Forensic audits help companies and government agencies to investigate fraud and corruption.
Such an audit, including a holistic review of an organisation’s financial and non-financial data, and is a key step in identifying and evaluating alleged corruption and fraud.
The result of forensic auditing must follow the highest litigation standards for potential use in legal action.
This blog post will cover the benefits of forensic auditing and comprehensive details on how it is conducted in businesses.
Table of Content
What is forensic audit?
Forensic auditing refers to the examination and evaluation of an organisation’s or individual’s financial records to collect evidence that can be used in court or legal proceedings. It is a special area within accounting, and most large accounting practices have a forensic auditing department.
Forensic auditing not only aims at finding and preventing errors but focuses on identifying instances of fraud, including overstating revenues, understating liabilities, inventory manipulation or asset misappropriation, creative accounting, and more.
A forensic audit is frequently performed to bring charges against a party for fraud, embezzlement, or other financial offences. Often an auditor may be called to testify as an expert witness in court as part of a forensic audit procedure.
Besides cases related to financial fraud, forensic audits may also involve disputes related to divorce, company closures, and bankruptcy filings.
Forensic audit investigations can reveal or prove a variety of illegal activities. In situations where there is a possibility that the evidence gathered will be used in court, a forensic audit is typically selected over a regular audit.
Why perform forensic audits?
Here are certain situations that mandate forensic auditing, like
● Conflict of interest
When an individual’s personal life or interests affect their choices or performance at work, it is said that they are in a conflict of interest.
For instance, if an employee utilises their power or position in the company for personal benefits, they may negatively impact the productivity and profitability of the business.
These actions may be fraudulent depending on their position and sector, necessitating a forensic auditor’s inquiry; however, if conflicts of interest are overlooked, it can harm a company’s reputation.
● Corruption
The company’s management team can request a forensic investigation if they suspect an employee engages in corrupt activities. For example,
● Bribery: When an employee offers money to someone to get things done or to influence a situation in their favour.
● Extortion: When an employee illegally uses intimidation, force, or threats to gain money or other benefits from an individual or entity, it is known as extortion which is illegal in any organisation
In both these cases, a company may initiate a forensic audit to dispel rumours among its employees. However, they might also learn more about these activities happening in the workplace and identify who is involved in them.
● Asset misappropriation
The most common type of fraud in businesses is the misappropriation of assets, which frequently includes misuse or theft of company assets and resources. One illustration of this is the embezzlement of business funds, which may involve fabricating invoices and accounts in order to change company accounting records.
Payroll fraud is another example of asset misappropriation in which employees access business staff files and transfer money to their own accounts. Theft of supplies and the creation of fake payments are two additional examples of this corrupt activity.
Companies may initiate forensic audits to discover the people behind such fraudulent activities.
● Financial statements misrepresentation
Financial statement fraud typically happens when businesses falsify their records to mislead prospective investors about the business’s financial stability.
They may get into this illegal behaviour to boost market performance, and the company’s management team is usually involved in it. Financial statement misrepresentation may involve understanding revenue or overstating expenditures to present a misleading high growth rate.
For example, the company may fabricate false balance sheet statements to conceal its bankruptcy. A forensic audit can clear any such allegations on your business and regain your reputation among investors and in the market.
4 Benefits of forensic auditing in business
Here are 4 benefits of forensic auditing in business:
1. Eliminates huge potential loss
Any fraudulent activity in the workplace can reduce the company’s profit generation. Thus, a forensic investigation can help you identify and stop fraudulent activities early and minimise financial losses.
2. Strengthen internal policies
Forensic audits ensure your employees use company assets properly and eliminate misappropriation. Such an investigation identifies the company’s internal process and structure loopholes and can determine the root of illegal activities.
3. Get rid of legal issues
If you are conducting a forensic investigation in your company, it will help you prevent or resolve fraudulent activities before they result in legal issues. Resolving such legal issues often takes a lot of time and resources, affecting business productivity during the period. However, if any legal proceedings against your company have already started, this investigation report may act as evidence to prove or dispel any allegation.
4. Enhances company image and reputation
Any allegation made against your company about illegal activities can sometimes be false or exaggerated but impacts the company’s image in the market.
Therefore, you need to initiate a forensic audit that provides an accurate report on the auditor’s findings, helps restore your reputation, and improves investors’ confidence.
Additionally, it demonstrates the company’s willingness to verify the accuracy of its records and business operations and look out for any illegal activities happening within the workplace.
Conclusion
Forensic audits are similar to regular audits, where an auditor walks into your business, learns about your business activities, plans an investigation, collects evidence, and writes a report.
The only difference is the forensic audit reports appear in the court as evidence that either uncover or disproves the fraud statement against your company during a legal session.
You can always turn to audit firm to conduct forensic audits in high-profile and politically sensitive cases or for other similar situations. Their teams include forensic accountants, investigators, data analytics, and other professionals who can comprehensively analyse your business.
It includes identifying illicit fund flows, scrutinising procurement contracts and agreements, investigating companies’ counterparties, uncovering patterns in complex data sets, and more.
