Process of Forensic Accounting

Each Forensic Accounting assignment is unique. Accordingly, the actual approach adopted and the procedures performed will be specific to it. However, in general, many forensic accounting assignments will include the steps detailed below.

A Forensic Auditor must initially consider whether his/her firm has the necessary skills and experience to accept the work. Forensic audits are highly specialized, and the legal framework.

Step -1         Initialization

It is vital to clarify and remove all doubts as to real motive, purpose and utility of the assignment.

It is helpful to meet the client to obtain an understanding of the important fact, players and issues at hand. A conflict check should be carried out as soon as the relevant parties are established. It is often useful to carry out a preliminary investigation prior to the development of a detailed plan of action. This will allow subsequent planning to be based upon a more complete understanding of the issues.

Fraud audits begin with an initialization process. Internal business owners or managers, government agencies or other business may require a fraud audit on a company. Reasonable expectation must exist in order to conduct a fraud audit. Fraud auditors will review each request on case-by-case basis to determine if circumstances exist whereby fraud may be going on. Incompetent accounting or handling of financial information does not necessarily indicate fraud; intent is an essential element for fraud to exist.

Step-2           Develop Plan

The forensic audit team must carefully what they have been asked to achieve and plan their work accordingly. This plan will take into account the knowledge gained by meeting with the client and carrying out the initial investigation and will set out the objectives to be achieved and the methodology to be utilized to accomplish them.

Planning a fraud audit will occur if auditors determine enough improprieties exist in an organisation’s financial or business operation. Auditors will gather information about the organisation and begin a review process of the company. Each approach to fraud audits is different, primarily because fraudulent schemes come in different varieties or situations. Auditors must also try to determine who is involved in perpetrating the fraud. Gathering evidence and connecting individuals to specific events can also help auditors develop an audit plan for fully investigating a company.

The objectives of the investigation will include:

·         Identifying the type of fraud that has been operating , how long it has been operating for, and how the fraud has been concealed

·         Identifying the fraudster (s) involved

·         Quantifying the financial loss suffered by the client

·         Gathering evidence to be used in court proceedings

·         Providing advice to prevent the reoccurrence of the fraud.

The investigators should also consider the best way to gather evidence – the use of computer assisted audit techniques, for example, is very common in fraud investigations.

Step- 3         Interviews

Auditors will conduct interviews with business owners, managers and employees to assess the depth of fraud in the organisation. This can also help auditors find witnesses who may have information on who is directly involved in the fraud. Finding multiple opinions or comments from employees can help strengthen the argument of fraud existing in an organisation. Auditors initially avoid interviewing individuals who actually conducted the fraudulent activities. Avoiding these individuals helps auditors not scare these individuals away from the investigation.

Forensic interviews are also conducted  using the science of professionally using expertise to conduct a variety of investigative interviews with victims, witnesses, suspects or other sources to determine the facts regarding suspicions, allegations or specific incidents in either public or private sector settings.

Step- 4            Obtain Relevant Evidence

Depending on the nature of the case this may involve locating documents, economic information, assets, a person or company, another expert or proof of the occurrence of an event.

In order to gather detailed evidence, the investigator must understand the specific type of fraud that has been carried out, and how the fraud has been committed. The evidence should be sufficient to ultimately prove the identity of the fraudster(s), the mechanics of the fraud scheme, and the amount of financial loss suffered. It is important that the investigating team is skilled in collecting evidence that can be used in a court case, and in keeping a clear chain of custody until the evidence is presented in court. If any evidence may be challenged in court, or even become inadmissible. Investigators must be alert to documents being falsified, damaged or destroyed by the suspect(s).

Evidence can be gathered using various techniques, such as:

·      Testing controls to gather evidence which identifies the weaknesses, which allowed the fraud to be perpetrated

·    Using analytical procedures to compare trends over time or to provide comparatives between different segments of the business

·    Applying computer assisted audit  techniques, for example to identity the timing and location of relevant details being altered in the computer system

·     Discussions and interviews with employees

·     Substantive techniques such as reconciliations, cash counts and reviews of documentation.

Step- 5      Perform the analysis

The actual analysis performed will be dependent upon the nature of the assignment and may involve:

·         Calculating economic damages;

·         Summarizing a large number of transactions;

·         Performing a tracing of assets;

·         Performing present value calculations utilizing appropriate discount rates;

·         Performing a regression or sensitivity analysis;

·         Utilizing a computerized application such as  a spread sheet, data base or computer model; and

·         Utilizing charts and graphics to explain the analysis.

Step- 6        Reporting

Issuing an audit report is the final step of fraud audit. Auditors will include information detailing the fraudulent activity, if any has been found. This report provides external business stake holders with information regarding the organisation’s business operations. Government agencies may also wish to see the audit report. Significant fraudulent activity may result in civil or criminal charges against the individuals conducting the fraud.

The client will expect a report containing the findings of the investigation, including a summary of evidence and a conclusion as to the amount of loss suffered as a result of the fraud. The report may include sections on the nature of the assignment, scope of the investigation, approach utilized, limitations of scope and finding and/or opinions. The report will include schedules and graphics necessary to properly support and explain the findings.

The report will also discuss how the fraudster set up the fraud scheme, and which controls, if any, where circumvented. It is also likely that the investigate team will recommend improvements to controls within the organisation to prevent any similar frauds occurring the future.

Step- 7          Court Proceedings

The investigation is likely to lead to legal proceedings against the suspect, and members of the investigative team will probably be involved in any resultant court case. The evidence gathered during the investigation will be presented at court, and team members may be called to court to describe the evidence they have gathered and to explain how the suspect was identified. It is imperative that the members of the investigative team called to court can present their evidence clearly and professionally, as they may have to simplify complex accounting issues so that non-accountants involved in the court case can understand the evidence and its implications.