Accounting
No, there’s no such thing as a forensic audit
The term “forensic audit” has become commonplace with allegations of financial impropriety. That’s too bad, because there’s actually no such thing as a forensic audit.
How is that possible, when it’s used in everything from proposals to firm advertising? The culprit is a snowball of misunderstanding, allowed to fester by clients who don’t know any better, and practitioners who probably should.
In fact, the term forensic audit is an oxymoron, and its use is not only wrong, it’s dangerous, at least as far as our world is concerned; it sets false expectations, the bedrock of unhappy clients and future litigation.
There are a few reasons why.
First, consider the word audit, a term defined by the American Institute of CPAs. An audit’s goal is to obtain “reasonable assurance” about whether the financial statements are free of material misstatement. It is, by nature, a broad brush.
Forensic work, however, is restricted to analyzing and evaluating specific evidential matter. In other words, it is a narrow, predefined scope. Providing any assurance is therefore incongruent.
It’s also impractical, because audits rely on a concept of materiality. Not every dollar has to be checked, because not every dollar is important to the user of the financial statements. For instance, a cashier stealing change at a multibillion-dollar business, while concerning, is likely immaterial.
But fraud has no materiality. A cashier stealing change is fraud, whether it’s $0.10 or $10,000. Identifying every aspect of fraud ranges from impractical to impossible, which is why it’s standard for engagement agreements to disclaim that acts of fraud may not be caught.
Hearing the phrase “forensic audit,” a client might assume assurance that everything will be caught. That’s antithetical to forensic work. We offer no assurance that we’ll catch everything, or even anything.
Forensic audit is also paradoxical in reporting. In audits, a CPA expresses an opinion. But practitioners performing forensic services are prohibited from providing formal opinions; we deal in fact only.
That’s why the term forensic audit doesn’t appear in regulatory guidance: it doesn’t exist.
That said, it’s easy to see why it’s used. The public knows audits as a validation exercise. A forensic audit? Performed by forensic accountants, that cool role Ben Affleck nailed in that movie? It just sounds more rigorous. Who wouldn’t do that?
But its use confuses the public, and paves the way for post-engagement disputes — and even lawsuits — if a so-called forensic audit fails to catch all fraud. So ultimately, just like a doctor correcting patients who misname procedures, it’s up to practitioners to correct misinformed clients.
If a federal, state or local agency issues a request for proposal for a forensic audit, the forensic accountants who respond, many of whom also provide assurance work, should be proposing forensic services instead and explain the reason.
And the firms and educational institutions that actually promote forensic auditing — yes, there are a few — should adjust that language. How can we expect the public to understand misnomers, if we as practitioners are guilty of propagating it ourselves?
Some might say that worrying about nomenclature is unnecessary. That focusing on the finer details misses the bigger picture.
Those people miss the point of forensic services altogether. If we can’t manage the small details, who will rely on us for the bigger ones?
Let’s get this fixed.
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