Forensic Audit Explained
A forensic audit is an examination of financial records for legal purposes. Forensic auditors, specialized accountants, investigate financial crimes like fraud and money laundering. They also understand law and legal procedures. Forensic audits serve various purposes like dispute resolution, asset recovery, contract enforcement, or regulatory compliance.
Why Forensic Audits are Needed
Conflicts of Interest: Misuse of power for personal gain at the company's cost, such as approving false expenses for a friend or relative.
Bribery: Paying money to influence decisions or situations in one's favor.
Extortion: Using threats or violence to acquire money or property.
Asset Misappropriation: Common type of fraud involving cash theft, fake invoice creation, paying non-existent suppliers or employees, misusing assets, and stealing company inventory.
Financial Statement Fraud: Companies may do this to enhance their financial performance. The false numbers may be shown to improve liquidity, ensure executive bonuses, or handle performance pressure.
Forensic Audit Example
Hindenburg Research's investigation against Adani Group is an example of a forensic audit. The report alleged Adani Group of stock manipulation, accounting fraud, and money laundering, leading to a significant debt burden. This report caused the company's stock market value to drop by over $100 billion and instigated a regulatory probe. The case is ongoing, with an independent panel set by India's Supreme Court investigating the matter.