"Isn't that what auditors do?"

As a forensic accountant, I have been asked by many clients what the main difference is between forensic accounting and auditing.

A forensic accounting commitment shall apply accounting, auditing and investigative skills to the examination, analysis and reporting of financial information in a manner appropriate to the court.

The audit shall be carried out by an internal or external auditor who shall comply with a set of standards established by the American Institute of Certified Public Accountants.

Auditing is specifically checking to see if the accounts and/or systems conform to a predefined set of specifications (GAAP for example).

An audit is the process of examining and evaluating the financial statements of any organization. An audit’s objective is to provide assurance, to the intended user, that the information contained in those financial statements is a fair and accurate representation of the organization. Audits are regulated and must follow the GAAP (Generally Accepted Auditing Standards).

One of the prominent distinguishing features between an audit and a forensic accounting engagement is that the audit program is formulated to provide assurance that certain parts of the financial statements are reasonable and a forensic accounting engagement is formulated to analyze a specific set of transactions or to look for misappropriated assets. Auditing focuses on identifying errors and preventing them. Prevention can be achieved as a result of an effective internal control system.

For example, audits may establish a threshold of materiality whereas forensic accounting engagements don’t have a materiality threshold. The auditor reviews the effectiveness of the internal control system by sampling transactions and not by a complete review of all transactions. The process can reveal errors. All errors are not considered equal. Some are important and are referred to as material. In the field of forensic accounting, every act or evidence of suspicious activity is material.

Audits often fail to detect fraud that is below the materiality level established by the auditor performing the engagement. According to the Association of Certified Fraud Examiners “Report to the Nations,” in 2016 only 3.8% of all occupational frauds were detected by external audits.

Forensic Accounting includes an investigative approach. Instead of seeking conformity, it involves looking for outliers or specific patterns. The outcome of a forensic accounting job is less general (than an audit report) and is generally useful as evidence in court concerning certain occurrences.

Forensic accounting services are usually needed when a dispute or a lawsuit is already in place. We are often asked by the client’s attorney to aid in the litigation process as an experience. The aim of the forensic accountant is to analyze, report, and assist the court of law in understanding the financial aspects of any case of fraud.

Though auditing and forensic accounting professionals use the same accounting skills, the purposes of the engagements are different. For that reason, it is important to explain to clients the difference and understand their needs, to provide better advice about the type of engagement that will benefit them the most.

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References

1. Compared And Contrasted To Traditional Accounting And Auditing, Dahli Gray, Loyola College, USA

2. Association of Certified Fraud Examiners, Inc., 2016

3. Keith Perry, Director of Global Accounting, Agrinos, Inc., 2013