Financial irregularity is one of the thorny issues organizations tend to grapple with in their operations. It is a matter of interest in terms of demanding accountability regarding the use of resources. The issue is a yearly ritual in the public financial management of government institutions and attracts wide national commentary. The private sector also faces similar challenges confronting it. But then, what is a financial irregularity? This article looks at the issue further with a forensic auditing perspective.
Financial irregularity itself can be understood as an intentional misstatement or omission of information related to a financial transaction. Typical financial irregularities include embezzlement of funds, incidents of fraud, misappropriation of assets or non-compliance with a law or a relevant regulation. These forms of financial irregularity encompass further details.
- a) Embezzlement of Funds
This takes the form of employees diverting funds from the organization into other accounts to benefit from the proceeds or withdrawals.
(b) Asset Misappropriation
There are many incidents of irregularity which fall into this category. The common feature is the cash theft. Others include:
(i)Fraudulent disbursements – the organization or the company’s funds being used to make fraudulent payments. A common example includes billing schemes where payments are made to a fictitious supplier.
(ii) Inventory frauds – theft of inventory (stock of goods) from the company (stores) or manipulation of related documents or files.
(iii) Misuse of assets – employees using a company’s assets for their personal interest. This also has to deal with conflict of interest.
(c) Financial Statement Fraud
This is also known as fraudulent financial reporting. It involves a deliberate omission or an intentional misstatement in a financial statement to deceive stakeholders. For instance, a misstatement or an omission may be done with the intention to hide liabilities or improve profitability. Some of the incidents of fraudulent financial reporting are the falsification of accounting records, omission of a transaction, balances or disclosures from the financial statements or the misapplication of relevant financial reporting standards.
Financial irregularities can lead to losses, expose the organization to a reputational risk and even legal liabilities. In fact, the impact can be devastating to an organization and its stakeholders. Hence, businesses must take proactive measures to prevent those irregularities or detect them as early as possible if they occur. In dealing with financial irregularity brings to the fore what is known as forensic auditing or forensic investigation. Thus, forensic auditing refers to an investigative procedure which must be carried out in order to produce evidence of financial irregularity. It is indeed, a powerful tool that any organization can use to uncover financial misconduct it is encountering and to enable it protect its resources.
Accepting A Forensic Audit Engagement
Forensic auditing requires technical knowledge of accounting, auditing or law and sheer diligence in an atmosphere of independence or freewill to apply investigative techniques to gather evidence and determine the cause of the issue. What then happens when an audit client is involved? In such a situation, a potential ethical dilemma arises and exposes a firm to audit threats of self-review, advocacy and management and objectivity. It is imperative for professionals to weigh the consequences and ensure that there are enough and robust safeguards in place to avoid falling into the trap of conflict of interest and public uproar That said, a forensic audit is a meticulous process and involves some fundamental steps.
Forensic Audit Process:
- Planning: This involves defining the scope or the terms of reference of the audit and developing a plan for the investigation accordingly. Generally, objectives of the investigation should include:
- Identify what fraud, if any, is being carried out
- Discover how the fraud was concealed
- Identifying the suspect(s) involved
- Quantify the (amount of financial) loss suffered due to the fraud
- Gathering relevant evidence to support those occurrences or in case legal suit arises.
Evidence can be gathered from various sources such as financial statements, transactional records and other relevant documents by using various techniques such as:
- Testing internal controls to identify any procedural weaknesses culminating in the irregularity or incidents of fraud.
- Substantive techniques such as account reconciliations, cash counts and reviews of documentation.
- Using an analytical procedure or tools to compare trends over time.
- Applying computer assisted audit techniques to identify the timing and location of relevant details being altered in the computer system
3.Forensic Analysis: This stage involves painstaking and detailed data analysis of evidence so gathered to establish a pattern and identify any of the irregularities. The analysis or investigation should make room for formal interviews with employees and other stakeholders or those concerned. Documents and other evidence gathered must be kept in a safe custody.
Reporting: The findings of the forensic audit must be presented in a detailed report which outlines the findings of the investigation (any identified irregularities), a summary of evidence so gathered and the recommendations that can prevent reoccurrence of similar incidents of irregularities. The report can then be presented to the client. The report can serve as a reference point to file a legal suit if the company wants to pursue it in court.
Benefits of a Forensic Audit:
Forensic audit provides numerous benefits to organizations and the public. Some of the benefits are:
- Business Process Improvement: It helps to improve business processes by highlighting weak internal controls or weaknesses in other operational areas. The process helps to detect and prevent financial irregularities from causing significant damages or becoming the norm in a company. Thus, improving business process means enhancing efficiency and effectiveness.
- Mergers and Acquisitions: During mergers or acquisitions, businesses often employ forensic audits as a due diligence strategy to gauge the financial health and viability of the target entity and, therefore, helps them to make informed decisions.
- Improving financial transparency: Forensic audits can improve financial reporting processes which invariably provides greater transparency into financial transactions. In effect, organizations are to make more informed and data-driven decisions.
- Mitigating Risk: Forensic audits can help organizations to identify and mitigate risks thereby protecting a business from the impacts of those risks. Risk management in this regard ensures business continuity, enhances reputation and commitment to financial integrity and transparency.
- Evidence for Legal Proceedings: Forensic audit findings also provide a cogent evidence that can be used in a legal proceeding to prosecute suspects of financial crimes.
- Regulatory Compliance: Regular forensic audits can be used as a mechanism for ensuring strict compliance with an industry-specific regulations and to prevent financial misconduct.
This foregoing article provides an insight into financial irregularities and how from the perspective of a forensic audit it can be dealt with to protect organizations. It is worth reiterating that the forensic audit process involves meticulous planning, evidence gathering, analysis to establish patterns and reporting. Indeed, the myth surrounding forensic auditing as a tool for deliberate fault-finding needs not be entertained. It should be viewed as part of a corporate culture where employees and other stakeholders are conscious of the fact that systems and procedures must work irrespective rank of ones rank or status in the organization. Nonetheless, the fundamental human rights of individuals or suspects to fair-hearing must be respected by following due process of law to avoid incidents of victimization and ill-will. In all, forensic audit should serve as valuable tool for any organization seeking to maintain financial integrity and protect its resources.
Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.
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