The word forensic sounds like police and court cases. But in terms of businesses, it is much simpler than that. A forensic audit means only one thing: a deep and careful checking of one problem, to find out what really happened.
It does not start by thinking someone has cheated. It starts with a question. For example: why has our purchase cost gone up? Or, why does this one account never match? Then it checks the papers, slowly and carefully, until it finds the answer.
And very often, the answer is not cheating at all. It is simply money the business lost without noticing. Money paid twice. Goods paid for but not fully received. Discounts the business never took. Old dues nobody followed up.
In an earlier post we looked at the procurement red flags a business owner can notice himself. This post explains what happens next, when you bring in someone to check it properly.
What this checking is, and what it is not
It helps to see how this is different from your normal audits.
- Statutory audit. Your yearly audit checks that your accounts are correct, because the law asks for it.
- Internal audit. This checks whether your systems and controls are working, again and again through the year.
- Forensic audit. This one is deeper, but only on one small area. It takes one problem, one supplier, one account, one time period, and checks it very closely.
And it is not a search through your whole business, and it is not a judgement on any person. It only finds the facts. What those facts mean, and what to do about them, is for the owner to decide, with a lawyer if needed.
How the checking is done
Every case is different, but the steps are usually the same.
- A quiet talk first. The CA sits with the owner to understand the problem, which time period, and what the owner wants at the end. This is agreed in writing before starting.
- Collecting the papers. Bills, purchase orders, agreements, bank statements, stock records. The checking is only as good as the papers you can give.
- Following the trail. The CA follows the money and the goods, step by step, through the records, to see where things match and where they do not.
- Asking people, if needed. With the owner’s permission, the people who can explain certain entries are asked, only to understand, not to blame.
- A clear report. A written report shows what was checked, what the papers show, how much money is involved, and what could not be checked.
Where the recovered money usually comes from
When this forensic audit does find money, it usually comes from a few common places as listed below:
- Paying a supplier too much, because the rate slowly went above the market, or the same bill was paid twice.
- Paying for goods that never fully arrived, found by matching bills with what the store actually received.
- Discounts or scheme benefits the business had a right to, but never took.
- Old money owed by insurance, schemes or customers, which was forgotten and never collected.
- Deals that slowly turned against the business over the years, and were never corrected.
Over a full period, these can add up to a big amount. But the bigger gain is this: once you can see the leak, you can close it, so the same money does not go out again next year.
What no one can promise
Be careful about one thing. No honest firm can tell you at the start how much money the checking will find. That number comes out of the work. It cannot be promised before. What can be promised is honest, careful checking, and a clear picture of what the papers show. If someone promises you a fixed recovery even before starting, be careful of them.
When this forensic audit is worth it
A forensic audit is not needed by every business, and it would be wrong to say so. It makes sense when you have one clear worry, not just a general uneasy feeling; when the money involved is large enough to be worth the effort; or when you need a clear record of facts, maybe for a court case, a sale of the business, or just your own peace of mind. If you only want to make your controls stronger in general, a normal internal audit or a profit leakage check is a better and lighter place to start.
So a forensic audit is not about catching people. It is about turning worry into facts. Sometimes the facts show nothing is wrong, and your mind is at rest. Sometimes they find real money and stop the leak. Either way, you finally know the truth instead of guessing. For most owners, that clear answer is worth as much as the money.
If you have one clear worry that needs proper, private checking, you can have a confidential first talk with the team at Agarwal Ajay & Co.