On the closing day of the third quarter, Company Z’s financial team began running the numbers to report to executive leadership and the board on the quarter’s progress. While everything seemed to check out, the team could not help but notice that the Chicago-based team submitted the exact same number of expense reports in the third quarter as it did in the second. The numbers were in line with budget, but looking back at prior quarters, a pattern of similar expense charges began to emerge. The question became: should they initiate an audit?
Organizations losing an estimated 5 percent of revenue to fraud each year, according to the ACFE, with the largest frauds committed by senior and mid-level management due to their ability to circumvent internal controls. Needless to say, if an organization senses something is amiss, it should investigate further to prevent possible damage to the company’s reputation as well as to its bottom line.
Is an audit enough? What type of investigation is best? When people request an “audit” into a case like the example above, they typically are looking for a series of tests and procedures executed to identify potential wrongdoing. Relevant controls are tested, and books and records are examined to uncover anomalies. An audit is not usually an investigation intended to get to the root cause of fraud or malfeasance. However, organizations should consider digging deeper to truly understand what went wrong and how it can be mitigated in the future.
The problem is that going beyond an audit to uncovering misconduct requires not only specific methodologies and procedures but also an investigative mindset. Much like the way a doctor would search for the root cause of a lingering illness, a fraud investigation often requires creative thinking and an ability to connect the dots to understand the underlying issue. That’s where forensic accountants and financial investigators can help.
An Investigator’s Approach
Financial investigators and forensic accountants are guided by process, but they do not subscribe to a set methodology—seasoned professionals will not “copy and paste” the approach from case to case. That is an advantage for uncovering facts and digging deep into what actually happened. Simply put: every investigation is different and requires a tailored approach to create a meaningful level of depth. Because audit is used as a catch-all term, here’s how to understand the differences between an audit and an investigation:
- Provides assurance that the numbers are not materially misstated
- Tests controls for functionality within the system or process
- Examines books and records, relying on financials
- Often times not granular enough to detect fraud
- Asks: Is this process working?
- Seeks to find the one time where numbers do not add up, and dig in
- Finds ways around controls that may be exploited
- Looks beyond the numbers and uncovers patterns of behavior
- Paints a full picture by digging deep into source interviews, data, history, and more
- Asks: What went wrong?
The internal audit department may lead an initial investigation, identify potential issues, and then call in investigators and forensic accountants to get to the bottom of a matter. Take a recent case example: In the course of a sample test of agents, a company’s internal audit function identified a group of agents whose contracts were vague, and who provided services that had no supporting documentation. These factors became red flags for the entity. Our team was tasked with a deeper investigation into the agents: determining who hired them, what they were doing, what results they were providing, and more. Following a review of supporting documentation, emails, and financial records, the team discovered that the agents were facilitating illicit payments to government officials—which is not only illegal but could also cause stakeholders to call into question the firm’s reputation, ethics, and controls.
As these examples show, it is important to understand the benefits of both approaches—the rigor and robust methodology of the internal audit, as well as the investigator’s ability to get to the bottom of an issue. To enact meaningful resolutions for clients’ most pressing challenges, forensic accountants and financial investigators dig deep and propose solutions that will help mitigate risk both now and in the future. Pairing internal audit with an investigative team can provide the client not only with general observations regarding controls and financial impact, but also information that senior leadership can use to take action.