Unusual transactions, large money transfers and erroneous accounting statements are activities that may raise red flags at a company. Whether discovered as part of an annual financial audit or by concerned employees, these activities may be enough to trigger a fraud audit. Unlike a financial audit, a fraud audit is a thorough, independent investigation into suspicious activity at a business that can lead to severe penalties. When run correctly, your company will likely never have to go through fraud auditing.
What Is Fraud?
Fraud is a broad term used to describe any crime that uses deliberate, deceptive measures for financial gain. In legal terms, it is the intentional misrepresentation of a material fact with knowledge that it is false in order to get another person to act, resulting in damage or injury, whether financial or otherwise. This includes fraud against a company – either internally by employees, managers or officers, or externally by customers or vendors – or fraud against an individual, such as credit card fraud or intellectual property theft.
Fraud is a crime that is punishable by significant criminal penalties as well as civil penalties, depending on the nature of the fraud. States have their own statutes for fraud crimes, charging them as either felonies or misdemeanors that come with prison time, fines or probation. Civil penalties include repaying what was fraudulently taken as well as punitive damages, which are meant to punish the person who committed the fraud. Time served in prison and the amount of fines levied vary by state.
Read More: What Constitutes Fraud When Contesting a Will?
Financial Audit Vs. Fraud Audit
If you have a suspicion of fraud in your company, you'll likely want to perform a fraud audit. A fraud audit is different from a financial audit.
A financial audit is typically performed on a regular basis to ensure that all of the company’s financial statements are on track and that the company is performing as expected. A financial audit should also ensure that the company's financial statements do not contain vital errors, omissions or lies. While fraud may be exposed or suspected during a financial audit, it is not the role of a financial auditor to fully investigate.
The fraud audit, or fraud exam, on the other hand, is a specialized audit that is performed when there are suspicions or allegations of fraud or when a fraud is known. It is often done as the result of a tip from someone at the company or by someone who works with the company. Certified fraud examiners perform a thorough investigation into the financial records of the business to highlight instances of fraud. The examiner’s goal is to determine if a fraud occurred and to identify the person responsible for the fraudulent activities so they can be held accountable, either civilly or criminally (or sometimes, both).
Getting a Fraud Audit
Fraud auditing is a very specific activity that is limited in scope. Examiners who perform fraud auditing look at specific accounts that are in question to get evidence that either shows or disproves any fraudulent activity at the company.
A fraud audit often begins with a brainstorming session with the team of fraud examiners, or auditors, led by the person in charge of the audit. This initial session considers how the company or its principals might have committed fraud, depending on the industry and the nature of its business. Sometimes a fraud specialist attends the meeting to offer insight into types of fraud committed by similar businesses. They talk to employees of the company who are involved with those specific accounts, even if peripherally, to see who may have committed the fraud or who may have information pertaining to the fraud.
If fraud is uncovered during fraud auditing, appropriate measures and penalties will be taken against the perpetrator and, when warranted, against the company itself. If no fraud is discovered, the problems are corrected, and the company may face greater scrutiny and examination during regular financial audits to ensure that no fraud occurs in the future.
A fraud audit is an in-depth investigation into a company's financial affairs to find fraudulent activity. This involves looking closely at journal entries and paperwork, as well as interviewing directors, officers and employees.
Leslie Bloom earned a J.D. from U.C. Davis’ King Hall, with a focus on public interest law. She is a licensed attorney who has done advocacy work for children and women. She holds a B.S. in print journalism, and has more than 20 years of experience writing for a variety of print and online publications, including the Journal of Juvenile Law and Policy.