What you need to know about Forensic Audit
Divergent public expectation of conventional audit ore often than not, the public usually expect that auditors of financial statements should know everything that has transpired including evidence of any fraud committed, imminent insolvency and corporate failures of the auditee.
In the expectation of the society, the auditor’s expertise is linked with fraud detection and fraud deterrence. Thus, auditor’s credibility has often been questioned and the auditor widely criticized where these expectations are not met notwithstanding that they are outside the scope of the conventional auditors’ duties and standard of practice. It appears that majority of the interest groups have little or no knowledge of the duties and limitations of conventional audit, as well the objectives and requirements. The general expectations of the society from an auditor are commonly covered under a different field of accounting and auditing called Forensic Accounting, or Auditing/ Investigation.
MDistinguishing conventional audit from forensic audit
There is no doubt that both conventional and forensic audits are examinations conducted retrospectively. However, the objective, focus and outcome are not the same. The objective of conventional audit is to form an independent opinion on the overall financial statements taken as a whole. The conventional auditor’s opinion is to add credibility to the financial information reported by the auditee in the eyes of its users or interest groups. Auditors are guided by standards of practice that require them to maintain professional scepticism while performing their audit work of inquiring, making observations, examinations and re-performance of accounting transactions of the sample selected to obtain evidence that will give reasonable assurance of the audit assertions.
The conventional auditor only seeks to ensure that the financial statements are free from material misstatements caused by either error or by fraud; and where they exist, cause management to correct the material misstatements before they are issued for users; otherwise he qualifies his opinion to put users on notice or at alert. However, the real work/ science of detection, deterring and investigating fraud, financial scandals, improprieties and providing remedial actions including litigation support to deter reoccurrence in in the future is covered under forensic audit or investigation.
Definition of forensic audit
There are many definitions of forensic auditing, accounting or investigation. The word forensic in its elementary use itself simply means the
The use of forensic is not limited to accounting or auditing alone. There are many areas of forensic specializations. In the field of medicine, much of forensic investigation is about trying to determine how and when a corpse died which we popularly refer to as autopsy. On the other hand, forensic in engineering try to find out what went wrong with a structure or machine.
Therefore, a very simple definition of forensic audit can be taken as
Dire need for forensic auditing There is no doubt that nobody wants to be duped or cheated. Even the thief does not want the booty of his illicit acts stolen. He equally wants to retain what he has stolen from others and will want to prevent it from being re-stolen from him. This would suggest that everyone may need forensic auditing. In recent years, public outcry and anger over occurrences of massive fraud and corrupt practices in governments and corporations have led to the establishment of special crime detection and deterrence institutions; new legislations, new corporate codes of conducts, new auditing and reporting standards, new accounting standards, regulatory oversights and stiffer penalties for conspiracy, commission or concealment of fraud and corrupt practices.
However, while some prosecutions have been successful, a lot of prosecutions involving mindboggling amounts/values have failed because of lack of evidence on the part of the prosecutors to ensure conviction of the culprit(s).
This presupposes that a high level of substantial evidence is required o convict a suspect of a crime. It is apparent that prosecutors most times rush to court with little or no evidence to procure convictions and the suspect ends up walking home tall even when there are apparent gaps between resources expended and value obtained. This is where forensic auditing becomes relevant to find the missing link, identify what had depleted the value addition and reconcile the gaps with verifiable evidence that can provide support for litigation and other remedial actions.
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The Process of forensic audit Forensic audit follows a multistaged process similar to normal audit process but its aim, objective, focus and extent of work done by forensic auditors are not the same with traditional or conventional auditors. The process of a forensic audit can be represented diagrammatically as follows:
The outcome of forensic auditing should either documentarily or in testimonial form detail amongst others:
About 600 bidders have emerged for the 57 marginal oil fields put up by Nigeria but a Niger Delta-based oil management expert, Leesi Gborogbosi, has placed caution at their disposal and explained the cost profile of a bid. The last time Nigeria carried out such bid was about 20 years ago, according to insiders.
The CEO of Gabriel Domale Consulting, a management consulting firm, warned bidders to endeavour to understand the concept of the marginal field from the perspective of government; the petroleum (amendment) decree number 23 of 1996; marginal field operations (fiscal regime) regulations of 2005; and the guidelines for the award and operation of marginal fields in Nigeria before deciding to invest.
The consultant who worked in one of the foremost oil multinationals in Nigeria for many years and was responsible for all aspects of the IOC’S strategy, business development, leadership, governance, competitiveness, teams, and operations across all network of client offices gave the definition and explanation of marginal fields. He said they have some investments implications which he said a marginal field investor should factor into the investment decision.
On want he called ‘assured marginal economics’, Gborogbosi warned that because the economics of the oil mining license (OML) is considered marginal, the investor needs to re-evaluate the historical risks and costs of the proposed marginal field. “The key question is - what has changed over the years and what will be the costs of mitigations?”
He said for over 10 years, the existing infrastructure may likely have decayed and requires an urgent upgrade. This was the sad experience of the buyers of Nigeria’s power sector. The Ogoni-born expert warned further; “Additionally, because the marginal field existed in the host community for over 10 years, there may be a heightened expectation on the part of the host community for immediate corporate social responsibility initiatives.”
He warned bidders to understand the rationale behind the decision of the portfolio owners to stay away by understanding the underlying drivers for the portfolio rationalisation which he said the investor should consider as an investment variable and be risked in the decision model.
On this, he warned against the oil field being returned to the government. “The expectation is that marginal field will be efficiently operated to deliver competitive returns to the investor and contribute towards the national oil and gas aspiration. Full risk management will ensure that the marginal field does not hibernate beyond 10 years to avoid being reclassified as marginal field and re-awarded.”
In explaining what the government classifies as marginal field, Gborogbosi defined them as : “Marginal field definition is further highlighted by the Department of Petroleum Resources in the 2020 marginal field bid guidelines.
A marginal field is any field that has reserves booked and reported annually to the Department of Petroleum Resources (DPR) and has remained un-produced for a period of over 10 years.”
Costs:
The expert gave cost ideas, advising investors who would be successful at the pre-qualification stage to treat the costs up to the point of winning the bid as search costs. “In the 2020 marginal field bid round, the total search cost is N47m (approx. US$130,235) excluding signature bonus.
This cost include costs for registration, application and bidding per field: N5,500,000 ( approx. US$15,235) as registration fee - N500,000; application fee - N2,000,000 and bid processing fee - N3,000,000) and [ B] – costs for data prying, data leasing, Competent Person’s Report and
Filed Specific Report : US$115,000 ( approx. N41,515,000) as data prying - US$15,000; data leasing - US$25,000; Competent Person’s Report - US$50,000 and Filed Specific Report – US$25,000.
“Signature bonuses will be paid as per the applicant’s winning bid. The signature bonus should be estimated to be included in the investment proposal. The US Dollars to Naira equivalent is derived using the Central Bank of Nigeria (CBN) current exchange rate of the US Dollars to Naira of N361/$1.”
Investment approach:
Leesi who has a long and successful record of helping diverse functions to develop collaborative relationships with key stakeholders in order to execute strategy effectively reminded bidders that successful pre-qualified companies were expected to prepare and submit field-specific technical and commercial bids based on the field data as provided by the leaseholder and/or DPR. “The documentation of the technical and commercial bids should include detailed proposed work programme, development plan and commercial proposals.”
He warned that experts consultants should be on hand to advise marginal field investors to treat all bid search costs, field ownership costs (signature bonus), and field lifecycle costs as an investment package. “This commercial perspective will enable the investor’s advisory team to develop a robust investment proposal.
“Investing in the oil and gas in