Forensic Accounting is not new, accountants have provided fraudulent financial records for investigation and litigation support to corporates, law enforcement agencies and states for decades. As a fraud investigator, I have been asked by many of my clients what is the difference between forensic accounting engagement and an audit engagement. Forensic accounting engagement applies accounting and auditing techniques post which examination, analysis and reporting of financial information is made in a manner suitable to the court. An audit is simply performed by an internal or external auditor, who must adhere to a certain set of standards established by the Institute of Chartered Accountants of India(ICAI) in case of India.
Forensic accounting is required when there is a disagreement between parties, or a lawsuit has been filed and as engagement partners we are often asked by the client’s attorney to assist in litigation process as an expert. The objective of a forensic accountant is to evaluate information report and assist the court in understanding the financial aspects of the case. In my experience I have dealt cases which are most common cases such as Ponzi schemes, embezzlement frauds, compensations, and bankruptcy analysis. Clients have also engaged us, as forensic accountants, when they suspect somebody is misappropriating funds from their businesses. During such engagements, we scrutinise the financial information, conduct market intelligence, conduct disk review before interviewing the suspected employee/s. And post submitting our findings to the management we help clients in implementing effective internal controls for their businesses and conduct periodic risk assessments. Unfortunately, many of the SME businesses do not have adequate internal controls in place and employees take advantage of such gaps to defraud companies and misappropriate assets. In my experience I have often seen that the fraud has performed by a long-time trusted employee or someone holding a management position.
While conducting auditengagements teams examine and evaluate the financial statements of any given organization. As per definition provided by ICAI “An audit is independent examination of financial information of any entity, whether profitoriented or not, and irrespective of its size or legal form, when such an examination isconducted with a view to expressing an opinion thereon”. Audit’s objective is to provide assurance, to the intended user, that the information contained in declared financial statements is a fair and accurate representation of the organization. Audits are regulated and follow the Generally Accepted Auditing Principles (GAAP).
One of the main differences between an audit and forensic accounting engagement is that the audit program is designed to provide assurance that certain parts of the financial statements are reasonable whereas while undertaking forensic accounting engagement teamanalyse set of transactions or search for trail of assets misappropriated. Auditors often fail to detect fraud that are below the materiality level established by the auditor performing the engagement. Although, forensic accounting and auditing professionals utilize the similar accounting skills, but the purpose of engagements are different. It is important for advisory firms to understand and explain clients the difference between Audit and Forensic Accounting and understand clients’ requirements so we can provide clear advice on the type of engagement that will benefit them the most.
Article written by: Hurrmeet Sg Vohra