You are a board member or shareholder of an organization. You receive certain information on possible revenue leakages or poor governance that you did not expect. How do you react?
Do you suspend or terminate the incumbent managers immediately or you first undertake a thorough independent review to obtain all facts to inform your next course of action?
Great leaders first obtain all facts to inform their decisions. That is called facts and data-driven decision making. You must avoid making decisions on hearsay or opinions at all costs. You need to undertake either a forensic audit or an independent organization audit/ review.
Now that you have decided to get all the facts, which approach to use? A forensic audit or an independent organizational audit or review?
A forensic audit also is known as forensic investigation, is the use of scientific methods to determine the smallest thing that was the main cause of the problem so as to determine who did what, when, where, how and why. The objective is to affix blame. Because of this, we approach the work with the assumption that matters will end up in courts of law which has the power to decide on the guilt or innocence of the suspects based on the evidence presented as a result of the forensic audit.
According to Investpodia.com,
“A forensic audit is an examination and evaluation of a firm’s or individual’s financial records to derive evidence that can be used in a court of law or legal proceeding.”
Forensic audit work is usually done in anticipation of litigation. The objectives are to collect water-tight evidence so as to determine what exactly happened, how it happened when it happened, who did it and why they did it if any. Forensic audit or investigation is preferred if fraud is suspected and the shareholder or the person requesting the investigation would want to find someone to hold accountable for disciplinary hearing or prosecution.
According to Wikepedia.org, an independent organizational audit or review is like an internal audit, which is:
“is an independent, objective assurance and consulting activity designed to add value to and improve an organization’s operations. It aims to provide reasonable assurance regarding the achievement of the following core objectives for which all businesses strive:
- Effectiveness and efficiency of operations.
- Reliability of financial and management reporting.
- Compliance with laws and regulations.
- Safeguarding of Assets.”
Under independent organizational audit or review, the entire organization is reviewed so as to gain 360 degrees understanding of the business –from strategy to operations, finance to procurement and everything in between so that possible governance failure is identified, and recommended fixes made.
Whereas forensic audit is reactive, adversarial as it involves affixing blame and pointing fingers, an independent business review is proactive and growth-focused as it helps identify areas of business risks, supported with evidence so as to improve the organization. The business review process focuses on use of internally available data and therefore does not involve possible legal risks.
If you are a leader, have a business and want to know how problems arose so that they could be fixed; you are not interested in prosecuting anyone in courts of law even if you determined they could have stolen from you, we recommend you undertake an independent organizational audit (IOA) or review.
Forensic audits are adversarial. Awfully expensive. Involves legal battles and usually leaves everyone bruised even the innocent parties. They could also attract risks of media coverage and possible reputation risks which in the long run could prove costly.
At Summit Consulting Ltd, we help you do the right thing and protect your money and brand always. You are safe with the right partners.
The Association of Certified Fraud Examiners (ACFE), www.acfe.com, an International Association of Fraud Examiners, in which I am a proud member, states the differences between auditing and fraud examination in the fraud manual handbook.
In Table 1, is a reproduced table with slight modifications to help the reader appreciate the difference between forensic audit (fraud examination) and auditing (independent organizational audit or review).