What is forensic audit?
A forensic audit is an examination and evaluation of a firm’s
or individual’s financial records to derive evidence that can be used in legal
proceedings. A forensic audit may be conducted to prosecute a party for fraud,
embezzlement, or another criminal behavior.
With the rise in the money laundering and other cases, RBI has made
forensic audit mandatory for large advances and restructuring of accounts. A
lot of companies are reaching the audit firms to seek extra comfort through
extended procedures. The forensic auditors requires analysis financial
transactions and other information’s related to the investment for use in court
of laws. And the reports produced by them are typically presented in the court
of laws as financial evidence against the frauds.
In the last two years, EY India has taken up seven to eight “large
engagement” to set up forensic frame work within the company. “This action was
taken because of the suggestions or the complaints received from the people
towards preventing the frauds,” said Yogen Vaidya, Partner, Forensic &
integrity services, EY India. There are some specific steps that the auditors
and companies are taking for risk mitigation: upgrading control mechanism,
using ‘heat map’ to find areas of concerns, process mining to spot deviations,
extensive back ground checks, setting up whistle- blower hotlines, all these
kinds of actions taken by the different audit firms used to fight the frauds.
Companies engage forensic auditors to answer specific
questions. Banker ask questions about trail of money, whereas government may ask
restated financial statements. Hence there is no standard format for forensic audit
report. Forensic auditors must provide the requested information and provide
sufficient evidence to be presented in courts.
Cutting across sectors, infrastructure to oil and gas to
mining, companies are looking for audit services that go beyond what’s normal
and commonplace. Checking the background information of the senior executives
or other personalities would help them to understand whether they are fits into
the culture and management of the company. While multinationals were already
doing it, increasingly many Indian promoter driven companies as well as IT and
ITeS firms are going for checks beyond managerial levels.
The famous multinational service network Deloitte launched a
product to mine and study end to end processes, thus pointing at deviations. The
idea was to combat fraud through use of technology. By the introduction of the Insolvency
and Bankruptcy code (IBC) demand for forensic audit has gone up among
independent directors, banks and resolution professionals.
To summarize, a forensic audit is a detailed engagement that
requires the expertise of not only accounting and auditing procedures but also
expert knowledge regarding the legal framework. A forensic auditor is required
to have an understanding of various frauds that can be carried out and of how
evidence need to be collected.
