What is forensic audit?

Forensic Audit can be termed as an examination and evaluation of a firm’s or individual’s financial information for use as evidence in court. A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims.

The objective of forensic audit is to relate the findings of audit by gathering legally tenable evidence and in doing so the corporate veil may be lifted (in case of corporate entities) to identify the fraud and the persons responsible for it (a criminal offence).

While conducting forensic audit regularity and propriety of off balance-sheet items (like contracts, etc.) are examined.

Forensic auditing aims at legal determination of whether fraud has actually occurred. In the process, it also aims at naming the person(s) involved (with a view to take legal action).

Forensic auditing[1] is focused on the identification, interpretation, and communication of the evidence of underlying strategic economic and reporting events. It not single-event based, like a fraud examination, and a forensic audit is not used to render an audit opinion. As such, forensic audits are easily adapted to a principles-based accounting environment with broad guidelines applied to a variety of accounting investigations without using rule-based audit approaches or more narrowly-focused fraud practices.

As put forth by the new Companies Act’2013 in terms of Section 143(3), now Auditor is required to report on frauds.

Hence, both nationally and internationally, Auditor’s legal liabilities for not discovering their client’s fraudulent financial actions are simply not going to disappear. It is hard to understand how the liability for undiscovered frauds or other malfeasance can be reduced by continuing to strongly rely on the present rule-based, audit-reporting model. When forensic accounting practices are incorporated into a separate forensic audit, they have the potential to overcome problems associated with identifying financial malfeasance within the traditional audit-reporting model.

Big Four along with Grant Thornton and BDO International released a white paper entitled “Serving Global Capital Markets and the Global Economy” herein the “Global Report” (Global Public Policy Symposium 2006). The Global Report is concerned with the legal liabilities accounting firms are facing from a host of expanding lawsuits based on stockholders’ and others’ losses from after audit negative financial events such as fraud. To counter this hostile legal climate and protect the firms from liabilities judgments, the Global Report’s authors suggest that all public companies have forensic audits.

The Public Company Oversight Board (PCAOB) issued Release No. 2007-001 in January 2007. The Release defines forensic accounting as operating outside the courtroom and applying “special skills in accounting, auditing, finance, quantitative methods, certain areas of the law, and research, and investigative skills to collect, analyze, and evaluate evidential matter and to interpret and communicate findings (Public Company Oversight Board 2007)

The PCAOB has stated that “forensic audits can be performed to achieve various objectives and can include a variety of different procedures”.

Taking into account the above developments globally perhaps it is time to start learning A,B,C of Forensic Audit.

(Author CA Piyush Baranwal, DISA, Certified FAFP(ICAI),Certified in International Taxation(ICAI) can be reached at mail@baranwal.in or 9818133880,Articles can be accessed and read at forensicpundit.com)

[1] Relevant extract from Journal of Digital Forensics, Security & Law,Vol.4(1)Defining a Forensic Audit by G.Stevenson Smith & D.Larry Crumbley.