Fraud Auditing, Detection, and Prevention Blog

Forensic Auditing Vs. Forensic Investigation of Fraud

Apr 20, 2022 5:17:42 PM / by Leonard W. Vona

Check out the answers to last month's Trivia Quiz and why it matters for making our profession the number one reason for fraud detection:

How much more money is laundered in fiat currencies than in cryptocurrency?

400 times more money is laundered in fiat currencies than in cryptocurrency.

What percentage of system-generated alerts against money laundering resulted in false positives?

95% of system-generated alerts against money laundering resulted in false positives.

According to money laundering statistics of 2020, what percent of laundered money goes undetected?

90% of laundered money remains undetected, according to money laundering statistics of 2020. 

Source: Legal Jobs Blog

In my last blog, I asked the question: What do these statistics tell us about our efforts to prevent, deter, and deter fraud? 

 Most financial institutions are rated as having met the standards for anti-money laundering programs. But, the statistics -- assuming you believe the statistics -- tell us a different story. We need to understand the difference between compliance with best practices and the effectiveness of our processes. There is a correlation between the compliance with best practices for internal controls and our anti-fraud program. I am not suggesting that we ignore our internal controls, but I am suggesting we should not have internal control blindness. Just because we see the control does not mean that fraud is not lurking behind it.

IIA Expert Knowledge

This blog is part of a continuing series regarding IIA Competency framework. Last month we discussed “Applied Knowledge,” this month we will discuss the expert knowledge level. For ease of reference, the IIA competency states: Apply forensic auditing techniques in fraud prevention, deterrence, and investigation.

If you have read my prior blogs, you know that I research the terms and concepts. As a starting point, I researched the “auditors’ responsibility for detecting fraud.” In conducting my research, I looked at the standards and published material, and I focused on the concept of auditors “performing forensic auditing techniques.”

Forensic: used in or suitable to courts of law or public debate. (Source: Black's Law Dictionary)

Forensic accounting: Forensic accounting utilizes accounting, auditing, and investigative skills to conduct an examination into the finances of an individual or business. Forensic accounting provides an accounting analysis suitable to be used in legal proceedings. Forensic accountants are trained to look beyond the numbers and deal with the business reality of a situation. Forensic accounting is frequently used in fraud and embezzlement cases to explain the nature of a financial crime in court. (Source: Investopedia.com)

In my opinion, the phrase “forensic auditing techniques” raises more questions than answers.
  • What is a forensic auditing technique?
  • What is the difference between fraud investigation and forensic auditing?
  • What are the qualifications of an auditor responsible for performing forensic auditing procedures?
  • Is management ready for auditors to perform forensic audit procedures?
  • Are auditors with expert knowledge responsible for detecting fraud?

My Opinion for Now: Forensic Audit Procedures

Forensic auditing procedures are an initiative-taking search for fraud risk statements occurring in core business systems. As one of my clients stated, it’s looking behind the internal control. It must use fraud data analytics to search our data based on the indicators that correlate to the fraud risk statements in the scope of our audit. I do realize in smaller companies this may not be necessary, but it is the thought process of fraud data analytics that is important.

The forensic audit procedure gathers the highest qualitative audit evidence available. I define qualitative as evidence that is created external to the organization and stored external to the organization. Using the phrase “look behind the internal control” or as I have stated forensic auditing examines the substance of the internal control rather than the form of the internal control.

The audit opinion is about creditable evidence that a fraud risk statement is occurring because we have red flags of fraud that cannot be resolved with internally created and internally stored evidence.

My Opinion for Now: Forensic Investigative Procedures

Forensic investigative procedure is performed in response to an allegation. The process is focused on whether there is creditable evidence that the allegation has merit. The process will certainly differ depending on how and where the allegation started. But the result will be the same.

The standards followed by the investigation team will be the applicable rule of law, otherwise, the conclusion will not be admissible. I would suggest the Association of Certified Fraud Examiners has clearly delineated the process and standards for performing a fraud examination.

Illustration: Comparison of forensic audit procedures and forensic investigative procedures.

To illustrate, new vendor procedures: The forensic audit procedure would validate the legal existence of the corporation at the applicable government ministry and be alert to the red flags of a shell company. It would gather evidence that is externally created and eternally stored.

In contrast, the internal control approach to new vendor procedures would see evidence of the performance of internal control. It would gather evidence that is internally created and internally stored.

The forensic audit would conclude whether there are red flags that a fraud risk statement is occurring, indicating the need for a forensic investigation.

The forensic investigation would provide a report regarding the facts and circumstances surrounding the illegal act in accordance with the rule of law.

Dilemma: Forensic Audit versus Forensic Investigation

I suspect this is where the question of investigation versus audit is relevant. To oversimplify the question, in my opinion, an investigation is about offering evidence in a court of law, whereas an audit is about offering opinions to management.

The forensic audit is bound by the professional standards of auditing whereas, the forensic investigation is bound by the rule of law.

My goal is not to offer the definitive opinion on the topic but rather to suggest our profession needs to better differentiate between the two terms. I hope this will lead to the auditing profession becoming the number one reason for fraud detection.

Fraud Trivia Quiz

This month's topic is online dating fraud.

  • On which day of the year are online dates most vulnerable to fraud schemes?
  • In the USA alone, romance swindles cost how many millions of dollars in one year?
  • How does the sophistication of fraud concealment, apply to online dating fraud?

So, why are these important questions for the auditing profession? Find out next month!

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Topics: Litigation, Fraud Auditing, Red Flags, auditing

Leonard W. Vona

Written by Leonard W. Vona

Leonard W. Vona has more than 38 years of diversified auditing and forensic accounting experience. His firm, Fraud Auditing, Inc., advises clients in areas of litigation support, financial investigations, and fraud prevention.