Forensic Auditing is a must for every Company

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I”ve been involved in the accounting and auditing world for more than 17 years and I found that the forensic auditing is a must for every company especially in a Listed Companies.

Why?

Because you can see clearly that major accounting scandals involving Enron, Worldtel and Parmalat have been widely reported. In all these cases, the methods and purpose of manipulations in financial statements were peculiar to the motives of such manipulations.

In another instance, KPMG Forensic conducted survey of directors of Canada’s 75 biggest companies, which revealed that more cases of financial accounting manipulation would emerge in the coming year.

Companies Auditors’ Report requires auditors to report, amongst others, “whether any fraud on or by the company has been noticed or reported during the year. If the answer is yes, the nature and the amount involved are to be indicated”. In this background, the techniques of Forensic auditing have gained importance.

Accounts- Actual Vs Estimantion

Financial statements, compiled on accrual basis are represent the following:

Actual receipts & payments (cash basis)
Recognition of certain items of expenditure or income on accrual basis, in accordance with the applicable statements. For example, recognition of sale may be either on appropriation of goods for delivery or on actual delivery, both methods in accordance with standards but as suited to the needs of the entity
Estimates of provisions and bad/irrecoverable debts, or write back of creditors and provisions no longer required, etc.
Provisions for various intangible items, like foreign currency fluctuations, retirement benefits based on actuarial valuation or any other basis
Adjustments on account of prior period transactions The financial statements cannot be said to present exactly the position of financial affairs. The true and fair presentation is an attribute to the methods adopted in compiling such financial statements. However, the basic tenets of the principles of double entry accounting are to be adhered to in maintenance of books of accounts.

Motives for Fraudulent

Most of cases of fraud that have been reported by management can be identified as follow:-

Management is under pressure, from sources outside or inside the entity, to achieve (perhaps unrealistic) target, where consequences of failure are significant.
To increase the entity’s stock price or earnings trend.
To keep the results attuned to knowingly unrealistic/non-achievable forecasts/commitment made to creditors and lenders.
Tax-motivated reasons.
To raise capital either by further issue of shares at a premium and/or through borrowings Corporate frauds are results of manipulation of accounts and accounting jugglery designed to deceive others for wrongful gains.

Forensic Auditing

This term has not been defined anywhere. However, since the object is to relate the findings of audit by gathering legally tenable evidence and in doing so the corporate veil may be lifted (in case of corporate entities) to identify the fraud and the persons responsible for it (a criminal offence).