“I don’t have fraud. I get an annual audit.”
Business owners can be guilty of thinking this, much to the frustration of fraud examiners and forensic accounting professionals.
While auditors, fraud examiners and forensic accountants are on the same team, their jobs differ and sometimes pit one against another.
The way to overcome this is to understand the roles and limits of each job.
Who they are
The auditor: An external auditor provides independent, objective assurance regarding your organization’s operations and financial reports and helps you improve the effectiveness of your risk management, controls and processes, though a systematic and discipline approach.
The fraud examiner: A fraud examiner is involved in the prevention, detection, investigation or resolution of fraud. They are responsible for establishing the scope of a fraud examination at its outset and then continuously reevaluating that scope as the examination proceeds.
The forensic accountant: Using systematic processes and investigations of data, forensic accountants examine the finances or compliance practices of an individual or organization, usually in relation to an investigation into suspected fraud or a litigation matter.
What they do and don’t do
The auditor determines whether a company’s financial statements are stated fairly, without any material errors or omissions. Audits are not designed to detect or prevent fraud, if the amount is immaterial.
The fraud examiner’s objective is to obtain evidence and information about a fraud that is complete, reliable and relevant; establish predication; create a report and testify to the findings. They also assist with fraud detection and prevention techniques.
The forensic accountant is often brought in when an issue is being litigated and a financial argument needs to be decided in a court of law. A forensic engagement does not determine whether company financials are compliant with Sarbanes-Oxley or other federal regulations and does not establish a level of materiality.
How they do it
Auditors act within specific agreed upon procedures, while forensic examiners look at all procedures. Auditors also do not consider qualitative and nonregulatory factors, such as unethical behavior or poor culture. Auditors tend to use the same testing procedures with set threshold parameters.
A fraud examiner will want to have a solid grasp of the culture and ethos of the employees, as well as the possibility of conjecture, unsubstantiated opinion and bias of witnesses and others. Professional standards also dictate that a fraud examiner cannot work under agreed upon procedures.
Forensic accountants cannot attest to or opine to the validity or material accuracy of the financial statements, nor can they work under agreed upon procedures. Most often the financial statements are tools used to see what was reported or where misappropriations were made. This is accomplished through the use a variety of data analysis to find variations and anomalies, such as horizontal and vertical analysis, Benford’s law and the Beneish Model. While the data analysis will not say exactly how a fraud may have occurred, it will provide an area for the forensic accountant to dive deeper.
Materiality and sampling are two “things” auditors have at their disposal. Neither are available in the forensic investigation.
Audits sample and look at material facts. Fraud examiners and forensic accountants look at all transactions, with no minimum dollar amount. Every penny should be able to be tracked to a legitimate business expense and/or revenue. A $10,000.00 embezzlement may not be material to a large corporation, but it is still theft.
Some audits do nothing more to address fraud than to ask, “Do you know of any fraud within the organization?” This may be enough to satisfy the audit in inquiring about fraud, but it would never satisfy the professional standards of a forensic accountant.
This is not an attack on audit, as there are many things that an audit covers that a forensic investigation or fraud investigation wouldn’t.
A forensic engagement and fraud investigation cannot determine whether someone has committed a fraud. By professional standards, that is a determination for a trier of fact. The investigator can only highlight the transaction, where the funds came from, where they went, and what the company policy and procedure states about that specific kind of transaction. It is left to those with the appropriate authority to decide whether a fraud has occurred.
Lastly, forensic investigations look at individual actions and transactions, not general company performance. An example of this in litigation is often a determination of whether partners in a business received equitable compensation.
Concerned about fraud?
The risk of fraud and litigation exists within every organization. Wipfli can help you reduce your risk of fraud or assist in any financial investigation. We regularly perform fraud prevention checkups, fraud risk assessments, forensic investigations, internal controls reviews, incident response, expert witness testimony and more. Click here to learn more.
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