Financial and forensic auditors: the same, but different

Forensic auditors and financial statement auditors are sometimes thought of as fulfilling the same roles, principally because of the word “audit.” But it’s like a stock car and a dragster: they’re both race cars, but they race differently. Television crime drama detectives invariably ask, “What have we got?” when they walk up to a murder scene. The person to whom the question is directed, usually shown bending over the body, is a forensic pathologist, whose job is to find the details and evidence to help solve the mystery.

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That’s the role – though somewhat less dramatic – of a forensic auditor. Using numbers, financial data, corporate and individual records, and other information, the forensic auditor dives deeply into an individual’s or organization’s data for many reasons, among them:

  • To discover asset theft or other fraud, embezzlement, or various forms of wrongdoing.
  • To determine if a spouse in a divorce proceeding is hiding income or assets from the other spouse.
  • Ensuring that organizations have followed financial reporting rules and laws.

Forensic audits, therefore, are usually conducted to find out if wrongdoing has occurred. Forensic auditors – in effect, auditing detectives – open up the “body” of financial information to see where, and to whom, the evidence leads. Among the issues they deal with, along with those mentioned above, are securities fraud; white-collar crimes; contract and procurement fraud; bankruptcy fraud; locating hidden assets; insurance claims; and more.
 
The American Institute of Certified Public Accountants (AICPA) description of forensic accounting says,

“…in the context of litigation, the term forensic means to be suitable for use in a court of law.”

As such, forensic auditors frequently serve as expert witnesses in legal proceedings."
 
The FBI itself relies on forensic accountants in its investigations. As it explains on its website,

“At the FBI, our forensic accountants conduct the financial investigative portion of complex cases across a wide variety of Bureau programs—investigating terrorists, spies, and criminals of all kinds who are involved in financial wrongdoing.”

However, forensic audits aren’t exclusively wrongdoing-related. For example, forensic audits are essential to determining the true value of a business before it is bought or sold. The work of a financial statement auditor is in the same field, but with a different focus. A financial statement auditor, or independent auditor, reviews financial information to determine if an organization - public, private, governmental, or non-profit - is accurately disclosing its financial position and the truthfulness of its performance.
 
These audits determine if a statement meets Generally Accepted Accounting Principles (GAAP). The audits themselves are audits carried out using Generally Accepted Auditing Standards (GAAS). These standards give everyone the same roadmap and, in theory, ensure audit consistency and quality. At the audit’s conclusion a report is issued. Often additional reports are also issued citing operational areas that can be improved. Accurate financial statements are crucial to boards of directors; management; investors; creditors, and other stakeholders, whose decisions depend on assurance that the financial statement reflects the organization’s true financial picture.

A financial statement audit delves into a small sampling of transactions or business activities. False, misleading, or incomplete data given to financial statement auditors can result in inaccurate findings, which leads to a forensic audit.
 
This leaves two things for organizations to consider when thinking about these audits: use only accurate and honest information in financial statements, and when a forensic accountant starts digging into your financial information, don’t have buried anything that will smell bad when unearthed.

 

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This article was recently printed in the Knoxville News Sentinel.

Tagged Audit, #JimmyTalk, Financial Statement Auditor, Forensic Accounting, Forensic Auditor