What’s the difference between a forensic audit and a regular audit? We think we know the difference when we see it, but what is it? The issue came up before a short talk I was giving to some accountants last week, and the answer was relevant to our fact-finding business.
A regular audit is not comprehensive. It doesn’t presume there’s something wrong and it doesn’t even look at every supporting document in a company’s accounts. If it did, annually auditing an entire large company would be impossible.
A forensic auditor goes in with the presumption that something may be wrong, and decides to leave nothing unexamined on the hunch that there is fraud in a particular department or company line of business.
The distinction holds for many other kinds of investigations. You can do the once-over-lightly check for criminal history and check references given, or you can decide to turn over every court case involving your subject, check for side companies at every address he’s had in the past five years, and perhaps talk to everyone he’s sued or been sued by – ever.
That’s what we would call a forensic investigation. If the New York State Society of CPAs says that a forensic accountant “prepares each case as if it will result in litigation in the future,” that is the approach a good investigator should take too. Gather facts, but do it meticulously so that you can back up your findings if anything goes to court. And whatever you do, don’t break the law or violate ethical rules when you gather your facts, because a fact that’s not admissible as evidence may turn out to be useless to your client.
How could this distinction work in practice? A normal “investigation” could turn up five court cases in Jefferson County. An investigator could report that none of them were criminal matters and had all settled. We’ve seen reports that really say this, and they are often not worth the paper they are written on.
What you should ask when you hire a fact finder is not for reports of settled cases, but a summary of what was in the papers filed in court. What were the allegations against the person? What kind of evidence was on the public record? And (probably only available by interviews), what were the terms of the settlement?
When it comes to due diligence on a prospective CEO or investment partner, regular background checks verify employment, education and call the places on the resume to make sure the person worked there.
Forensic due diligence looks for the places the person worked that are NOT on the resume (Fired? Quit to avoid being fired?) and the people not listed as references (“Everyone thought he was lazy and were happy when he left.”)
It’s not that a forensic investigator presumes that everyone he looks at is hiding something bad. But if they are, he has a much better chance of finding it than someone using the approach of once-over-lightly.