What is a forensic audit?
A forensic audit is a type of audit that aims to collect and analyze evidence from financial records for legal purposes. Forensic auditors are accountants who have specialized skills in investigating financial crimes, such as embezzlement, fraud, and money laundering. They also have knowledge of the law and the legal procedures involved in presenting their findings in court. Forensic audits can be conducted for various reasons, such as resolving disputes, recovering assets, enforcing contracts, or complying with regulations.
The necessity of Forensic Audits
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Conflicts of Interest: when someone abuses their power for personal benefits at the expense of the company. For example, if a manager approves false expenses of an employee who is their friend or relative.
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Bribery: giving money to influence a decision or a situation in one's favor.
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Extortion: using threats or violence to get money or property from someone or something.
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Asset Misappropriation: This is the most common type of fraud. It involves: taking cash, creating fake invoices, paying non-existent suppliers or employees, misusing assets (like company equipment), and stealing company inventory.
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Financial Statement Fraud: A company may do this to make its financial performance look better than it is. The reasons for showing false numbers may be to improve liquidity, keep C-level executives getting bonuses, or deal with the pressure to perform.
Example of Forensic Audit
An example of a forensic audit is the investigation conducted by Hindenburg Research, a US-based short seller, against Adani Group, an Indian conglomerate owned by billionaire Gautam Adani. Hindenburg Research published a report in January 2023 alleging that Adani Group companies had engaged in decades of stock manipulation, accounting fraud, and money laundering through offshore entities. The report claimed that Adani Group had a substantial debt that put the entire group on a precarious financial footing. The report was based on two years of research, including interviews with former Adani senior executives and reviews of thousands of documents. The report caused Adani Group's stock market value to plummet by over $100 billion and sparked a regulatory probe by India's Securities and Exchange Board of India (SEBI). Adani Group denied the allegations and accused Hindenburg Research of launching a calculated attack on India to profit from short-selling its shares. The case is still ongoing, as India's Supreme Court has set up an independent panel to investigate the matter