Some instances of fraud make international headlines, like accountants found guilty of billions of dollars worth of fraudulent activity at global banks. At the other end of the scale, an individual commits fraud for giving false information to an insurance company to get a lower premium. In the first example, getting to the bottom of the fraud typically requires a professional service known as a fraud audit.
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 and interviewing directors and employees.
What is Fraud?
Fraud is a broad term to describe any crime that uses deliberate, deceptive measures for financial gain. 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.
What is a Fraud Audit?
A fraud audit is a thorough investigation by certified fraud examiners into the financial records of a business to highlight instances of fraud (and thereby confirm or disprove allegations or suspicions of fraud). A fraud audit may begin with a brainstorming session with the team of fraud examiners (known informally as auditors) led by the person in charge of the audit. This initial session considers how the company 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 other types of fraud committed by similar businesses.
Fraud Audit Procedure
After the initial brainstorming meeting, the audit team starts work. In the early stages of the audit, the team may analyze the company's journal entries for any signs of wrongdoing, by selecting some entries and requesting supporting documentation that corroborates each one. Another place they may look for fraud is in accounting estimates, because a company can influence estimates to manipulate their financial statements. Auditors may also look at patterns of estimates. For example, if most estimates from one year were of decreasing income, but most estimates from the following year were of increasing income, this may be a sign that the company is moving income from one period to another. Auditors may also look for unusual transactions, i.e. transactions that are different than a company's normal financial operations.
Normal Audit vs Fraud Audit
A fraud audit is much more detailed than a regular business audit, which is designed to confirm (or not) that a company's finances are in order, but provides no opinion on whether any fraudulent activity has taken place. A fraud audit is actually more like a consultancy service, because there is normally an allegation or discovery of fraud, and the role of the auditor is to gather evidence in support of fraudulent activity. Because some types of fraud involve very small amounts of money and other assets, they may not come to light during the course of a regular audit. More interviews (with company directors, employees, etc.) take place during a fraud audit than a regular audit because the auditors have to look closely for any clues of fraudulent behavior.