluation of cases to be settled. Also, policyholders look for the assistance of a legal accountant when they have to challenge the case settlement as worked out by the insurance agencies. A legal accountant handles the cases identifying with significant misfortune arrangement, property misfortune because of different dangers, devotion protection and different sorts of protection cases.
- Dispute settlement
Business firms connect with legal accountants to handle contract debate, development claims, item risk cases, and encroachment of patent and trademarks cases, obligation emerging from break of agreements et cetera.
- Matrimonial dispute cases:
Forensic accountants engage cases relating to matrimonial disputes wherein their part is simply restricted to following, finding and assessing any type of advantage included. Aside from learning of accounting, law and criminology, a forensic accountant likewise should be acquainted with corporate financial management and administration. He additionally needs PC aptitudes, great correspondence and meeting abilities.
Robert Maxwell’s Embezzlement
Robert Maxwell, European publisher, had been embezzling funds from shareholders, clients and more for years when he died in 1991. As soon as he passed away, his entire company started to crumble as it was mostly built on deceit and lies and the games he had played with funding and loans. A team of forensic accountants spent 14 years figuring out the entire mess and discovered that Maxwell had embezzled approximately $1 billion.
O.J. Simpson’s Millions
After O.J. Simpson received a verdict of innocent, the families of his victims attempted to file a civil suit in order to get financial compensation. O.J. claimed that he was broke and had no money to give to the civil suit. However, forensic accountants investigated his finances and found that he was hiding away millions. The families of the victims were able to receive a $33 million settlement.
These are just a few examples of cases in which forensic accounting played a very important role. Forensic accountants are experts in investigating deep into every situation, looking where others didn’t think to look and meticulously tracking expenses, taxes and other important details. Most people would overlook these little details, but the forensic accountant knows that it’s their job to spot them. When these small details can affect the outcome of a course case and ultimately, the lives of others, they can be very important!
The scandalous tricks of Harshad Mehta, Ketan Parekh, Sanjay Seth and the late India bulls trick still new in our brains. Whether it is securities exchange extortion or bank fraud or digital fraud, scientific accounting has turned into an imperative instrument for examination. The requirement for measurable accountant turns into all the more significant in today’s world. As it were, scientific accountant are considered as experienced evaluators, accountant and reviewers of lawful and money related records who are utilized to explore false movement and avoid it. They additionally give a few administrations in accounting, harms, examination. Scientific accountants have basic part in Insurance plan, extortion claims, development, Auditing of distribution rights and recognizing fear mongering by utilizing budgetary articulations.
– Sakshi Laturiya (CA Final)