Consider yourself a member of an accounting team in a bank who is pleased with the positive outcomes. However, you start to have second thoughts because your business consistently outperforms comparable banks in terms of earnings. However, you cannot uncover any errors despite thoroughly searching the available literature. Even the auditor was unable to find any illicit activity throughout his audit. A few months later, the bank declared bankruptcy and enquired about why the audit was insufficient and whether prompt consultation with forensic accounting services would have been beneficial.
Why could the underlying balance sheet issues not have been found earlier, given the recent corporate bankruptcies? In an ideal world, forensic bookkeeping services wouldn’t be demanded. After all, every business has a qualified accounting department built to avoid such situations. The auditors also examine each annual financial statement and thoroughly outline any hazards.
Accounting, auditing, and forensics
First: The first difference is that each of the three institutions has a different practice. Employees in the accounting department are oriented to the management’s requirements and corporate policies because they are hierarchically connected to it. All business transactions must be recorded following the accounting standards by a corporation’s external accounting (bookkeeping). The basis for information provided to internal and external managers is the work’s outcomes.
The auditor expresses an opinion on the accuracy of the annual financial accounts as an impartial third party. It is necessary to uphold the standards of completeness, materiality, and objectivity. Complete implies including all pertinent information, vital means weighing the relevance of the information, and objectivity means maintaining an unbiased perspective.
Here, the line between forensic accounting and the grey area begins. The check is restricted in numerous ways: Due to time and resource constraints, companies are not thoroughly inspected, but pertinent random samples are collected. Additionally, spotting fraud is not the auditor’s main duty. The auditor must follow established test guidelines and checklists that the industry association has standardized. However, rather than determining whether the documents are fakes, it is evaluated to see if they have been accurately booked and rated in accounting.
Second: the auditors’ report will be constrained if they have concerns about the integrity of the documents and their available resources cannot resolve them within the parameters of the audit mandate. The auditor, as well as other organizations like the supervisory board or authorities, are responsible for calling a forensic accounting and fraud detection team at this point, at the very least.
Forensics in this task goes much beyond an auditor’s scope of practice. In contrast to a typical examination, the forensics team starts off assuming a fraud case and performing checks under entirely different circumstances. First, forensics can focus on single, individual transactions instead of evaluating the entire organization. Targeted interviews are undertaken to find discrepancies, documents are forensically analyzed for probable forgeries, data analysis is done using specialized software, and there is strong coordination with law enforcement officials.