Forensic Audit Vs. Forensic Accounting

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Sarang Khatavkar
Sarang Khatavkar
Sarang is one of the first forensic accountants in the country who worked extensively with the law enforcement agencies across the country to solve the fraud problems. He is a Certified Anti Money Laundering Expert. He worked in the shipping industry before joining Riskpro and is instrumental in exposing the Trade based money laundering cases for the banking sector. He investigated numerous Ponzi Schemes for the Government of Maharashtra and presented in the court of laws as the expert witness to justify the findings of the reports.

Off late i have seen number of Indian experts using forensic audit as synonym of Forensic Accounting. Which makes me think what is forensic audit exactly ? There is a lot of literature which highlight the differences between forensic accounting and fraud examination. Those who are certified as forensic accountants from India Forensic can refer the Forensic Accounting Manual.

This article attempts to compare these two seemingly similar professions. Both the professions deal with financial evidences but differ in methods, techniques and tools used in the process.

Difference between forensic accounting & auditing

To understand the difference between forensic audits and accounting one needs to understand the gamut of frauds. There are two types of frauds in business world.

  1. Frauds against business – Generally committed by the Employees, Vendors or Clients or in connivance of all these parties
  2. Frauds for business – Generally committed by the promoters and shareholders of the business to deceit the bankers, revenue authorities and regulators.

The primary difference between forensic audits and accounting lies in the purpose of the audit. A forensic accounting assignment relates to Frauds Against the Business. This issue may involve employee fraud or a dispute with a vendor or customer.

On the other hand, forensic auditing is related to Frauds for the business. Forensic audits relate directly to financial statement frauds whereas forensic accounting require investigative techniques and technology. The auditor’s report must meet the standards for presentation in court.

Forensic Accounting assignments are complex in nature. Forensic Accountants answer the questions such as who perpetrated the fraud ? what was the modus operandi ? and what were the fraud losses?

On the other hand forensic auditors are engaged to check the trail of money. Source of funds to utilization, forensic auditors answer the questions such as motives of the businesses behind the fraud.

In India, forensic auditors witnessed boom, when bankers started scouting for experts to ascertain willful default in borrower accounts.

In the proceedings of NCLT or in asset reconstruction mechanism, forensic audits play a crucial role. Many times law enforcement agencies summon the forensic auditors for investigation of Ponzi schemes.

Tools required by Forensic Experts

Forensic Accountants need different analytical tools based on the scenario they investigate. Many times the scope of forensic accounting is challenging. Forensic Accountants look beyond numbers, they use digital forensic tools to recover the deleted data, CDR tools to analyse mobile phone records. They use expert witnesses to unearth signature forgery. Government Agencies such as revenue departments may summon forensic accountants to take the image of the computer system to recover the deleted data and to analyze the emails which can be produced in court of laws to recover the taxes.

Forensic Audits primarily deals with the trail of money. But the work becomes challenging when the expert Public Accountants or advisors create layers of entities to route the transactions.

Court cases requiring the evidence provided by a forensic accountant may include commercial litigation, business valuation, divorce, bankruptcy and, of course, fraud

Forensic audits require analysis of financial transactions and compilation of the information for use in court cases. The forensic auditor may also examine a company’s financial records to determine reliability, accuracy and the strength of internal control systems. There are very few tools like End Use Monitoring System developed by Riskpro

Who appoints Forensic experts

Financial audits confirm certain information such as bank balances or vendor and customer accounts with the appropriate third parties. This provides the necessary confirmation of the company’s accounting practices and standards. Many of the procedures followed in the forensic audits are similar to regular audits. Forensic Audits are ordered by the regulators, revenue authorities or bankers.

On the other hand forensic accountants are appointed by the business themselves when they suspect a fraud or data leakage. The objective of such assignment is to identify the evidences to be produced in the court of laws. In India, there are very few accounting firms which deal in this aspect. Forensic Audit firms are fairly large in numbers due to the regulatory requirements. Enforcement of Insolvency act created new avenues for the forensic auditors.

Education and Certification 

A forensic accountant’s education begins with Certified Forensic Accounting Professional. Beyond that, forensic accounting requires knowledge of specific areas of accounting and investigative techniques. These include court procedures, legal research and the ability to recognize criminal activity. A forensic accountant must understand more than just fraud. She also must understand insurance claims, insider trading, and legal contracts.

National Stock Exchange and Indiaforensic Center of Studies, among others, provide Certified Forensic Accounting Professional program.

Differences in Final Reports

To an external observer, forensic audits and forensic accounting may look similar. Both types of forensic experts closely examine and confirm financial position, using different methods. The two types of assignments differ significantly in their end product – the auditor’s report.

Because companies engage forensic accountants to answer specific questions, a standard forensic accounting report format does not exist. The forensic auditor must supply the requested information and provide sufficient evidence to argue the results in court.

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