The essence of Forensic accountants in audit engagements

KEMI MONGOADI MATHATHO

MBA, CFE, IAT(SA) SQR Audit Director

There is a misconception that forensic accounting and forensic auditing are the same thing.

Auditors loosely define forensic accounting as the use of accounting principles and investigation techniques to identify fraud and theft. Forensic accountants qualify to testify in court and are instrumental in building legal cases.

With the growing complexity of the business environment and the growing number of business-related investigations, forensic accounting professionals are increasingly asked to assist in the investigation of financial and business-related issues.

Improving infrastructure of internal control and accounting systems

There have been many instances where forensic accountants are called in to determine the possible causes of the collapse of companies or SOEs who are involved in the reporting of financial statement misrepresentation. Global companies like Enron, Xerox and many state-owned entities like ESKOM, and SAA have harmed the reputation of their appointed auditors. In effect, shareholders, most especially the taxpayers, are financially affected. In order to mitigate fraud and theft, and to restore public confidence, entities can take steps to improve the infrastructure of their internal control and accounting systems.

Forensic investigations, such as shareholder and partnership disagreements regarding financial records for valuations, and business/ employee fraud investigations, which may involve fraud tracing, asset identification and recovery, forensic intelligence gathering, and due diligence reviews are all examples of forensic accounting activities.

The difference between financial audit and forensic accounting

The difference between financial audit and forensic accounting is the tasks’ objectives. The processes undertaken in forensic accounting versus auditing are where the real difference is. Auditing will typically have a programme and plan from the start that does not diverge in any shape or form. Contrary to that, a forensic accountant’s investigation may require several pivots or new directions depending on the information that is uncovered. A financial audit is performed with the main objective of evaluating the financial statements of the firm to assess its fairness and accuracy.

Forensic accounting is more concerned with establishing the existence of fraud, determining the extent of damage or losses involved as a result of the fraud or crime and gathering sufficient evidence for use by the courts of law to come up with a fair and judicial ruling for indemnification and/or prosecution.

With forensic accountants frequently specialising in detecting fraud, forensic accounting is one of the most in-demand areas of accounting, especially considering the losses brought on by corporate fraud. Soft skills such as conducting effective interviews are vital to any forensic accountant, and the volume of data produced by modern companies

requires analytical tools to direct the forensic accountant’s attention toward suspicious transactions or accounts. The key to forensic accounting engagement is the use of both skill and advanced analytical tools.

There are apparent similarities in the ways and methods of carrying out duties and responsibilities to attain the objectives. The financial audit pursues the indications of fraud, prepares a report on the extent verified, and makes recommendations for further investigations. However, these functions are performed as a result of the financial audit review and not as the financial auditor’s main goal. Financial audit examinations such as forensic accounting include verification and inspection of supporting documents to ascertain the accuracy of claims against the company.

In financial audit, the aim is to avoid penalties and sanctions whereas, in forensic accounting, the objective is to determine the possible existence of third-party claims or willful desire to evade the obligations.

• Confirming the existence and accuracy of receivable balances by sending out confirmation letters.

• Financial statement audit and forensic audit of banking institutions both include confirmation of balance and existence of accounts.

The basic aim of the financial audit is to aid management, while forensic accounting generally seeks evidence to support litigations.

The outcome of a forensic audit is far more unpredictable

At times, the forensic accountant may have to reconstruct books and

records, or specific transactions, from whatever information is available. The specific information needed may not be readily available or may not be in a form that the forensic accountant needs or can use. Thirdparty verification and confirmation. At times, the forensic accountant may need to obtain third-party verification to confirm matters that arise during the investigation. These third parties may include vendors, customers and banks.

The audit engagements permit a forensic accountant and auditee to divide the investigation into phases, allowing for the control of the investigation and its costs. In practice, the possible results of an ordinary financial audit are pretty much predictable (e.g., unqualified, qualified, disclaimer, or adverse opinion), whereas the outcome of a forensic audit is far more unpredictable.

Yesterday’s experience is not sufficient to track fraudsters of today

Experts in this area of forensics must be active in order to guarantee that they have the necessary knowledge to adhere to the standards and fulfil any forensic accounting/auditing engagements.

It should also be noted by forensic accountants/auditors that the experience of yesterday is not sufficient to track the fraudsters of today. Violations and fraud risks are becoming more complex by the day, and rapid technological advancement is making fraud discoveries harder.

So should one suspect that they or their company are victims of fraud, it is essential that they appoint a forensic accountant within the audit engagement to carry out the work and bring the case to a satisfactory conclusion. 