How is a forensic audit carried out?
In this month’s article, our forensic specialists share more about what is involved in a forensic audit, so if you ever have to go down that road, you’ll know what to expect.
The possibility of fraud is always a scary prospect for any business owner. But when the numbers don’t add up, it’s not enough to just assume that company funds or resources may have been stolen or are being misappropriated. You need to be sure of the facts and have evidence to back up any suspicions you may have. Preliminary investigations may uncover enough to cause concern, but in order to gather all the information necessary to take further action, which may or may not include taking a case to court, a detailed forensic audit needs to be performed. This is an audit carried out by a forensic accountant, an experienced specialist who knows what to look for, and how to gather and present the relevant information.
What are the steps involved in a forensic audit?
Step 1: Defining the scope of the audit
When fraud is suspected, there is generally a source, something that tipped off the business owner to the possibility of fraud. This is the starting point of the investigation, the point from which the forensic auditor can plan out their investigation. Important questions to be asked would include “Does the suspected fraudulent activity involve raw materials, products, cash, or electronic or payroll discrepancies?” This will assist the forensic auditor to narrow down the focus of the investigation.
Step 2: Establishing whether fraud has taken place
Fraud is not an innocent accounting error. It is an intentional and illegal action taken by individuals to enrich themselves, and this is what a forensic auditor sets out to determine. Is it really fraud or a once-off mistake? When did it occur? How often did it occur? What steps were taken to conceal it? And who was involved? A forensic specialist is not only a skilled investigator but is also adept at interviewing relevant parties in order to systematically put the pieces of the puzzle together to explain what really happened.
Step 3: Presenting findings
By the end of the audit the forensic specialist should be able to show a clear audit trail linking the instances of suspected fraud to the fraudsters. This will include providing evidence of how the fraud took place, when it took place, what the loss or damage was, and how the business was affected. It is also the responsibility of the auditor to ensure that none of the evidence or documentation is tampered with and that the entire case is accurately presented in a logical flow, making it easy for the business owner and, in the event of a court case, legal entities to examine and understand the facts.
Step 4: Preparing for court
As forensic accountants are often called upon to testify in court, they will collate the material facts so that these can be evaluated against the rule of law and other case precedents. They can also provide advice on how to present the case so that the defendants cannot easily evade the allegations, ensuring the correct processes are followed so that prosecution can take place.
Step 5: Recommending fraud prevention measures
Regardless of whether fraud has taken place or not, a key benefit of conducting a forensic audit is that the specialists can identify possible weak points in the company systems or policies that make them susceptible to fraud. They can make recommendations of additional security measures to put in place so that the risk of fraud is reduced in the future, which can be extremely valuable to a business. For more insights into fraud prevention, read Is my company at risk of fraud?
The scale of fraud
While fraud is generally regarded as a financial loss to the business, it can take many forms. For example, a vendor may supply inferior raw materials but charge the higher-grade price. The manufacturer believes they are getting the higher-grade materials but when they unknowingly uses these inferior materials, it could result in product failure, costing them both in product returns and in reputation damage. Worse still, if the product failure results in injury or loss of life, the manufacturer could be facing legal action.
It’s clear that fraud can result in significant damage to a business, not only in terms of financial loss, but also to its reputation and standing. Would customers be as willing to deal with your company if fraud was suspected? Would industry partners still want to work with the business? Unlikely, as it would also expose them to risk in the process. If there is any suspicion of possible fraud, it is well worth getting in the experts.