What is forensic Audit?

Dishonest and fraudulent activity is present in virtually every organization of significant size, perpetrated by employees, customers, agents, claimants, providers, contractors, and vendors. With growing appreciation of the fact that there is an inherent risk that fraud will occur in an organization, auditors are becoming more vigilant in their duties with the aim of identifying fraud. However when fraud is discovered many organization’s are not sure who or where to turn to.

So, what happens when auditors or any other party do identify fraud in an organization? What should management do?

Management in most firms prefer to handle matters of alleged fraud as an internal affair. Most managers consider matters of fraud an internal affair that needs no external or independent intervention. Many managers expect or hope that the fraud will somehow go away once action has been taken on the suspected individuals.

No manager wants to have or be seen to have fraud problems. In fact most managers are often reluctant to acknowledge that problems exist -- unless the problem falls under someone else's area of responsibility.

This tendency toward willful blindness and/or willful ignorance results in a weak response just when a strong one is demanded. The organization sends a powerful message that it will at least tolerate, if not actually encourage, wrongdoing. Perpetrators know that they are safe. When such actions are taken there is a high likelihood of re occurrence of fraud.

How do you handle suspected fraud?

There is a misconception that once an external auditor has given an unqualified audit opinion on a firm’s financial statements, the firm is free from any fraud. It should be noted that in as much as an auditor has a duty to detect fraud and error, this is not his primary responsibility. Even when an external auditor discovers fraud and reports the same to management, the firm is unlikely to have necessary resources to investigate and take appropriate actions. Even internal auditors are not specialised to handle fraud investigations.

The concept of engaging professionals who have specialized in fighting fraud is yet to take root especially in Kenya. The term forensic audit and what forensic auditors do is still not well understood. In Kenya the concept of forensic audit is associated with government scandals. Organizations are reluctant to engage forensic auditors or accountants because such moves could be viewed as an acknowledgement by management that they are unable to handle fraud in the organization.

So what is forensic audit and how is it helpful to organizations faced with fraud.

Forensic audit can be defined as the application of accounting methods to the tracking and collection of forensic evidence, usually for investigation and prosecution of criminal acts such as embezzlement or fraud.

Forensic professionals provide assistance where facts and figures do not agree, or where behavior does not comply with expectations or regulations. Forensic auditors help investigate how long the fraud occurred and how the perpetrator carried it out, according to the Association of Chartered Certified Accountants. Forensic auditors can also act as expert witnesses in court proceedings.

Forensic audit aims at identifying whether a fraud has actually taken place, identify those involved and quantify the monetary amount of the fraud (financial loss suffered by the client), and to ultimately present findings to the client and potentially to court.

 Globally forensic accounting/ auditing has grown and today firms that provide forensic accounting services engage professionals with varied skills and have in their ranks Certified Public accountants, Forensic accountants, Forensic technology professionals, Data analysts, Lawyers, Finance professionals, Former investigative and law enforcement professionals. Forensic auditing professionals provide a wide range of services that include investigations, dispute advisory services, fraud risk management, regulatory compliance (incl. anti bribery & corruption and anti-money laundering services), intellectual property & contract governance, corporate intelligence, economics and forensic technology.“fraud is like cancer, once it starts, it grows spreads and if left untreated, it destroys its host”. There is therefore need for more appreciation of the immense benefits that could be derived by firms in engaging forensic accountants/ auditors whenever they are faced by a possibility of fraud.
Forensic accounting/auditing is a highly specialized field requiring highly skilled personnel who understand not only auditing and accounting techniques but also the relevant legal framework. Given the specialized nature of forensic accounting and the special skills and experience required, forensic services are usually provided at cost higher than traditional auditing. This may explain partly why most organizations are reluctant to engage forensic auditors but opt to leave the task of fighting fraud to their internal audit departments. Internal audit professionals may lack the requisite skills to effectively manage fraud in an organization and this may have adverse effects to the organization in the long term. As it has been observed

Kennedy Waituika

Kennedy is a forensic auditor working in Nairobi. He can be reached on Kenneddy86@yahoo.com