THE IMPORTANCE OF FORENSIC AUDIT

In recent years, the importance of Forensic Accounting has been growing steadily.
A rapidly changing landscape, this field now includes many online components.
Making sure that a companys finances are being kept safe and in order has become
a growing concern in todays business environment.

While many companies have always had in-house accountants (internal auditor) to
monitor and minimize any irregularities or complications that arise over the course
of regular business, there are still instances of fraudulent activity. While the
numbers may be balancing out in the end, businesses are still finding cleverly
masked fraudulent activity when they go through the books.

Forensic accounting is the use of accounting skills to investigate fraud or

embezzlement and to analyze financial information for use in legal proceedings.
Where traditional accounting deals in the assessment of a business funds and
duties of a forensic accountant properly conveying that information to investors
and management, a forensic accountant is called upon to investigate the flow of
funds through a business to evaluate the path it takes and determine whether illegal
transactions have occurred.

A forensic accountant investigates a wide range of different crimes that relate to

fraud, such as corporate, health care, mass marketing, hedge fund, and securities
fraud. They also investigate other crimes such as contract disagreements, money
laundering, and embezzlement.

While the mainly leads them to investigating and analyzing, they are also
commonly called on as an expert witness during a trial, due to the combination of
experience and knowledge required to enter the field.
There are also instances in which the skills forensic accountants employ are used in
more personal matters. The dissolution of a marriage, for instance, is an event
during which a forensic accountant will review the financial situation of both
parties as well as their spending to further the settlement process or to assist
attorneys with accurate information to use in court. Forensic attorneys are able to
trace assets through the various investments and accounts as well as identify any
hidden income or assets.

Why has it become so important?

The discipline is beginning to see many avenues for additional proficiencies that
go beyond accounting and finances. The need for skill sets more accustomed with
the legal process and computer technology are highly sought after and play a
crucial role in determining the outcome of courtroom events. Forensic accounting
is in its current state due to a few factors one of them being the rise of a new
generation of hopeful entrepreneurs and business professionals. Every year, about
500,000 new businesses start up, many of which have partial or major online
components.

With the newborn reliance on technology, the role of the forensic accountant has
expanded into the digital world. Information stored online, regardless of the
strength of passwords and other security features, is always at some level of risk
and the modern forensic accountant has evolved their skills to include various
methods of investigation that apply to the ever-changing digital world.

They can be commonly seen sifting through enormous email accounts and other
digital services for the hint of fraudulent activity, just as easily as they are found
sorting boxes of files, folders, and forms.
According to Box, 2011 the importance of forensic audit is forensic accounting
skills can enable an organization to take the proper first steps in the event of a
suspected fraud. You should also have a clear idea regarding the appropriate time
to engage a forensic accounting specialist to preserve evidence for law
enforcement. Fraud is a possibility in almost any company and a prudent executive
will ensure that fundamental early planning is performed so that a pre-arranged
sequence of events goes into effect when a possible fraudulent event has occurred.

A Major Forensic Accounting Issue: Employee Fraud

The motivation for fraud is often explained by the fraud triangle or three pieces
that are usually in place when fraud occurs:

1. Pressure. The employee has encountered financial pressure from some

source. This source could be medical bills, a drug problem, a gambling
addiction or many other scenarios causing significant financial
difficulty. The employee often views their theft as a loan that will be paid
back as soon as the financial crisis is over.
2. Rationalization. Here the employee dredges up some real or imagined past
wrong justifying their action. The employee could believe he or she was
cheated in some way when a promotion or a raise was given to some other
person.
3. Opportunity. This is the only element which you, as the financial executive
can control and where the knowledge of how internal systems work and how
those systems can be bypassed, come into play. Good internal control is one
way to mitigate the opportunity to steal. Proper segregation of duties, no
management overrides of the control system, dual-employee interaction at
critical control points (counting cash, bank reconciliation preparation and
 review, etc.) are examples of how internal control can reduce the opportunity
to commit fraud.

The digital era has made it easier than ever before for criminals to tamper with
business accounts and generally defraud others. Of the 500,000+ new businesses
that are established every year, the overwhelming majority rely on computers and
the internet. Each time security experts intensify their efforts to minimize external
risks, hackers push back with equal force.

Research has also shown that internal white collar crime is also a growing
problem, contributing to more than $1 trillion in combined losses every year. The
contemporary fraudster has a tendency to be highly capable in covering their tracks
and leaving little to no evidence behind. Conventional accountants and business
managers alike simply do not have the knowledge, the specialist skills or the
available time to carry out comprehensive financial audits and investigations.

By taking a proactive approach to accountancy, a business is able to safeguard

itself from both devastating losses and dire legal consequences. Forensic
accountants investigate financial activities and records in comprehensive detail,
searching for any evidence whatsoever of fraudulent or unusual activity. Where
detected, the required evidence is gathered, collated and ultimately presented in a
clear and concise manner often in a court setting.

The Benefits of Forensic Accounting

Forensic accounting represents the only realistic approach to gaining a

deeper understanding of whats going on behind the scenes in a financial capacity.
As such, for any business with an interest in minimizing losses and maximizing
revenues, it is an invaluable specialism.

The primary benefits of quality forensic accountancy include:

1 Minimized Losses

The primary benefit of strong forensic accounting is the way in which it can
help minimized and prevent unnecessary loss. Fraudulent activity and general
financial discrepancies cost the business community extraordinary sums of money,
every hour of every day. The forensic accountant ensures this isnt allowed to
happen.

2 Improved Efficiency.

Forensic accountants play a key role in examining and investigating current

financial processes and standards, which can help in the identification of more
effective and efficient solutions. The whole process is one of detecting problems
and areas of improvement for the benefit of the business.

3 Reduced Exploitation Risk

By proactively patching any obvious gaps in current financial operational

standards, the forensic accountant can ensure that risk of future exploitation is
significantly reduced. Its a case of protecting the best interests of the business
before fraudulent activity can take place.

4 Avoidance of Legal Problems

Dealing with instances of fraud (internal or external) can be spectacularly

disruptive and costly for the business. In an ideal situation, forensic accountancy
can be used to avoid such scenarios from ever occurring by both preventing
fraudulent activity and nipping any problems detected in the bud.

5 - Improved Brand Reputation and Authority

A brand that leaves itself wide open to manipulation and fraud is a brand
that is very difficult to respect, trust and work with. Fraud can do the kind of
reputational damage that is borderline impossible to repair hence the importance
of thorough and ongoing forensic accountancy.

In brief forensic accounting important because by forensic accounting helps

the organization in exposing the fraud of financial especially committed by those
who are professional, educated and learned knowledge (white collar crime). In
which white collar crime is as big problem in organization.