Forensic Accounting -How it is different from normal audit procedures?

When we talk about the word “Forensic” it sounds like a medical/ clinical or sort of criminal investigation in a search of some criminals etc. and it would be hard to believe that we the Accountants are also getting associated with these terminology in a sense of doing investigations solely related to financial aspects (and not to do any interrogation like other security forces do).

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Let’s understand that the word FORENSIC – it means something which is related to law”- It means an act which is having an objective to conclude it results mainly for presenting the fact in the court of law would predominantly be called Forensic. It could be related to criminal, clinical or financials etc.

Now,

Leave other aspects aside, We the Accountants need to focus on the areas in forensic related to financial aspects (not a criminal or clinical investigations) only. Forensic Accounting generally provides a set of techniques which would gather information/ records/ evidence etc to substantiate the purpose for which it was initiated.

Put it in other way, When there is an incidence or Management of an entity requires to Investigate certain piece of transaction/ event to understand the likely frauds or/ & its processes then they may call for such investigation by inviting professional who specializes in these techniques and expect them to come up with a fact finding report so that a litigation may be initiated. One thing to remember that it is NOT essential/ mandatory to use such fact finding report for filing a case in court. But yes, it may very well be used to present in a court of law, hence professional who requires to issue such report should keep this in mind for any kind of such potential litigation issues.

It is now little bit clear that what does Forensic Accounting means and why it is done so, now let’s understand that why it is different from normal audit procedure-

1-      In normal audit procedures the main objective is to present true and fair view of a financial statements whereas in Forensic accounting, there is a specific transaction which needs to be investigated which may or may not be relevant for an overall presentation of financial statements,

2-      In normal audit procedure, Samples are being taken using various approaches as per relevant auditing standards however under Forensic Accounting there is no SAMPLE test allowed/ expected, hence complete investigation is envisaged,

3-      Under normal audit procedure, there is a threshold limit which is being set while performing such audit procedures and hence below that threshold limit, no audit procedure is performed whereas in Forensic, no such materiality concept applicable, all the details/ transactions should be investigated thoroughly without inferring any limits, 

4-      Under normal audit procedures the report which is being issued usually available for a bigger group of users however under Forensic it is usually for the Management and/ or for litigation purposes,

5-     Generally in normal audit procedures, several Management representations are being gathered to safeguard the work performed, however under Forensic there is nothing which can deprive any responsibility of person performing such forensic investigations,

6-    Usually the financial statement audits are being performed because of statutory requirements however Forensic investigations are mostly called by the Management as per their own choice/ requirements. However some of the cases a regulator could ask for such Investigations,

7-     The documents that are being gathered by an auditor while doing normal procedure are not subject to enquiry (except some peer reviews or regulators in some special situations only) however under Forensic investigation, the documents supporting the Investigation would need to be disclosed or communicated to the Management or in court of law as and when it is asked for. One of the major objective of Forensic investigation is to gather evidences which are presentable/ acceptable in COURT of LAW,

8-    It would not be completely true to say, under normal audit procedure there is no specific/ specialize skill set required however under forensic investigation it is utmost important to have experienced/ specialized resource who can think beyond the normal situations,

9-    Knowledge of Information Technology is required to perform under normal audit procedures, however in Forensic investigation IT related tools would be key to conclude such investigations and hence it needs expert knowledge,

The above differences were purely based on the general working scope between these two areas and it’s not an exhaustive list.

Future is purely based on DIGITISATION/ CYBER/ INFORMATION TECH etc and hence there would be massive requirements related to such Forensic Investigations because of complex and dynamic nature of business and the stream would be in high demand in coming days..

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