Monday, January 15, 2018

What is "Forensic Auditing"

The term "forensic audit" is tossed around a lot these days. The word "forensic" has an ominous ring to it - perhaps because of its use in popular crime shows. Most often, its use is a misuse of the term. Not all audits are forensic audits. In the context of Government contracting, a forensic audit is something that occurs when a contractor is suspected of committing fraud.

A "forensic audit" typically involves an evaluation of a company's financial information for use as evidence in court. It includes investigative activities related to fraud, embezzlement or other financial claims (e.g. claims filed by the Government under the False Claims Act (FCA).

Forensic auditing is a specialization within the field of accounting and auditors are called upon to render expert testimony during trial proceedings. Most large CPA firms have forensic auditing departments. Similarly, DCAA (Defense Contract Audit Agency) has its own cadre of individuals that specialize in forensic auditing.

 Most of the Justice Department fraud cases we report on these pages rely on forensic auditing. Of course there is an investigative agency that leads the charge (e.g. FBI, Inspector Generals, NCIS, AFOSI, or CID) but these investigators, in turn, must rely upon the work of experts to prove their case - someone with the expertise, understanding, and experience to determine how irregularities were buried.

The actual auditing process is not that much different than one would find in a financial statement audit or an audit of an incurred cost proposal. There are the typical planning, reviewing and reporting phases. It it pertained to fraud, there would be an attempt to determine impact.

During the planning stage, the auditor defines objectives such as determining whether fraud has been committed, it duration, the parties involved, calculating the loss, and recommending fraud prevention measures. The collection of evidence however is more important and perhaps more disciplined than one would find in a non-forensic audit as it may end up being used in a court case.

The types of fraud typically found in Government contracting involve timecard manipulation, product substitution, bribery, kickbacks, over-billings, and falsification of socio-economic status.

Government contractors have the right to know and understand the scope of any audit. Most contract audits are routine reviews of pricing proposals, progress payment requests, incurred costs, etc. But if an auditor cannot articulate his/her scope or is being evasive or circumspect as to why certain information is being requested, it may be more than a routine audit. That might be a good time to find an attorney.

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