Auditing and Forensic Accounting are often confused, but they are not the same. Let’s use an analogy to compare Auditing with Forensic Accounting.
What Is Auditing?
Imagine that your company is your child and it’s time for an annual physical. Your doctor assesses their overall health by methodically examining all the major areas and body functions. Once the doctor completes their evaluation, they create a report summarizing their findings and opinion of your child’s general well-being.
This annual physical is comparable to an annual audit done by an Auditor. An Auditor designs auditing and testing procedures to determine whether the financial statements are fairly presented, in all material respects, in conformity with generally accepted accounting principles (GAAP). An audit is designed to detect material misstatements, whether caused by error or fraud; However, an audit does not have the depth or focus of a forensic accounting analysis.
Like a doctor, an Auditor will use specific tools to evaluate and form an opinion.
- Examining a portion of all evidence or transactions as a reflection of the whole.
- Setting a minimum level of attention given to a potential issue. There will be items too insignificant to the overall impact of the financial statements to be scrutinized within the audit. Every audit has an established level of materiality.
An audit will also examine if the financial statements prepared by the company comply with accounting standards. This is important because of the Financial Accounting Standards Board (FASB).
“The FASB’s goal is to set accounting standards that produce financial information useful in helping investors decide whether to provide resources to a company, and whether the management of that company has made good use of the resources it already has.”[1]
When a company details their financial statements using established principles, those who read the financials can understand the company.
What Is a Forensic Investigation?
Imagine your child has severe pain in their abdomen or you suspect something may be wrong that your general doctor cannot diagnose—you take them to a specialist. This specialized doctor represents Forensic Accounting. Unlike a general doctor, a specialist focuses on the precise problem to determine what is causing the pain. For any business, fraud creates terrible pain, and Forensic Accounting focuses on detecting, documenting and gathering evidence of the fraud or illegal activity. Like a specialized doctor, Certified Fraud Examiners will dig deep to find causes and solutions and consider the smallest details for this specific problem.
Certified Fraud Examiners also deliver a report which focuses on the evidence found that is consistent with elements of fraud or other illegal activities; the extent of the fraud and any further information they may glean. Their report may be carefully structured so it could be used in a court of law. Certified Fraud Examiners have knowledge and experience in accounting, auditing, law, investigation and criminology—all skills used to uncover numerous kinds of fraud, which can include:
- Theft of Assets. Also known as Asset Misappropriation, when business assets or information is stolen.
- Typically, internal fraud when an employee accepts hidden payments in return for favors or influence.
- Financial Statement Fraud. When financial statements are intentionally incorrect for misleading purposes.
These kinds of fraud, and many others, are uncovered within a detailed fraud examination by a certified professional. As explained by the Association of Certified Fraud Examiners, Forensic Investigations will complete the following:
- Perform forensic research to trace funds and identify assets for recovery.
- Conduct forensic analysis of financial data.
- Prepare forensic accounting reports from financial findings.
- Prepare analytical data for litigation and testify as needed.[2]
Is an Auditor a Forensic Accountant?
Not necessarily. While they are both financial experts, the services they provide are different and their goals are unique. Auditors and Forensic Accountants are not interchangeable; however, some auditors are also Certified Fraud Examiners.
While an Auditor provides yearly reviews of a company’s financial statements (which can be associated with the company’s health), a Forensic Accountant drills into a specific problem, fraud or crime.
Both Auditors and Forensic Accountants will document their findings and both are accounting professionals with specific education, certification and training.
If your company is facing potential fraud, it is recommended you reach out to a specialist. A Certified Fraud Examiner can do the complicated work of forensic accounting, while you continue to concentrate on running your business. Not only can a thorough examination find fraud, but an examiner can also testify in court on your behalf.
If you would like more information on Rocky Mountain Advisory’s Forensic Accounting and Fraud Examination services, contact us today.
[1] WHY ARE FASB ACCOUNTING STANDARDS IMPORTANT TO INVESTORS? FASB. (n.d.). Retrieved March 15, 2023, from https://www.fasb.org/
[2] Examiners, A. of C. F. (n.d.). Job Responsibilities Forensic Accountant. Association of Certified Fraud Examiners. Retrieved March 15, 2023, from https://www.acfe.com/
