Please ensure Javascript is enabled for purposes of website accessibility

Finding fraud with the right auditor

By: dmc-admin//December 13, 2006//

Finding fraud with the right auditor

By: dmc-admin//December 13, 2006//

Listen to this article

Coenen
Tracy L. Coenen

The idea of performing a “fraud examination” sounds interesting to many. They don’t necessarily want to deal with the numbers that a forensic accountant wades through, but they like the idea of someone sleuthing and digging through records.

I’ll admit that the work I do is pretty darn interesting. Each case has its own intricacies and unusual spin.

In contrast, the idea of an accountant performing an “audit” on a company’s books doesn’t sound half as exciting. I’ve done both, and from my perspective, audits are far less noteworthy. They’re both necessary evils in the business world, and it’s important for executives, attorneys, and consultants to know the difference between the two. Buyer beware of what services a client is really buying.

Defining an Audit

There are many different types of audits that are all properly named, but they must be differentiated from one another. A typical bank audit for lending purposes is generally a limited scope examination of certain financial statement items. Each bank has its own guidelines for performance of those audits, and generally they are aimed at verifying the value of collateral.

A tax audit is generally an adversarial situation under which a state or federal tax official is examining the books and records of a company. The audit can be limited in scope, or it can be very wide reaching.

Oftentimes, a tax auditor will start an audit to verify specific numbers that may have drawn the attention of the taxing agency. These types of audits can be contained if the taxpayer is cooperative and provides documentation to support he items under examination.

On the other hand, unlucky businesses and individuals can be selected for a full-blown audit that examines most or all of the numbers on a tax return. Naturally, this is a much more labor-intensive process and requires much more documentation on the part of the taxpayer.

Larger companies typically have internal auditors on staff, who are engaged in auditing activities all year long. Sometimes these audits are aimed at improving processes or identifying weaknesses in the company’s accounting system. Other times the internal auditors may be involved in a special project to revamp a system of controls and procedures. Special projects may also involve examinations of the books and records to determine if fraud has occurred.

Finally, there is the independent audit, which is probably the type of examination most corporations think of when they hear the word audit. For this audit, a company hires an accounting firm that is completely independent of the company, meaning the auditors have no financial or other interests in the company.

The independent auditors follow a widely-accepted set of rules for performing the engagement, and they have standardized work programs that dictate the procedures performed to verify the numbers. The purpose of the independent audit is to assure users of the financial statements that they are free from material errors. This means that the auditors are attempting to determine if the company properly followed the accounting rules and correctly recorded their income, expenses, assets, and liabilities.

A traditional independent audit is not designed to detect fraud, however. It is designed to detect errors or misapplication of accounting rules. Many times, the users of financial statements mistakenly believe that an independent audit will find fraud if it is present within a company. That’s simply not the case. It is very difficult for a traditional audit to discover fraud, and financial statement users should be clear about this point.

Fraud Examinations

A fraud examination is very different from the various types of audits already discussed. Some people like to refer to fraud examinations as forensic audits or forensic accounting engagements. Those terms are fairly accurate as well, although I sometimes try to avoid the use of the word audit so as not to confuse anyone about my work.

Generally, a fraud-related engagement has a very specific purpose in mind. Often a suspicious situation has been identified, and the fraud examiner is being brought in to investigate the scenario further. This investigation is likely aimed at determining the method of theft, gathering proof of the fraud, and identifying the responsible parties.

The plan of attack for each fraud-related engagement is different. Many forensic accountants and fraud examiners do not have standard work programs that they use to guide their work. The work is instead much more intuitive, and the direction of an investigation depends upon the current findings and suspicions.

Traditional auditors often base a lot of their work on a company’s control policies and procedures. That is, if they believe a company’s procedures are effective in preventing errors in the accounting process, they may do less testing of the numbers. Forensic accountants are more concerned about the procedures just from a “what could have happened” viewpoint. It’s important to know how things happen in a company, but the depth of examination of certain accounts will probably not change based upon those procedures.

While traditional audits
may involve “sampling” of transactions, fraud examinations don’t usually follow such a methodology. In sampling, an auditor selects a certain number of transactions for testing, rather than testing all items flowing through a financial statement account. Fraud examiners, on the other hand, often select certain accounts of interest and examine every single transaction in those accounts for the given time period.

Fraud examinations also don’t typically rely heavily on the concept of “materiality.” Traditional audits look for material errors, or ones that are large enough to “make a difference” to the financial statements. In contrast, forensic accountants tend to agree that any size fraud matters, and they might pay more attention to small numbers than traditional auditors would.

Get the Right Service

It’s important for the buyer of accounting services to know exactly what she or he is getting. Buyers should not confuse the various types of audits, as the results of one type may not be as valuable to a company as the results of another. It is also important to make sure that the right auditor or examiner is being hired for a project, so that the results can be relied upon. The various types of audits require different skill sets, so it’s not reasonable to assume that an auditor is proficient with all the types of audits.

An in-depth conversation with a fraud examiner should confirm that she or he is able to carry out the services needed, as long as the buyer is forthcoming about the circumstances and the work desired. As always, credentials, experience, and track record speak volumes about an auditor and should be considered heavily when selecting a consultant for a project.

Tracy L. Coenen, CPA, MBA, CFE, is the president of Sequence Inc., a forensic accounting firm with offices in Milwaukee and Chicago. Coenen can be reached at [email protected] or 414-727-2361.

Polls

Should Wisconsin Supreme Court rules be amended so attorneys can't appeal license revocation after 5 years?

View Results

Loading ... Loading ...

Legal News

See All Legal News

WLJ People

Sea all WLJ People

Opinion Digests