Imagine you work in the accounting department in a bank and are happy about the good results. But since your company regularly makes much better profits than comparable banks, you become skeptical. But despite intensive research of the books available to you, you cannot find any irregularities. Even the auditor cannot discover anything illegal in the context of his audit assignment. A few months later, the bank went bankrupt and asked why the audit fell short and whether timely consulting to Forensic Accounting Services in India would have helped.
Looking at current corporate bankruptcies, the question arises why the underlying balance sheet problems could not be uncovered earlier. After all, every company has a professional accounting department that is designed to prevent such occurrences. In addition, the auditors review each annual financial statement and describe all risks in detail. In an ideal world, there should be no need for forensic bookkeeping. (Read More: Why Should You Go for Forensic Accounting Even After Conducting an Audit of Your Business?)
1. Accounting, auditing and forensics
The practice looks different insofar as all three institutions have completely different tasks. The external accounting (bookkeeping) of a company is tasked with recording all transactions of the company according to the rules of accounting. The results of this work are the basis for information to internal and external managers. The employees of the accounting department are hierarchically linked to the management and orient themselves to its requirements and the company guidelines.
As an independent external party, the auditor has the role of giving an opinion on the correctness of the annual financial statements. The principles of completeness, materiality, and objectivity must be observed. Complete means to include all relevant facts, essential means to examine the facts according to their importance, and objectivity means to ensure an impartial approach.
The check is subject to several restrictions: Among other things, companies are not checked completely due to time and resource-related reasons, but relevant random samples are taken. Nor is it the primary responsibility of the auditor to detect fraud. The auditor has to adhere to specified test standards and checklists that are standardized by the professional representation. Put simply, it is checked whether the documents made available have been correctly booked and assessed in accounting and not whether the documents as such are forgeries. A grey area begins here, which also describes the boundary to forensic accounting.
2. From audit to forensics
If the auditors have doubts about the truthfulness of the documents and the means available to them cannot clarify the matter within the scope of the audit mandate, this will lead to a restriction of the auditor’s report. At this point, at the latest, it is the responsibility of the auditor, but also of other bodies – such as the supervisory board or authorities – to convene a Forensic Accounting & Fraud Detection team.
In contrast to the normal examination, the forensics team assumes a fraud case from the outset and therefore checks under completely different conditions. First, forensics can concentrate on individual, specific transactions and does not have to assess the entire company. In this work, forensics goes far beyond the competence of an auditor. Targeted interviews are conducted to uncover contradictions, documents are forensically examined for possible forgery, special software is used for data analysis, and there is close cooperation with law enforcement authorities.