Financial or Forensic? Which Audits to Do When

by Scott Koman

Many people think financial audits and forensic audits are two sides of the same coin, but these two types of examinations are, in fact, different in several critical ways. Understanding these differences, and knowing when to conduct which, is critical to your organization’s financial health and future stability.

Although we hope in the intrinsic goodness of humanity, it is a sad fact of corporate and everyday life that fraud happens. Through deceit, secrecy, and the abuse of positions of trust, money can easily fall into the wrong hands. Fraud is especially prevalent in small businesses and organizations, where internal controls may be limited. A secretary may write expense checks to herself, a manager may withdraw thousands from a little-used fund, or an analyst may misstate or misrepresent facts on vital forms, all to benefit themselves.

An organization should never rely only upon its financial audit to detect and report fraudulent activities. Why? Because financial audits take a more broad-brush, “it-is-what-it-is” approach to accounting. They are designed to be an objective examination and evaluation of an organization’s financial statements to ensure that the records fairly and accurately represent the transactions they claim to depict.

They may highlight the one satellite office that is dragging down the bottom line, a dramatic change in revenues and expenses, or a high-performing product line. In contrast, it is the forensic audit that will stand up in court, when trouble is brewing and litigation looms large.

Financial audits

Financial audits can be conducted internally by an organization’s employees, or externally, by an outside firm. An external audit may be required to ensure compliance with applicable rules, laws, regulations and standards.

These types of audits are also helpful to provide additional information to management, owners and boards of directors, and to inspire confidence among investors.

When trouble looms, and a civil or criminal prosecution is in the cards, a more specialized forensic audit may be in order.

Forensic audits

As the Forensic CPA Society puts it, “Forensic accountants not only utilize their accounting and auditing skills, but also use their investigative skills to determine what events actually took place in a financial setting.”

A forensic audit may occur before fraud has been confirmed, but some suspicion exists. A forensic audit will help to determine whether fraud, or any other irregularities, such as negligence, has occurred. In this case, the sooner the audit is done, the better. Fraud can go undetected for extended periods, causing extensive damage and steep monetary losses, and a prompt forensic audit can minimize the damage.

A forensic audit is absolutely necessary after a fraud has already occurred.

A forensic audit will determine who was involved; assess whether collusion was present; quantify the amount involved in the theft; and uncover how the fraud was able to happen.

The forensic accountant will work with the organization and its legal team to conduct an audit in anticipation of litigation.

The result of the forensic audit is typically a fact-based report of findings. The report may be used to recover losses from a fraudster or an insurance company. The forensic accountant can stand by findings as an expert witness during any legal proceedings.

Routine forensic audits can help prevent similar cases in the future and act as a deterrent, since employees will know there is an additional level of scrutiny.

Bottom line

Thinking that a financial audit is adequate protection against fraud is a common but high-stakes mistake. If you suspect fraud, find a forensic accountant, who will be a capable ally in helping to determine what happened, if anything, and who was involved.

It may just be the first step in a long journey to uncover, punish, and prevent fraudsters from draining your assets. When fraud is suspected, the numbers will tell the real story.

Scott A. Koman, CPA, CFE and FCPA, is a supervisor at Boyer & Ritter LLC, where he is a member of the Forensic, Litigation Support and Consulting Team. Contact Scott at 717-761-7210 or skoman@cpabr.com