HOW TO CATCH A THIEF VIA A FORENSIC AUDIT?

What is one of the first and most important questions you may be asked during your annual audit? Are you aware of any fraud or suspected fraud in your organization? Unfornately, the answer is easy if you have been the victim of fraud. But what about the fraud that you’re not aware of? How do you catch a thief? A forensic audit may the answer.

Forensic auditing refers to the process of examining or evaluating an individual’s or organization’s financial information, usually for the purpose of substantiating fraud and/or gathering evidence for law enforcement. A forensic audit is often conducted in order to prosecute a person for embezzlement, fraud, and other financial claims. A forensic audit is also used in divorce cases as well in order to detect hidden assets.

Forensic audits are conducted for several kinds of cases:

1. Corruption

One kind of case is corruption and a forensic audit can assist in proving it. The auditor would look for conflicts of interest between the supposed fraudster and the organization. A fraudster often uses the influence of his position to do damage to the organization. For example, a manager is corrupt and a fraudster if he allows, approves, or facilitates inaccurate or excessive expenses of an employee with whom he is personally connected. Even though the manager was not benefitted directly by the transaction, he likely received personal benefits from the employee after the fraudulent transaction.

2. Bribery

Bribery is also a form of corruption that an auditor is wary of. Offering money to an organization’s employee or officer in order to get things done or receive an outcome in one’s favor is a clear case of bribery. Another form of corruption is extortion which happens when an organization unlawfully demands money from another so that the organization may do something, such as awarding a contract. These kinds of corruption are what an auditor looks for in a forensic audit in order to prove a case in court.

3. Asset Misappropriation

Asset misappropriation is another case of fraud for which a forensic audit is helpful. The misappropriation of money such as making payments to non-existing employees or suppliers, faking invoices, theft of inventory, and misuse of the organization’s resources and assets are a few clear examples of asset misappropriation.

4. Financial Statement Fraud

Financial statement fraud is also a kind of fraud that a forensic audit seeks to uncover. This fraud is used by some organizations to show that the financial performance of the organization is better than its actual situation. The goal of financial statement fraud is to unlawfully reduce taxes, improve liquidity, or influence market performance.

The Forensic Audit Standard Procedure

A forensic auditor often conducts the forensic audit. This auditor is a person or group of persons with special training in detecting irregularities, forensic auditing techniques, and legalities.

Although every forensic case is unique, there are standard procedures that are commonly followed in a forensic audit:

1. Planning the investigation

First, the forensic auditor plans the investigation or audit. The auditor plans his objectives such as identifying any fraud committed, the period of time during which the fraud took place, the suspected perpetrators of the fraud, how the perpetrators concealed the fraud, the loss or damage done to the organization, and the relevant evidence that could be used in court.

2. Collecting the evidence

Second, it is important that the auditor collect the relevant and admissible evidence in order to prove the fraud in court. The auditor must study the case carefully and analyze what kind of fraud was committed and how it was committed. The evidence that the auditor collects should be sufficient to prove who the fraudsters are and how the fraud was carried out.

It is also the job of the forensic auditor to ensure that the documents gathered as evidence are not tampered, altered, or damaged by anyone.

3. Reporting

Third, the forensic auditor prepares a report which will be presented to the client. The report includes the auditor’s findings and conclusions from his investigation, an explanation of the fraud and its details, and recommendations for the improvement of internal controls so that future fraud can be prevented.

4. Court Appearance

Lastly, the forensic auditor must be present during the court proceedings so he can explain his report.

Catching a thief is not easy, particularily in today’s world of paperless, electronic transactions that don’t produce a clear audit trail. The forensic auditor of today must not only be a skilled investigator, but also be savy with computer audit techniques. We must be diligent with maintaining effective internal controls, both manual and electronic in order to prevent becoming a victim or fraud.